Supplier Identification and Selection

Once the need and the description of the need are identified, one of two things can happen: (1) The need is fulfilled by a supplier that has an existing contractual relationship with the buying company. (2) The need is fulfilled by a new supplier that is not currently qualified to provide products and services to the firm.

In the first case, the P2P process moves quite smoothly. Through the need forecasting process, purchasing personnel have already identified which suppliers will be used to source the need, and they have already taken steps to evaluate and prequalify the supplier. Qualification is important, as the purchasing firm must ascertain that the supplier meets several criteria and evaluate whether it is qualified to do business and meet the needs of their internal customers in a satisfactory manner. This evaluation process is described in some detail in the next chapter.

In the second case, where a supplier is not identified, or when the internal customer requests that the need be fulfilled by a specific supplier of their choosing, purchasing faces a more difficult challenge. Because there is no existing contract with the supplier, they may balk at approving the need fulfillment from this supplier. When internal customers purchase directly from nonqualified suppliers and try to bypass purchasing in the process, this is known as maverick spending. That is, customers are acting as a maverick, in that they do not wish to use suppliers already deemed by purchasing as qualified to fulfill the need. Although some level of maverick spending is always going to occur in an organization, there are significant risks that can occur when it reaches high proportions. We will discuss some of these risks later in the chapter.

Maverick spending is acceptable when there is little risk associated with the purchase. For example, if someone needs to purchase a box of copy paper, there is little risk when an internal customer goes to the local Staples store and purchases a box using the company procurement card. In fact, purchasing will often encourage them to do so, because going through the entire requisitioning process for a small item does not represent a productive use of their time in managing these types of expenses. However, when high levels of maverick spending occur repeatedly throughout the company, it can result in major lost opportunities to control cost and also expose the firm to undue risk and loss of control over the purchasing process.

Let’s assume for the moment that a qualified supplier is able to provide the product or service, and that the supplier has been through the evaluation process. For some items, firms may maintain a list of preferred suppliers that receive the first opportunity for new business. A preferred supplier has demonstrated its performance capabilities through previous purchase contracts and therefore receives preference during the supplier selection process. By maintaining a preferred supplier list, purchasing personnel can quickly identify suppliers with proven performance capabilities.

In cases when there is not a preferred supplier available, purchasing must get involved in selecting a supplier to fulfill that need. Final supplier selection occurs once purchasing completes the activities required during the supplier evaluation process. Selecting suppliers is perhaps one of the most important activities performed by companies. Errors made during this part of the purchasing cycle can be damaging and long lasting. Competitive bidding and negotiation are two methods commonly used for final supplier selection when there is not a preferred supplier.