Selecting suppliers is one of the most critical aspects of any organization. Any inaccuracy in the supplier selection process can lead to poor supplier performance, supply disruptions, and inefficiencies in the business process. However, not many organizations adopt a well-defined vendor selection process and, therefore, struggle when it comes to reducing excess spend.
The inability to leverage effective solutions for supplier selection results in common supplier failures that can be defined in two categories, i.e., quality failures and failures of timing. Quality failures may influence costs to the buying firms; whereas, failures of timings come in the form of late deliveries, back orders, variable lead times, and incorrect shipments. It may include production shutdowns, late deliveries to customers, and increased inventories. In any scenario, supplier failures add to the additional costs for the buying organization and impact their performance.
Why is selecting a supplier so important?
Any buying organizations’ performance is directly influenced by their supplier’s performance. When suppliers fail to deliver, the supply chain performance of the business starts dwindling and they start looking out for ways to identify an alternative supplier. Conversely, changing suppliers too often can also negatively impact the price and quality of products and lead to stability issues.
At SpendEdge, we understand the impact that an efficient supplier selection process can have on the financial performance of the business. And to help businesses overcome such issues, we have listed some basic steps that can help improve your supplier selection process substantially.
Want to decrease additional costs arising from supplier failures? Talk to our experts and know how adopting an effective supplier selection procedure can reduce the probability of such situations.
Four critical steps to improve supplier selection
Step 1: Identify suppliers
Though identifying suitable suppliers is the key objective of any supplier selection process, business still need to be clear about their expectations from a supplier. By taking into account factors such as suppliers delivery commitments, customer service, reliability and responsiveness, and business policies, companies can better plan their supplier selection process. However, the priority of all these factors may differ according to the requirements of the organizations, and businesses should, therefore, determine the vendor selection criteria and then select a supplier accordingly. Companies can even start the process of supplier selection by analyzing the current suppliers of the organization.
Step 2: Determine supply performance
After selecting a suitable supplier, companies need to ensure that the supplier of choice does not suffer from significant compliance issues since it can impact the productivity of the organization. To do so, they should have an effective vendor selection process in place and conduct audits throughout multiple stages of the supplier selection process. Also, conducting audits beforehand will enable companies to determine the supplier’s strengths and weaknesses before the relationship becomes official.
Want to know what your ideal supplier selection criteria should be and how can you enhance your supplier selection process?
Step 3: Analyze financial factors
In recent times, financial analysis has become one of the most crucial steps in the vendor selection process. It helps companies to analyze overall supply base risk factors and choose suppliers on the basis of their financial strength and competitive advantage. Companies can even call for bids to gather information on the suppliers, the extent of their need, and the reasons why they are the best option for the organization.
Step 4: Create a contract
Creating a contract is perhaps one of the most crucial steps in any supplier selection process. Companies should use this as an opportunity to negotiate with top suppliers while keeping other suppliers on the list of potentials. After the agreement is reached, a contract can be created and signed. In many cases, the purchase order is considered a contract, but companies can even have a contract and then create a purchase order, depending upon the complexity of the situation.