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A Comprehensive Framework for Vendor Selection

May 29, 2019

The vendor selection process has undergone significant changes in recent years. The increased reliance on outsourcing complex services and products has made the vendor selection process an extremely important of businesses. Companies require a framework for vendor selection that can rank existing vendors depending upon the requirement, select right vendors for the business and maintain cordial relationships with them.  Here’s a 7 step process to help you understand the key steps involved in the vendor selection.

Steps Involved in the Vendor Selection

#1 Identifying Potential Vendors

To survive in this intensely competitive market, it is imperative to identify new vendors apart from relying on existing vendors. Here are the few points that companies need to consider for vendor selection.

Importance of New Vendors: New vendors may be superior from existing vendors\ in terms of efficiency and capabilities. They may have new technologies and strategies that can reduce the production costs of companies. Also, new vendors may increase competition and minimize risks pertaining to the supply chain.

Check Vendors’ Capability: It helps companies to reduce the likelihood of vendor non- performance such as late delivery, non-delivery, or delivery of non-conforming (faulty) goods before awarding contracts to vendors.

Improving the vendor selection process requires companies to analyze new and existing vendors. Request a free demo to know how our experts can help you with real-time insights pertaining to vendors in different industries.

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#2 Information Request to Vendors

Once new vendors have been identified, the next step in the vendor selection process is to formally request information from vendors about their goods and services. While there is no agreed upon terminology, the information asked can be broadly classified into three different types.

Request for Information (RFI): RFI is issued when companies are interested in knowing about the options available with vendors to meet their present needs. They want to know how a particular vendors’ goods and services have edge over others. However, issuing RFI by companies does not guarantee a contract.

Request for Proposal (RFP): It is issued when companies have a sense of the marketplace. It includes a statement of work which contains a certain set of performance parameters which vendors need to fulfil. Vendors provide detailed information to companies on how they would address such demands and the price they are expecting in return.

Request for Quote (RFQ): RFQ is issued when companies develop a statement of work stating the actual requirement of goods or services needed. RFQs along with the structured tendering process is the most prevalent in today’s competitive marketplace.

#3 Evaluation

In the vendor evaluation process, a data bank containing an authorized list of vendors with their profiles is developed. Data comprises critical information such as quality assessment, technical competence and organizational profile corresponding to each vendor.  It depicts the performance of vendors on a quantitative scale based on different factors that can be categorized under given aspects in the vendor selection process.

Cost Criteria: It determines vital elements of the cost associated with purchases. It considers purchase cost, transportation cost, and tax prices to figure out the minimum price of the product to increase profitability.

Technical Capability: It assesses the competent technical abilities of vendors required for delivering good quality product or services and promote successful development efforts.

Quality Assessment: It is an important factor for both parties to ensure the quality and availability of products. It is one of the key vendor selection criteria and methods that help vendors  to improve and maintain quality and delivery performance.

Organizational Profile: Owing to the number of unprecedented risks affecting the performance of vendors, it is crucial for companies to gain details regarding marketing goals and their financial performance. A robust vendor selection process ensures high organizational power and advanced coordination skills from vendors.

#4 Contract Terms

The vendor selection process culminates in a contract between companies and vendors. A contract specifies the formal contractual terms that vendors need to abide by apart from mentioning payment terms. It specifies rules of payment and non-payment arrangements, liquidates damages paid upon the breaching the contract. The contract also specifies details related to how the contract will be executed, such as delivery quantities, schedule of delivery, delivery locations, quality level, technical specifications, and tenure of the contract.

#5 Negotiation

It is one of the most vital steps in the vendor selection process. After the vendors’ qualifications and contract terms are evaluated, the negotiation process starts. In this process, companies try to induce favorable terms from vendors, and likewise, vendors attempt to induce favorable terms from the company (purchaser). However, few companies dictate the terms to vendors.

Instead of squeezing every penny out of vendors, companies should focus on producing the most comprehensive contract document and improving the process of vendor selection.

Want to know how the vendor selection process can influence the negotiation process,  request for more information here.

#6 Contract Awarding

Once companies have finished evaluating vendors, the process of contract awarding begins. During this phase, companies decide which vendor or vendors they finally want to work with. Companies may choose to award the contract to single or multiple vendors depending upon the goods and services needed.  They can award contracts to several vendors in order to have a wider range of options and encourage vendors about their possible participation in future contract competitions.

#7 Vendor Monitoring 

Monitoring vendors’ performance during the life of the contract is important to maintain the standards of goods and services. It identifies cost containment  and checks if there are issues in the quality of items delivered and charges back to vendors. Also, it helps companies to make improvement in the vendor selection process in the future.

Why SpendEdge:

At SpendEdge, we understand that companies can leverage significant benefits from the vendor selection process while contracting with vendors. However, it requires a tremendous amount of resources and time. Through this blog, we have tried to establish a framework for vendor selection to help companies succeed in this competitive environment by ensuring supply of quality products and services within schedule.

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