The CPO’s Guide to Strategic Sourcing

A 10-step guide to strategic sourcing implementation

Chapter 6: The Vendor Selection Process

In Chapter 5 you designed a sourcing strategy with the help of the Purchasing Chessboard®. Now your strategy roadmap is in place, and you know how get to your desired negotiating position. If you think back to our strategic sourcing cycle, we have already covered the planning stage and are now moving on to taking action.

The next step is the vendor selection process. In the supply market research chapter, we identified a couple of potential vendors. Now you’ll need to gather detailed information from potential vendors. Using that information, you’ll begin to narrow your options. The RFI process should be utilized to initiate the vendor selection process. The vendor selection process is wrapped up by performing a product qualification and site visit.

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1. Vendor Lifecycle

The vendor lifecycle covers the entire vendor-buyer relationship, from vendor selection, to onboarding and performance measurement, and finally ends with the offboarding process.
Vendor selection is actually the second step in the vendor lifecycle. The first step, market research, we already completed during the planning stage of our strategic sourcing process. The main objective of the vendor selection process idea is to ensure vendors are a good match for the buyer before actually entering into a business relationship. The vendor selection process itself also has several important steps: vendor self-evaluation and qualification, product qualification and site visit.

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Fig.1 Vendor Lifecycle

2. The Vendor Selection Process

 

Self-evaluation and RFIs

After you’ve done your research and found a few interesting companies who could be potential vendors, put together your vendor requirements and a self-evaluation questionnaire. In order to get detailed answers each company and their products, you’ll need to get in contact with them and ask for straight questions. In many companies, the buyer-vendor relationship begins with a vendor self-evaluation. As a time-saving technique, buyers encourage potential vendors to register themselves by filling out a self-evaluation questionnaire on the buyer’s company’s homepage.

However, if you do not have a vendor self-service environment, your best bet is to run an RFI. Whether you run the RFI on a SaaS solution or do it the old way by email, you need to benchmark potential vendors against qualification requirements. An RFI is much more efficient than sending an open-ended email to multiple vendors, especially if you use a SaaS solution specifically designed for the process. An e-sourcing solution lets you ask vendors questions by setting up a questionnaire. This way they’ll be able to provide information about themselves and the products they provide. Plus, you’re able to send the same RFI to several companies, saving you precious time.

In the vendor qualification requirements document, you need to describe expected qualification levels for the focus areas most important to you. Since you are looking for a partner to be part of your supply chain, your requirements should reflect how your company does business on a daily basis. Based on your vendor qualification requirements, put together a questionnaire that can be divided into your preferred focus areas. Add detailed questions to each block. It may be helpful to phrase questions so that they can be answered with yes, no, or partially. This will make it easier to analyze the answers later on. At this point, you can also request evidence for specific questions, such as certificates or other documentation.

Vendor Selection Criteria

Think about including the follow six areas in your self-evaluation questionnaire: Management, Sustainability, Product, Process, Improvement, and Costs.

  1. Management: These questions should convince you the company has management systems in place and follows both internal and external standards. For example, you might ask for quality management certifications, such as ISO9001, or ask about their company code of conduct. Basically, you want to guarantee the company is committed to being an honest partner.
  2. Sustainability: Here you’ll be looking for evidence that the company is financially sustainable and follows all appropriate safety rules. Depending on your company’s primary areas of concern, you can also ask about social and environmental sustainability.
  3. Product: Ask for evidence of the product test reports and certifications. You’ll also want to know how product quality is ensured, whether there is product development process and version handling process, etc.
  4. Process: These questions will help you identify the processes your vendor has in place for handling nonconformities and managing sub-vendors. You’ll want to see that your vendor can target any production issues and fix them before they adversely affect your supply chain.
  5. Improvement It’s also important to see that there’s a continuous improvement process in place. The key here is to discern whether and to what extent vendors cooperate with sub-vendors and/or customers.
  6. Cost: Finally, if they’re willing to share, ask for information on their product cost structure. This may include the factors that affect their pricing, which can help you anticipate cost fluctuations down the line. You may also want to ask them if they are willing to make an effort to reduce costs and share these savings with you, the buyer.

Qualification

Once you get the questionnaire answers back, you can create a nice scorecard and benchmark their scores against the requirements. You can set a threshold (80%, for example) indicating what level of score in order to qualify a vendor. The qualification threshold should not be set in stone, though. There should be some room for flexibility. For example, single source vendors and vendors that supply critical products may need further analysis. On the other hand, vendors supplying indirect products and services may not need to be held to such rigorous standards.

Vendors who do not reach the qualification threshold level should complete an improvement plan and repeat the qualification procedure later on once they’ve carried out their improvement plan.

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Fig.2 Vendor Qualification Scorecard

Product Qualification and Site Visit

During the self-evaluation stage, you also need to make sure that the products you plan to buy meet your standards. You should ask from vendor all product related documentation like certifications, testing reports, etc. While it depends on product sensitivity, you may also want the product tested. Consult with your engineering team, and the vendor to make the necessary arrangements.

Vendors whose products and processes meet or exceed the qualification threshold can be moved on to the next phase: the site visit. During the site visit, sit down with the vendor’s representatives and go through the vendor qualification questionnaire and product documentation together. If certain certifications or documents weren’t provided with their original answers, now would be a good time to make sure you get the evidence you need as support.

The site visit can help you address any lingering questions you might have about the vendor. You can gauge how honest your potential partner was when answering the questionnaire and try to determine whether everything is indeed as good as they said. At the same time you have chance to inspect their premises and meet their teams. You’ll want to make sure the vendor is really a good fit as a collaborative partner in real life and not just on paper.

Summary

Just as strategic sourcing is a continuous process, so, too, is supply base optimization; while you are onboarding new vendors, you will be offboarding others. The category manager is responsible for maintaining an overview of all category vendors at all times. Obviously, you cannot offboard vendors before you have a replacement already in the onboarding phase. Ramping down one vendor and ramping up another should be done simultaneously.

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Fig. 3 Continuous Supply Base Optimization

The vendor selection process should not be underestimated. During this process, you will be able to foresee possible vendor-related risks while still in the early phase of the relationship. This process will help you decide whether to accept this risks and create a contingency plan to deal with them head on, or simply choose to avoid doing business with certain vendors if the risk is too big. In single vendor situations, it is especially important to identify and mitigate risk early on.

The next stage in the vendor lifecycle is onboarding. We will discuss this in the next chapter where I will describe how to carry out the RFP process now that you have qualified potential vendors.

Don’t forget to share this guide with your colleagues!

Written by Peep Tomingas