Buying: Supplier selection (part 2)-What have the Romans ever done for us?

In our blog “Don’t go choosing the wrong supplier Part “ we looked at considerations that impact the commercial arrangement you want for a specific workscope, and cited 3 factors that drive poor contract performance, namely:

·         A focus on failure

·         Arrogant assumptions

·         Mis-aligned supplier selection criteria

Here we will look at the third point; on what basis are you selecting your suppliers/technical partners? Experience again teaches us that there are fundamentally 3 groups of factors that should be taken into account when selecting a supplier.

·         Their ability to deliver your technical basecase at a competitive price

·         Their ability to align with, and contribute to, your higher-level business drivers or stretch targets.

·         The consequences of their selection, both negative, but also positive.

The negative consequences are generally well covered in procurement procedures, assessing the risk of a supplier to deliver the contracted workscope as part of their selection preparations. When actually evaluating suppliers, many organizations focus on the first point and only occasionally consider the other two factors, and even then, rarely as part of their formal selection criteria. We will focus on these two points.

You may only be buying pencils, but if one supplier can do this locally in an environmentally friendly factory, and this is important to you; this may have a greater benefit to your company than selecting the lowest bidder from the other side of the world.

As companies embark on new directions and promote new green, or social credentials, they are invariably going beyond their “procurement comfort zone”, and therefore have a greater reliance on their suppliers to help them achieve these new goals than they recognise. It seems odd that they do not include these new business drivers or the contribution of their suppliers in their selection process.

Similarly, when a supplier provides exemplary service and delivers remarkable results to their client, just to be told that “company rules” dictate that they will need to go to bid for future work with no consideration of what they have delivered to date; their motivation to help contribute to your success plummets.  Assuming the contract pricing is acceptable, the biggest single driver for a supplier is to be able secure future work, so when you refuse to recognize this fundamental business reality, don’t dream, you won’t find a friend, only a mercenary. In terms of consequences, this is 100% within your control, and only has to happen once to provoke this reaction. Evaluating your business needs is a critical part of deciding your procurement strategy. If you truly want a partner include this in your evaluation priorities.

The clarity of direct scope AND your wider business objectives or stretch targets especially through investment and innovation need to make it to the evaluation matrix, and hold sufficient weight to impact your selection.

So, this is not rocket science, so why doesn’t it happen every time?

Partly this is due to insufficient time and effort being spent on the contents of an evaluation, and their alignment with what is really important for the buying company. It is also not quite so simple to do as it seems. Success depends on asking the right questions to the internal stakeholders in the right way depending on the context. Establishing the questions to ask so as that you have consistency is important, training your procurement team to frame the questions in order to obtain greater insight from all stakeholders is a very good investment.

Once you have established your priorities, you must decide what level of collaboration you want to encourage through the commercial model and contract terms. It serves little purpose to propose a motivational commercial model, only to impose penalties that negate the efforts made to earn the bonuses.

The final stage is the way you evaluate your suppliers. Weighted scorecards are convenient, and give a “winner”. However, this is a very binary view of reality. Does this really mean that one supplier was consistently better than all of the others in all areas?, of course it doesn’t. However, converting everything to a score prevents a more realistic evaluation. In place of scores we believe in visualizations based upon commercially pertinent questions. Multiple questions give you the opportunity to “slice and dice” in different ways and assess the suppliers’ strengths and weaknesses from different viewpoints, and can include the indirect drivers so often overlooked. Of course, this is subjective, but unlike a scorecard the subjectivity is visible for all to see and agree upon.  Using the same commercial criteria across contracts allows you to refine your questions as well as compare contracts when completed. Did this contract really perform as you anticipated, and in which areas did it fail.

Peter Kraljic first promoted visulisations when assessing the criticality of a workscope. The Dutch Windmill took it further by looking at the supplier’s attitude to the same workscope. The logical progression is to also include the contribution of your suppliers to your success, not only as a risk to your failure.  Watch this space for a tool to help you achieve this!

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*1 Practical Supplier Selection & Relationship Management – Carter & Croome