January 10th, 2018
Evaluation of the supplier, awarding the contract and monitoring performance
The determination of the supplier to whom the buyer awards the contract follows a process of ranking the suppliers according to the selection attributes, negotiation outcomes and other business considerations. For evaluation, the buyer first delineates the metrics that will inform the rating of the supplier for ranking purposes. For instance, after reviewing 76 papers on supplier evaluation, Thanaraksakul and Phruksaphanrat (2009) found out that most buyer’s used quality, delivery and cost to inform their evaluation of suppliers. Other criteria that were evaluated to feature in buyers consideration of the supplier included supplier’s production facility and capacity, flexibility and reciprocal arrangement, technical capacity and support, and repair services and follow-up (Thanaraksakul & Phruksaphanrat, 2009). The supplier’s capcity in information and communication technologies, financial status and R&D and innovation potential were also aspects that most buyers considered (Thanaraksakul & Phruksaphanrat, 2009). Although buyers in the studies reviewed by Thanaraksakul and Phruksaphanrat (2009) rarely considered aspects such as terrorism risk in their supplier evaluation, the nature of business and changes in the operating environment could make such considerations significant (Biel, 2009). For instance, terrorism could be a core concern in sourcing shipping suppliers in places where piracy dominates.
Once the buyer establishes such metrics, the number of dimensions that factor into the evaluation process determines the complexity of the ranking process. Where only a single dimension, e.g. cost, is the determinant, the ranking process is simple (Biel, 2009). However, where multiple dimensions compete for the buyers’ attention, the buyer has to delineate the weight accorded to each dimension. In such a case, the buyer must establish the level of tradeoff among any competing dimensions that he or she is willing to condone (Biel, 2009). Apart from weighting each dimension, a more detailed evaluation of the importance of each dimensions by using operation resource tools such as mathematical programming to model the effect that non-observance of each dimension would have on the buyer’s business (Biel, 2009). Dimensions that bear a higher risk to the business thus become the core consideration for the buyer in the choice of supplier. When the buyer cannot quantify ones preference for the dimensions for consideration in supplier evaluation, a third alternative would be to rate such dimensions by observing how the prospective suppliers choose options that involve similar dimensions (Biel, 2009).
The evaluation of the suppliers paves way for the buyer to award the contract to the supplier or a set of suppliers. Apart from the ranking that follows the evaluation, other aspects may factor into the buyer’s award decision. One of such factors is whether a sole supplier or a combination of suppliers would better deliver the contract (Biel, 2009). The award to one supplier is termed a sole award, and it is influenced by considerations such as the risk or cost involved in dealing with multiple suppliers (Beil, 2009). Other factors favoring a sole award include the need to monitor the supplier to protect leakage of products’ core attributes such as intellectual value, capital investments required for performance of the contract, and the need for a long-term strategic partnership (Biel, 2009).
Based on other considerations, however, the buyer could award the contract to many suppliers resulting into a multiple-award. In such cases, considerations such as diversification of sources to reduce disruption risks, supplier’s lack of appropriate capacity and reverse economies of scale feature (Biel, 2009). Other reasons for multi-award may entail strategic aspects such as lowering the bargaining power of the supplier (Porter, 2008). In this respect, the buyer chooses multiple suppliers thus averting a case where a monopolistic supplier results, who would subject the buyer to unfavorable contract terms. Accordingly, the buyer engages the many suppliers, for instance, to keep them in business, thus avoid being subjected to a monopolistic supplier who dictates the terms of the contract (Biel, 2009).
Other considerations could influence the supplier who the buyer contracts. For instance, government buyers may favor local suppliers to boost the economy, even where such buyers do not emerge the best in the ranking (Biel, 2009). Other factors that could serve to influence the choice of the supplier include need for continuity (where a new supplier implies massive training costs for integration with buyer systems), obligation to award suppliers from historically disadvantaged groups, and supplier geographical location (Biel, 2009).
Irrespective of the criteria resulting into the award of the contract, the features of the process may influence the eventual outcome of the contract. For instance, a transparent process would reduce the chances of suppliers collaborating to defeat the evaluation process of the buyer (Biel, 2009). For instance, such transparency would arise where the supplier who provides the lower bids wins the contract. In this case, side deals between suppliers in exchange for some considerations or bribe would be avoided. Such importance of the integrity of the process in informing the contract’s outcomes informs the use of a competitive-bidding process by various governments (Biel, 2009).
For long-term contracts, monitoring the supplier’s performance is critical in determining renewal of such supplier’s contract. Monitoring also ensures that the supplier adheres to the terms outlined in the supply contract (Biel, 2009). Additionally, monitoring enables the buyer to recover costs in the event that the supplier fails to meet specifications of the contract (Biel, 2009). The monitoring process involves the review of supplier performance based on the benchmarks established throughout the supplier selection process. For instance, suppliers may be evaluated on their delivery efficiency based on historical performance revealed during the supplier evaluation process (Biel, 2009). Alternatively, such evaluations may be based on the supplier’s ability to meet the agreed-upon milestone in contracts that spread over a long period.