Supplier evaluation is a term used in business

Business

A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...

 and refers to the process of evaluating and approving potential suppliers by factual and measurable assessment. The purpose of supplier evaluation is to ensure a portfolio of best in class suppliers is available for use. Supplier evaluation is also a process applied to current suppliers in order to measure and monitor their performance for the purposes of reducing costs, mitigating risk and driving continuous improvement.

Process

Supplier evaluation is a continual process within purchasing

Purchasing

Purchasing refers to a business or organization attempting for acquiring goods or services to accomplish the goals of the enterprise. Though there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations...

 departments and forms part of the pre-qualification step within the purchasing process, although in many organizations it includes the participation and input of other departments and stakeholders. Most experts or firms experienced in collecting supplier evaluation information prefer doing so using five-step processes for determining which to approve. Their processes often take the form of either a questionnaire

Questionnaire

A questionnaire is a research instrument consisting of a series of questions and other prompts for the purpose of gathering information from respondents. Although they are often designed for statistical analysis of the responses, this is not always the case...

 or interview, sometimes even a site visit, and includes appraisals of various aspects of the supplier's business including capacity, financials, quality assurance

Quality Assurance

Quality assurance, or QA for short, is the systematic monitoring and evaluation of the various aspects of a project, service or facility to maximize the probability that minimum standards of quality are being attained by the production process...

, organizational structure and processes and performance. Based on the information obtained via the evaluation, a supplier is scored and either approved or not approved as one from whom to procure materials or services. In many organizations, there is an approved supplier list (ASL) to which a qualified supplier is then added. If rejected the supplier is generally not made available to the assessing company's procurement team. Once approved, a supplier may be reevaluated on a periodic, often annual, basis. The ongoing process is defined as supplier performance management.

Benefits and Drawbacks

There are various benefits associated with an effective supplier evaluation process such as mitigation against poor supplier performance or performance failures. The benefits typically include sourcing from suppliers that provide high standards of product and service levels whilst offering sufficient capacity and business stability. Supplier evaluation can help customers and suppliers identify and remove hidden cost drivers in the supply chain. The process of evaluating performance can motivate suppliers to improve their performance.

Associated challenges with supplier evaluation include resource and cost commitments in establishing and maintaining a robust and effective system, challenges with specifying and gathering meaningful and relevant information, data integrity, scorecards that do not get at the root causes of supplier problems, and subjective or inconsistent scoring which may result in inaccurate assessment. Another challenge is making sure that evaluation of current suppliers goes beyond measurement to actual performance improvement by providing feedback to suppliers on their performance and working on continuous improvement opportunities. Thus, management commitment to and support of a supplier evaluation process is essential.

Tools

Some of the challenges associated with supplier evaluation may be mitigated by the use of appropriate tools. For simple projects a spreadsheet can be can used. But as evaluations become more complex or more frequent data management and data integrity issues become significant. Web Electronic RFP / Tendering systems are often used for initial selection projects. Some products provide functionality for combining both initial selection and ongoing evaluation and benchmarking.