SUPPLIER SELECTION

Supplier selection is the process by which firms identify, evaluate, and contract with suppliers. The supplier selection process deploys a tremendous amount of a firm’s financial resources. In return, firms expect significant benefits from contracting with suppliers offering high value. This article describes the typical steps of supplier selection processes: identifying suppliers, soliciting information from suppliers, setting contract terms, negotiating with suppliers, and evaluating suppliers. It highlights why each step is important, how the steps are interrelated, and how the resulting complexity provides fertile ground.

Importance of new suppliers

Several factors make new suppliers important. First, there may exist new suppliers that are superior in some way to a firm’s existing suppliers. For example, a new supplier may have developed a novel production technology or streamlined process which allows it to significantly reduce its production costs relative to predominate production technology or processes. Or, a new supplier may have a structural cost advantage over existing suppliers, for example, due to low labor costs or favorable import/export regulations in its home country.Second, existing suppliers may go out of business, or their costs may be increasing. Third, the buyer may need additional suppliers simply to drive competition, reduce supply disruptionrisks, or meet other business objectives such as supplier diversity.In recognition of these reasons, buyers and their internal customers may be obliged by company policy to locate a minimum number of viable, potential suppliers for every product or service procured.

Information requests to suppliers

Once the buyer has identified potential suppliers, the next step in supplier selection is to formally request that the suppliers provide information about their goods or services. While there is no agreed-upon terminology, generally the buyer makes one of three types of information requests to suppliers. The request types, each appropriate for a different situation, are described below.

Request For Information (RFI) :

 is issued when the buyer seeks to gain market intelligence regarding what alternatives and possibilities are available to meet the buyer’s needs.Typically the buyer asks suppliers what goods and services they could potentially provide,what differentiates them from other vendors in the marketplace, etc. With an RFI the buyer does not state a particular intention to award a contract. However, since responding to an RFI is time-consuming for suppliers, generally suppliers will only respond to the RFI if they expect that the buyer will eventually issue an RFP or RFQ, which is discussed below.

Request For Proposal (RFP) :

 is issued when the buyer has a sense of the marketplace and has a statement of work which contains a set of “performance” requirements which it needs fulfilled. For example, the RFP may describe a formed part with certain strength, flexibility, and fire resistance requirements, but not specify the particular composition of the material. Suppliers respond to the RFP with details on how they would satisfy the buyer’s performance requirements and the price they would be willing to accept to do so.