LESSON 2

PURCHASING ORGANIZATION IN THE ENTERPRISE

TYPES OF PURCHASES

Organizations buy many different goods and services. All purchases represent a tradeoff between what
an organization can either produce or service internally versus what it must purchase externally. For many
items, the make-or-buy decision is actually quite simple. Few firms could manufacture their own production
equipment, computers, or pencils. However, all firms require these items to support continued operations. The
challenge is deciding which suppliers offer the best opportunity for items an organization must purchase
externally. The following sections outline the variety of goods and services a typical purchasing department is
responsible for buying. Please note that for each category, organizations should establish measures that track
the amount of goods in physical inventory.

Raw Materials

The raw materials purchase category includes items such as petroleum, coal, and lumber, and metals
such as copper and zinc. It can also include agricultural raw materials such as soybeans and cotton. A key
characteristic of a raw material is a lack of processing by the supplier into a newly formed product. Any
processing that occurs makes the raw material saleable. For example, copper requires refining to remove
impurities from the metal. Another key characteristic is that raw materials are not of equal quality. Different
types of coal, for example, can differ by sulfur content. Raw materials often receive a grade indicating the
quality level. This allows raw materials purchases based on the required grade.

Semifinished Products and Components

Semifinished products and components include all the items purchased from suppliers required to
support an organization's final production. This includes single-part number components, subassemblies,
assemblies, subsystems, and systems. Semifinished products and components purchased by an automobile
producer include tires, seat assemblies, wheel bearings, and car frames.
 Managing the purchase of semifinished components is a critical purchasing responsibility because
components affect product quality and cost. Hewlett-Packard buys its laser jet printer engines, which are a
critical part of the finished product, from Canon. HP must manage the purchase of these engines carefully and
work closely with the supplier. Outsourcing product requirements increases the burden on purchasing to select
qualified suppliers, not only for basic components, but also for complex assemblies and systems.

Finished Products

All organizations purchase finished items from external suppliers for internal use. This category also
includes purchased items that require no major processing before resale to the end customers. An
organization may market under its own brand name an item produced by another manufacturer. Why would a
company purchase finished items for resale? Some companies have excellent design capability but have
outsourced all production capability or capacity. Examples include IBM, Hewlett-Packard, Sun, Cisco, General
Motors (Geo), and others. The purchase of finished products also allows a company to offer a full range of
products. Purchasing (or engineering) must work closely with the producer of a finished product to develop
material specifications. Even though the buying company does not produce the final product, it must make sure
the product meets the technical and quaity specifications demanded by engineering and the end customer.

Maintenance, Repair, and Operating Items

Maintenance, repair, and operating (MRO) items include anything that does not go directly into an
organization's product. However, these items are essential for running a business. This includes spare
machine parts, office and computer supplies, and cleaning supplies. The way these items are typically
dispersed throughout an organization makes monitoring MRO inventory difficult. The only way that most
purchasing departments know when to order MRO inventory is when a user forwards a purchase requisition.
Because all departments and locations use MRO items, a typical purchasing department can receive
thousands of small-volume purchase requisitions. Some purchasers refer to MRO items as nuisance items.

Historically, most organizations have paid minimal attention to MRO items. Consequently, (1) they have
not tracked their MRO inventory investment with the same concern with which they track production buying. (2)
they have too many MRO suppliers, and (3) they commit a disproportionate amount of time to small orders.
With the development of computerized inventory systems and the realization that MRO purchase dollar volume
is often quite high, firms have begun to take an active interest in controlling MRO inventory. At FedEx, an
agreement with Staples allows purchasing to be free of the burden of tracking office supply requests. Instead,
Staples provides a website listing all supplies with prices; users can point and click on the items they need, and
the supplier will deliver them to the users' location the next business day.

Production Support Items

Production support items include the materials required to pack and ship final products, such as pallets,
boxes, master shipping containers, tape, bags, wrapping, inserts, and other packaging material. Production
support items directly support an organization's production operation; this is a key distinction separating
production support from MRO items. The DaimlerChrysler sourcing snapshot in Chapter 19 provides a good
example of how this activity can be managed.

Services

All firms rely on external contractors for certain activities or services. An organization may hire a lawn
care service to maintain the grounds around a facility or a heating and cooling specialist to handle repairs that
the maintenance staff cannot perform. Other common services include machine repair, snow removal, data
entry, consultants, and the management of cafeteria services. Like MRO items, the purchase of services
occurs throughout an organization. Therefore, there has been a tendency to pay limited attention to them and
to manage the service purchases at the facility or department level. A study by AT&T several years ago
revealed that the company was spending over a billion dollars a year on consultants. As with any purchase
category, careful and specialized attention can result in achieving the best service at the lowest total cost.
More and more, companies are negotiating longer-term contracts with service providers just as they would with
other high-dollar purchase categories.

Capital Equipment

Capital equipment purchasing involves buying assets intended for use exceeding one year. There are
several categories of capital equipment purchases. The first includes standard general equipment that involves
no special design requirements. Examples include general-purpose material-handling equipment, computer
systems, and furniture. A second category includes capital equipment designed specifically to meet the
requirements of the purchaser. Examples include specialized production machinery, new manufacturing plants,
specialized machine tools, and power-generating equipment. The purchase of these latter items requires close
technical involvement between the buyer and seller.

PURCHASING FUNCTIONS

Product Design

Product design had been largely the responsibility of marketing and engineering. Recently, however, it
is becoming more obvious that other functions should be involved in the product design process. One of the
leading concepts in this area is concurrent engineering or participative design/engineering—a concept that
refers to the simultaneous participation of all the functional areas of the firm in the product design activity.
Suppliers and customers are often included in the product design process. The intent is to enhance the design
with the inputs of all the key stakeholders. Such a process should ensure the final design meets all the needs
of the stakeholders and should ensure a product that can be quickly brought to the marketplace while
maximizing customer value and minimizing costs.

Product Specifications
 Once the product has been designed, there is a need to further define it by developing the product
specifications. A specification is “a clear, complete, and accurate statement of the technical requirements of a
material, an item, or a service, and of the procedure to determine if the requirements are met.” Product
Engineering is a key player at this point; however, as they specify the materials and services required,
purchasing personnel must also participate in decisions involving the availability and costs of those materials
and services.

Target Costing

Traditionally, companies designed and specified the product. Then, based on the projected cost, they
could add the markup and calculate a selling price for the product. In recent years, however, it has become
apparent that the marker strongly influences prices of many products. Consequently, many companies are now
working with a concept called “target costing.” This approach first determines what an acceptable selling price
will be to compete in the marketplace, and subtracts a desired contribution margin to arrive at an acceptable,
or target, cost. The equation for this process is:

Projected selling price minus the desired profit contribution equals the product target cost

Supplier Selection

Supplier selection is critical in the contemporary purchasing approach. In the past, vendor turnover was
more common when orders were awarded based on the most recent low bid. There were no guarantees that
getting today’s order gave a supplier an advantage on getting the next order. Buyers pursued low prices with a
vengeance and did not place a high value on continuing relationships.

Today, suppliers are selected for their potential to sustain a long-term relationship. Companies consider
factors other than price in the supplier selection process. These factors include product quality, on-time
delivery performance, facility proximity, industry position, financial stability, product development assistance,
continuous improvement capability, operational flexibility, and ethical operating standards.

Supplier Location

Supplier location is one of the criteria used in selecting vendors. It is especially important because of
the emphasis on reducing supply chain response time. For this reason, it is desirable to have suppliers located
close by. Some companies are even experimenting with having their suppliers on-site to reduce delivery time;
however, these facilities are largely experimental at this point. Ironically, at the opposite end of the spectrum,
some buying organizations are using suppliers that are on the other side of the globe because of the
attractiveness of lower costs.

Resolving the conflict between a desire for the close proximity of suppliers with a desire for low
purchase costs requires careful analysis.

Inventory Management

Inventory management is an important component of supply chain management. Inventory is defined

as “those stocks or items used to support production (raw materials and work-in-process items), supporting
activities (maintenance, repair, and operating supplies), and customer service (finished goods and spare
parts). Demand for inventory may be dependent or independent. Inventory categories include anticipation,
hedge cycle (lot size), fluctuation (safety, buffer, or reserve), transportation (pipeline), and service parts.”
 Effective supply chain inventory programs require collaboration among all supply chain participants.
While one party may be more influential than others in a supply chain, there is little room for non-participants.
The purchasing function is usually able to act as an enabler to provide effective interfaces along the supply
chain.

PURCHASING PROCESS

Joyce describes the purchasing cycle as follows: “The purchasing cycle begins with a request from
within the organization to purchase material, equipment, supplies, or other items from outside the organization,
and the cycle ends when the purchasing department is notified that a shipment has been received in
satisfactory condition.”' He lists the main steps in the cycle as (1) Purchasing receives the request; (2)
Purchasing selects a supplier; (3) Purchasing places the order with a vendor; (4) Orders are monitored; and (5)
Orders are received. Figure 8.2 shows the general model of the ordering activities.

1. Prepare order and sent to supplier

2. Supplier checks credit of customer before shipping
3. Supplier prepares order for shipment
4. Supplier prepare invoice
6. Supplier ships to customer, directly or through third party
6. Purchasing sends purchase order to accounting
7. Operations sends receiving report to accounting
8. Supplier sends invoice to customer (accounts payable)
9. Accounts payable reconciles purchase order, receiving report and invoice: approves payment
10. Customer bank sends electronic funds transfer to supplier bank

PURCHASING CYCLE (1st)

A typical purchase follows a similar set of steps in almost every organization. First, there has to be a
recognition of a need for a purchase to be made. This need may be identified through the use of am MRP
system, a forecast, or a stockroom cycle count. To communicate this need to purchasing, whatever function
determined there was a need for an item fills in some type of order form, for example, a purchase requisition
form. Purchasing then determines the potential sources for obtaining the material. If it is a routine purchase,
there will ordinarily be suppliers' names and information on file in the purchasing office. If it’s not a routine
purchase, the purchasing agent will search through directories, obtain recommendations from users, search
the internet, or request information from potential suppliers.

Purchasing agent. A person authorized by the company to purchase goods and services for the company.
APICS Dictionary 8th edition, 1998
PURCHASING CYCLE (2nd)

Once sources have been identified, purchasing typically invites the sources to bid by sending a request
for proposal (RFP) or quotation to them. In the age of the Internet, some potential suppliers have been able to
automate this by providing web pages that allow a potential customer to submit their RFP to them
electronically. If the request is for an item similar to what has been manufactured by the company, it is
sometimes possible for the purchasing department to quickly receive an electronic bid.

Request for proposal (RFP). A document that describes requirements for a system or product and requests
proposals from suppliers. APICS Dictionary 8th edition, 1998

PURCHASING CYCLE (3rd)

Once the purchasing department has a bid that is acceptable (which means that the provider is
reputable, the product to be purchased meets specifications, and the price is appropriate), the purchasing
department prepares a purchase order (PO). The formality of this PO may depend on the size of the purchase.
If it 1s an expensive one-time buy, the purchase order may be very detailed. If it is a low-cost item, such as the
purchase of a training manual or book, it may be done over the phone or by fax.

Purchase order. The purchaser's authorization used to formalize a purchase transaction with a supplier. A
purchase order, when given to a supplier, should contain statements of the name, part number, quantity,
description, and price of the goods or services ordered; agreed to terms as to payment, discounts, date of
performance, and transportation; and all other agreements pertinent to the purchase and its execution by the
supplier. APICS Dictionary 8th edition, 1998

Often when the items being purchased are used by production, purchasing will monitor the progress of
the order. It will evaluate progress by the supplier and keep operations informed about any problems. This may
be done with some type of purchasing follow-up report or via information that is posted on the company’s
intranet.

Firms have a receiving function to ensure that the material and equipment they actually receive are
what the company ordered and paid for. Depending on the firm's relationship with its supplier, receipt of the
material may be confirmed by the supplier itself, or it may be received by a separate function which performs
only this task. The receiving function checks the quantity of material received and may perform quality control
checks on it or send it to a quality control lab to do this. The receiving function records discrepancies and logs
the receipt of the material into the system and then places it in its appropriate storage location until it is
needed.

Receiving—The function encompassing the physical receipt of material, the inspection of the shipment for
conformance with the purchase order (quantity and damage), the identification and delivery to destination, and
the preparation of receiving reports. APICS Dictionary, 8th edition, 1998

Receiving report—A document used by the receiving function of a company to inform others of the receipt of
goods purchased. APICS Dictionary, 8th edition, 1998

PURCHASING CYCLE (4th)

 Once the material is received by the firm, it has to be paid for. This is usually done by accounting. But,
accounting needs to reconcile the invoice received from the vendor with the receiving report and the supplier
needs to resolve any discrepancies.

Purchasing performs another function during this purchasing cycle. It maintains records about suppliers
and the performance as well as records about the receipt of materials and the sources of these materials.

PURCHASING

When an Organization has several plants located in different geographical regions, there are two
alternatives. One, to have a centralized purchase department located at the headquarters. The other, to have a
decentralized purchasing department set up in each plant.

CENTRALIZED PURCHASING

Centralized Purchase refers to purchasing all the requirements under the central point of the
organization. Likewise, Decentralized Purchase refers to the purchasing of requirements of each production
center in an organization.

● Business Dictionary defines centralized procurement as a purchasing system in which all the departments of
a company with a wide geographical distribution can make purchases through a common purchasing
organization.

● In simple words, centralized procurement is a purchase of all required goods and services by a single
department for all the branches of the entire company. Generally, a purchasing manager heads the
department.

● Centralized procurement is beneficial in finding the best deals with local vendors for the corresponding
location of the company department. It not only aids in avoiding duplicity of orders, but also promotes
advantages arising from the high volume bulk discounts, lower transportation and inventory management
costs. Centralized purchasing is an indispensable solution for those who feel difficulties in managing long-
running transitions and mending fences.

● Combining the requirements of Plants and buying in bulk leads to substantial reduction in purchase cost.

● There is only one department dealing with limited items, a high order of purchase skill can be expected.

● Inter-Plant transfer of materials in an emergency is possible.

● Surplus Materials in one Plant can be utilized in meeting the requirements of another.
● The Centralized Purchase Department at Headquarters may lay down common policies, procedures and
systems for all the plants.

● A periodic reporting system may be established between the plants and the Centralized Purchase
Department at Headquarters.

● Organizations having Multi-plant operations would benefit by adopting a judicious blend of decentralized
setup with centralized control.

MORE CENTRALIZED PURCHASING BENEFITS

1. Overhead expense reduction

First and probably the most important feature of centralized purchasing is the reduction in overhead
costs for the enterprise. Separate facilities require not only individual lease agreements, but also separate
utility deposits, insurance policies, security features, office equipment, network, etc.

2. Better relationships within the organization

Interpersonal communication in recent years has been consistently placed high as an important
requirement for conducting successful job performance in the organizations. Communication is what makes a
team strong. In a centralized office, where employees and managers have the opportunity to interact in person,
atmosphere is much more pleasant, than in departments where colleagues communicate via telephone or
email. Company meetings, conferences and training seminars that are held in a group setting increase
employee productivity and rally team.

3. Advanced control
Management teams may operate more efficiently and cost effectively in a centralized office. Managers
who are often absent or spread out among various departments are typically less effective due to the absence
of regular contact with employees.

4. Team cohesion
Employees who work together as a collective group get to know one another’s work styles and
approaches as their own. That’s why such teams are typically better able to collaborate on projects as a group.
A centralized office also increases its ability to be consistent across all channels, with employees all working
under the same set of guidelines with regard to brand development and customer service directives.

5. Saved money
Centralized purchasing has many cost-saving features. Purchasing managers can buy in bulk at
reduced costs, can better manage inventory and assess company needs. Moreover, in centralized
procurement there is no need to employ individual managers for individual locations. It’s obvious that addition
of duplicate staff positions implies additional costs. Fortunately, in centralized purchasing you don’t have to
bother about that.

6. More benefits
Among the other key advantages of centralized procurement, we can define avoidance of duplication,
saved time, knowledge resource sharing, reduced transportation costs, increased specialization, better
relationships with the buyers and uniformity in purchasing policies.

CENTRALIZED PURCHASING DISADVANTAGES

● Complex management of the company in case organization becomes too large;
● Difficulties with timely replacement of defective materials;
● High probability of delays – often requisitions for goods have to be sent from distant areas;
● Difficulties with purchasing materials from local suppliers in case of an emergency;
● Centralized purchasing is not suitable, if branches are located at different geographical locations

CENTRALIZED PURCHASING FUNCTIONS

CENTRALIZED PURCHASING TASKS

CENTRALIZED PURCHASING COORDINATION

The Centralized Purchase Department at Headquarters has to work in close coordination with all
Decentralized Purchase Departments at Plants and Finance Department at Headquarters. Only an atmosphere
of mutual trust will ensure that these departments will work towards the total organizational objectives.

DECENTRALIZED PURCHASING

● Decentralized purchasing is just the reverse of centralized purchasing. This is suitable for organizations
running more than one plant. Under this type, each plant has its purchasing agents. In other words, every
department makes its purchases. This also calls localized purchasing. Also, Decentralized purchasing is quite
flexible and can quickly adjust following the requirements of a particular plant.
● More attention can pay by the departmental head to buying problems as he will be carrying the limited
number of activities in his department and he can hold responsible for the purchase of goods and the overall
performance of the plant. The serious drawback which emerges from this type is the lack of uniformity in
purchasing procedure in the organization.

● At the same time, uniformity in prices cannot ensure and every departmental head may not possess the
caliber of an expert buyer. This method also poses the problems of coordination among various departments of
the organization and usually leads to unplanned buying. In comparison to centralized buying, this method
involves a lesser economy in purchasing.

DECENTRALIZED PURCHASING ADVANTAGES

● Materials can purchase by each department locally as and when required.

● Timely availability of materials.
● Materials are purchasing in the right quantity of the right quality for each department easily.
● No heavy investment requires initially.
● Less cost of internal transport.
● Lower chance of obsolescence.
● Purchase orders can place quickly, and.
● The replacement of defective materials takes little time.

DECENTRALIZED PURCHASING DISADVANTAGES

● Organization losses the benefit of a bulk purchase.

● Poor layout of space.
● More finance requires.
● Duplicate purchase of materials.
● Specialized knowledge may be lacking in purchasing staff.
● There is a chance of over and under-purchasing of materials.
● Fewer chances of effective control of materials.
● Less technical skill obtains.
● More clerical work, and.
● Lack of proper co-operation and co-ordination among various departments.

CENTRALIZED VS DECENTRALIZED PURCHASING

● MEANING: Centralized is the retention of powers and authority concerning planning and decisions, with the
top management, knows as Centralization. However, decentralized is the dissemination of authority,
responsibility, and accountability to the various management levels know as Decentralization.

● TERMS OF PURCHASE: Centralized is Due to the large scale order, better terms of purchase may be
available, but Decentralized in Less favorable terms may be available.

● NATURE: Centralized is usually involves two people; a manager and his subordinate. But decentralized
involves the entire organization; from the top management to individual departments.

● ADVANTAGE: Centralized is proper coordination and Leadership, but Decentralized is sharing of burden and
responsibility.
● CONTROL: Centralized is controlling by the manager or the delegator controls it. But decentralized control
rests with the respective departments or classes.

● NEED: Centralized need all organizations to need delegation to get things done, Delegating authority is
essential to assign responsibility. But decentralized is an optional mode of working, Organizations can also
work in a centralized manner.

● RESPONSIBILITY: Centralized Responsibility is the delegator can delegate authority but the responsibility
remains with him, the delegator is accountable for the task. However, decentralized is the head of the
departments responsible for the activities performed under him, Therefore, responsibility is fixed at the
department-level.

● INVOLVES: Centralized is involves in Systematic and consistent reservation of authority. Similarly,

decentralized involves Systematic dispersal of authority.

PURCHASE COST

● “Everywhere Production goes, Costs follow behind like a shadow.”

● Purchasing is the act of buying the goods and services that a company needs to operate and/or manufacture
products.

● Given that the purchasing department of an average company spends an estimated 50 to 70 percent of
every revenue dollar on items ranging from raw materials to services, there has been greater focus on
purchasing in recent years as firms look at ways to lower their operating costs.

● Purchasing is now seen as more of a strategic function that can be used to control bottom-line costs.

● Purchase Cost is the cost incurred in procuring the raw materials/input goods.

TRADITIONAL PURCHASING PROCESS

● Requisition, soliciting bids, purchase order, shipping advice, invoice, and payment.
● Regarded as unacceptably slow, expensive, and labor intensive.
● Purchasing was seen as essentially a clerical function.
● Purchasing simply was not considered to be a high-profile or career fast-track position.

PURCHASING

● That attitude has changed in recent years, in part because of highly publicized cases wherein companies
have achieved stunning bottom-line gains through revamped purchasing processes.

● As a result, new strategies are being used in purchasing departments at companies of all size.

MODERN PURCHASING PROCESS

● New concept of total cost of ownership (TCO).

● Instead of buying the good or service that has the lowest price, the buyer instead weighs a series of
additional factors when determining what the true cost of the good or service is to his or her company.

● These factors can include "price, freight, duty, tax, engineering costs, tooling costs, letter of credit costs,
payment terms, inventory carrying costs, storage requirements, scrap rates, packaging, rebates or special
incentive values, [and] warranty and disposal costs."

PURCHASING COST REDUCTION IDEAS

“Planning for the purchases is one way to reduce the cost.”

● BULK BUYING: The companies which have greater geographical presence or are multi locational can
achieve better price by buying bigger volumes instead of buying for individual units. Central buying policies are
recommended for such unit .Bulk buying results in annual contracts for a period of six – twelve months for
entire year requirement with prices being finalized for the entire period .

● OPPORTUNITY BUYING: Most of the commodities and raw material has seasonal cycle of prices as they
peak and fall in intervals .Hence we can book maximum amount of our requirement when prices are low.

● LOCAL VENDORS: Vendors should be located in close vicinity of company which helps in keeping low
inventory as well as low freight cost .

● PARTNERSHIPS WITH MAJOR VENDORS: It is highly recommended to have partnership with vendors in
either having equity or technical collaboration so as to pass on savings to the customer . Which results in cost
reduction in manufacturing cost. Most of the Automobiles Majors has this kind

● E Procurement: Putting up tenders and requirement on Internet and setting up auction for requirement on
web which helps in reaching out more numbers of vendor base . This also helps in cutting cost when we opt for
conventional way of asking tender/quotation . Most popular way of procurement strategy is reverse auction ,
where the lowest price bidder takes away the order.

● BUYING MATERIAL FROM TAX EXEMPTED AREA: In several countries the federal/ State govts provide
tax havens for manufactures for certain period say 10- 15 years .Hence buying from these areas helps in
cutting cost .In common parlance it is called TAX HOLIDAYS . Look out for such places prior to placing orders.

● ALTERNATE MATERIAL:
○ Select high cost items and replace it by some low cost material.
○ Eg; steel by plastic/aluminium.

● TRY MERGE IN TRANSIT: The concept of in-transit product merging—where, for example, two things are
shipped from different locations and then married in transit so that they reach the customer as a single
shipment—can be seen as a technique for reducing inventory .

● VENDOR MANAGED INVENTORY (VMI): With the appropriate incentives, allowing suppliers to assume the
responsibility for replenishment of your inventory, because of their visibility into both their own inventory and
production schedule and your demand data, can almost always reduce your inventory.

SUPPLIER APPRAISAL (VENDOR ASSESSMENT)

● Vendor assessment is an evaluation and approval process that businesses can use to determine if
prospective vendors and suppliers can meet their organizational standards and obligations once under
contract. The end goal is to secure a low-risk, best-in class vendor and supplier portfolio. ● Vendors and
suppliers both furnish services or goods, but there is a distinction: The term vendor applies to business-to-
business (B2B) and business-to-consumer (B2C) sales relationships, while supplier applies only to B2B
relationships.

BENEFITS OF VENDOR ASSESSMENT

● Risk Mitigation: By carefully vetting vendors and suppliers, you can lower the regulatory, contract, and
security risks of working with entities outside your company.

○ Lower Regulatory Compliance Risk: Confirm compliance with the laws, regulations, and standards that apply
to your business. If your vendor is in another country or you sell to another country, check those countries’
legal requirements, too. For example, if you do business in the European Union, the General Data Protection
Regulation (GDPR) applies.

○ Scope of Service and Contract Compliance: Conduct a legal review of contract terms, nondisclosure
agreements (NDAs), or partnership agreements to ensure that you’ve set favorable conditions and mitigated
any risks.

○ Decrease Security and Cyber Risk: The threat of cyber risk grows as we increasingly move our work to the
cloud. Therefore, it’s crucial to protect all your customer and company data. Your selection process should
focus on assessing a third-party vendor or supplier to store your data. First, identify and evaluate the type of
data that vendors and suppliers may need to access, and decide whether they need to access all, some, or
none of it to do their work. It’s crucial to ensure the vendor takes the proper measures to encrypt and protect
your data. Once you Identify potential partners, have them complete a questionnaire that thoroughly covers
security management system details.

SUPPLIER PERFORMANCE MONITORING

● Financial health: sales, profitability, liquidity, return on investment (ROI), debt ratio, transparency of finances
(Aiter et al., 2011).

● Expertise: network capabilities, quality and production capabilities, technical level compared to sector
average, spread of technical creation, investment in R&D (Aiter et al., 2011).

● Operational performance: on-time delivery, lead time, responsiveness, inventory management and control,
order acceptance, processing and fulfilment, customer service, preventive maintenance, hours of operations
training (Aiter et al., 2011).

● Business processes and practices: how a supplier provides a product or a service at the best value, on time
and as required (Aiter et al., 2011).

● Behaviours and cultural factors: the improvement culture, information capabilities, intention of coordination
(Aiter et al., 2011).

10C MODEL OF SUPPLIER EVALUATION (BY DR. RAY CARTER)

CARTERʼS 10 C MODEL

● Competency: Ask vendors to provide evidence of proven quality with other customers, and review their
training and development procedures, qualification records, essential personnel background and abilities, and
recruitment methods.

● Capacity: Look into prospective partners’ current and forecasted orders and customers, along with how that
impacts the ability to meet your current and projected requirements. Ask for operational statistics around
quality- or service-level challenges, which should be readily available if the supplier is ISO 9000 accredited. To
learn more about this accreditation read “The Ultimate Guide to ISO 9000.”

● Commitment to Quality: Review the policies and procedures the company uses on an ongoing basis to
monitor and manage quality and adherence to industry standards, such as ISO 9000 and HIPAA.

● Consistency of Performance: Ensure that your future partner will be able to deliver consistently high levels of
quality and service throughout the life of the contract. For example, look for a vendor that assigns an account
manager as a single point of contact dedicated to quality control and oversight; this indicates the vendor’s
commitment to high performance.

● Cost: Review whether the product or service can be delivered at a reasonable price and keep your vendor or
supplier in business.

● Cash and Finance: Of course, you want to work with a financially stable entity. Request the most recent fixed
and current asset lists, profit and loss (P&L) statements, and credit rating documentation.

● Communication: Ensure that your vendor or supplier will set up and manage (or conform to your existing)
communications channels, whether in person with your account manager and other key personnel, via virtual
meetings, or with collaboration software.

● Control of Internal Processes: Ask for evidence of how the company manages inventory, quality control
operations procurement, marketing, distribution and health, and safety.

● Clear (Corporate Social Responsibility): Vendor and supplier services and products should conform to legal
and environmental standards and requirements.
● Culture: Determine if you and your potential partner share values and working philosophies before you enter
into a contract. A similar outlook makes for smoother work relationships and helps you establish long-term
partnerships.

DIFFERENT METHODS OF VENDOR EVALUATION

● There is no single vendor evaluation method that covers every circumstance. To evaluate vendors, take into
consideration your business and the vendor classification, as well as whether the vendor is a prospect or
already under contract, and if you're conducting a post-award review.

● Following is a list of common methods that you may use to conduct your vendor evaluation:
○ Commercial: When considering the commercial side of any potential vendor or supplier, keep in mind their
reputation, market dominance, market and advertising presence, awards, ability to deliver promptly, and
existing clients.

○ Technical: A technical evaluation is centered on standards for compliance, innovation, technical equipment,
and scientific capabilities. ○ Records: In this type of vendor evaluation, you collect data from public sources,
such as financial records, industry news items, and award notices. ○ Before-the-Fact: In this type of evaluation,
the evaluator plans and starts gathering data public data sources and vendor or supplier endorsement or
reviews early in the history of the project. Replies to RFIs and RFPs with substantiating documents should
provide many of the necessary answers, too.

○ After-the-Fact: For this evaluation, review a first engagement or shipment and assess performance and
process. Ask critical stakeholders about successes, failures, and operations. Responses provide data for
decisions, future planning, and discussions after an event is complete.