Supplier Evaluation & Approval

Do you have the right supplier assessment process in place, enabling your procurement group to evaluate and approve suppliers?

Suppliers directly affect your company’s ability to meet its mission and serve its customers. Therefore, it is important to properly assess and qualify a supplier operationally before allowing them to do business with your company. Below is a process that can be applied to conduct an overall business evaluation.

Supplier Evaluation

Let’s assume that the company has already concluded its review of the product specifications, completed a non-disclosure agreement (NDA) sent out the Request for Quotation (RFQ), and suppliers have returned their offers.

Upon review of the responses, a new potential source of supply has appeared, and the company would like to evaluate to determine if the firm should do business with that supplier. The steps below, at a minimum, are usually followed.

  1. Non-Disclosure Agreement (NDA). If not already completed, the first step moving forward is to agree not to disclose any confidential or company proprietary information without the buying (or supplier) firm’s written authorization to do so. There are unilateral and bilateral NDAs.
  2. Supplier Quality Survey. The survey is a questionnaire completed by the supplier that covers all business operations. The supplier’s answers, to this inquiry, provide a general insight as to the degree of expertise and performance in the company’s various departments. Again, the company must determine if their responses are sufficient or warrant further investigation.
  3. Financial Review. If the company under review is a publicly traded corporation, financial records will be readily available from the company’s website or the U.S. Securities and Exchange website. For private companies, you can request the supplier’s management provide financial information. You can also use a financial analysis, called the ‘Z-Score,’ that measures the likelihood of a company filing for bankruptcy.
  4. Tax Payer Identification Number (TIN) and Certification. A new supplier should provide their TIN using the IRS W-9 form.
  5. Supplier Information form. This form contains different types of information including site information, management, and department contacts.
  6. Contract Terms and Conditions (Ts and Cs). It is prudent to send the new supplier the buying company’s Ts and Cs up front to see if there are going to be any exceptions to negotiate.
  7. Commercial Terms. Some companies require specific packaging, product traceability, etc. Likewise, some corporations want to conduct business electronically. The buying company should declare these needs up front so that the supplier understands and can discuss any exceptions.

When each step is completed, a judgement is made that the supplier has either met the requirements in that step, or it has not. At that point, the company makes a ‘value’ decision.

The company can proceed to the next step, halt the evaluation process until they find a remedy, or terminate the approval process and disqualify the supplier. When a supplier completes the entire process satisfactorily, the supplier is approved and added to the ‘approved vendor list’ (AVL).

The steps above have been prioritized, top down. They include general administrative tasks as well as ‘required’ tasks. Administrative tasks were included to organize, control, and streamline the entire supplier evaluation and approval process. Otherwise, the process may not be as organized or can go on longer than planned.

Furthermore, each of these steps may be stumbling blocks for either or both supplier and the buying company. The supplier and buying company need to come to an agreement before moving forward and involving more resources and time.

Plant Visit, Quality and Operational Audits

Not all new suppliers warrant a plant visit or an audit. Typically, the decision to conduct a visit or not depends on how important the proposed purchased product is to the buying company. Likewise, the sourcing model (single, dual or multiple) or the complexity of the product also may warrant more scrutiny.

The idea is to develop a level of confidence in the source of supply. The buying company’s Quality Survey and plant visit, along with quality and operational audits, can provide additional information that may be needed to approve or reject a specific supplier.

Production Part Approval Process

It is important to note that passing the company’s supplier evaluation process does not approve a supplier to produce a product for the company. This supplier approval process is simply stating that the supplier meets the buying company’s general business and operational requirements as a supplier.

To produce a specific production part for the company, the newly approved supplier must go through and pass the company’s Production Part Approval Process.

The Bottom Line

Suppliers directly affect your company’s ability to meet its mission and serve its customers. Therefore, it is important to properly assess and qualify a supplier operationally before allowing them to do business with your company. The process above can be applied to conduct an overall business evaluation. Approval of a new supplier may require a plant visit and/or an operational audit depending on product, complexity, etc. Finally, supplier approval does not imply production part approval.

Related Topics

Supplier Performance Measurement. Today, procurement is expected to bring value to the entire business enterprise. Companies that have a supplier performance measurement system can see if the supplier is helping or hindering their company’s mission and its efforts to serve customers. For more on this topic, please follow this link.

Supply Chain Management. Supply Chain Management involves managing ‘all’ suppliers associated with the sale of a product to the buying company. The company’s Supply Chain Management program should apply to each step taken, by each organization, to transition a product to the ‘end user.’ For more on this topic, please follow this link.

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