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Supplier Selection Essay

7844 words - 32 pages

Supplier Selection
by Damian Beil Stephen M. Ross School of Business July 2009

Abstract: 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 ...view middle of the document...

There is also a growing audience for such research, as the importance of fostering talent by employing buyers with analytical expertise, general management backgrounds, and deep knowledge in a particular purchasing category becomes widespread [3]. This article is organized around the major steps involved in supplier selection. First, the buyer must identify qualified potential suppliers, as described in Section 1. Next, the buyer must evaluate these suppliers. This process is initiated when the buyer formally 1

solicits information from suppliers, as described in Section 2. Depending on the information request, suppliers respond by providing “bids” for the contract, specifying an offer on the contract terms, such as price, leadtime, quality, etc. Various contract terms, which relate to the type of contract up for bid, are overviewed in Section 3. Suppliers’ offers often evolve over the course of negotiation with the buyer, and negotiation processes are touched on in Section 4. Finally, as discussed in Section 5, the buyer determines which supplier or suppliers will be awarded a contract and subsequently monitors the supplier during the life of the contract to support future supplier selection iterations. Finally, Section 6 discusses ORMS research on supplier selection. While this article introduces the key steps in supplier selection, further readings in this encyclopedia can provide a more detailed picture. Pointers to such readings are suggested throughout this article; most importantly, see Article 4.4.4 for details on procurement contracts and Articles 3.3 and 3.5 for discussions about negotiations. For consistency in the article we refer to “buyers,” but in practice the role we describe is also called procurement manager, procurement agent, or contracts manager. This article focuses on the complexities and frictions involved in supplier selection (verifying that suppliers are indeed qualified, using historical supplier performance in making award decisions, etc.). Such complexities are present in the supplier selection process for most goods and services. One possible exception are raw materials traded via commodity exchanges; such markets are specifically designed to circumvent the complexities and frictions of supplier selection by instituting highly standardized contract terms, using liquid markets to find prices, and using clearinghouses to guarantee the terms of trade. As such, commodity exchanges will not be covered in this article.

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Identifying potential suppliers

To survive in the intensely competitive global economy, it is often critically important to not only develop existing suppliers but also to discover new suppliers. This section outlines the process of finding viable new suppliers. Subsection 1.1 first briefly motivates why a buyer might wish to find new suppliers. Subsection 1.2 explains why identifying suppliers is only part of the challenge — the buyer must also be cognizant of the need to ensure such suppliers are...

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