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 . 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.
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...