Purchasing & Supply Management: Supplier Selection (Part 1 - The Process)

Summary

This lecture by Professor Finn Winstram of the Rotterdam School of Management covers supplier selection within purchasing and supply management. It details the processes and criteria for supplier selection, tendering, and contracting, emphasizing the importance of developing category-specific sourcing strategies. The lecture also explores different tendering procedures and selection methods, highlighting the impact of purchasing situations and objectives. Key concepts include problem definition, criteria formulation, supplier qualification, and final selection, along with various tools and techniques used in these processes.

Takeaways

• 📚 Supplier selection is a critical process within purchasing and supply management, involving identifying, evaluating, and contracting with suppliers.
• 🔄 The tendering process follows the sourcing strategy development and results in category-specific sourcing strategies.
• ⚙️ Tendering involves a buying organization putting its needs up for bidding by different suppliers, often using competitive procedures.
• 🏆 Supplier selection criteria often include price, quality, and delivery, but other factors like sustainability and effectiveness are also considered.
• 🌍 The supplier selection process can differ based on the buying situation, such as new tasks, modified rebuys, or straight rebuys.
• 📊 The process can be divided into problem definition, criteria formulation, qualification, and final selection, with different tools used at each stage.
• 🔍 Requests for information (RFI), proposals (RFP), and quotations (RFQ) are common steps in the tendering process to gather market intelligence and assess supplier capabilities.
• 🏢 The purchasing situation and objectives influence the choice of tendering procedures and selection methods, including non-competitive purchases, informal negotiations, closed tenders, and open tenders.
• ⚖️ Criteria for supplier selection can be categorized at the supplier level, product/service level, and condition level, each with varying degrees of uncertainty and information availability.
• 🔄 The supplier selection process and criteria can vary significantly depending on the purchasing situation, such as routine items, leverage items, bottleneck items, or strategic items.

Q & A

What is the main focus of this lecture?

The main focus of the lecture is on supplier selection, which is one of the main processes within purchasing and supply management.

Who is the lecturer and what is their affiliation?

The lecturer is Finn Winstram, a professor in purchasing and supply management at the Rotterdam School of Management, Erasmus University.

What is the definition of tendering according to the lecture?

Tendering is defined as the process by which a buying organization puts up its needs for bidding by different suppliers.

What are the four major steps in the tendering and supplier selection process?

The four major steps are problem definition, criteria formulation, qualification, and choice.

What are the three main levels of supplier selection criteria?

The three main levels of criteria are supplier organization features, product or service performance, and conditions including price and delivery.

Why might a buying organization need new suppliers?

A buying organization may need new suppliers if it starts offering new products or services, if supply markets or technological conditions change, or if it needs to reconsider existing supplier relationships.

What is the difference between closed tenders and open tenders?

Closed tenders are by invitation only, whereas open tenders are open to any supplier willing to bid.

What are the three types of requests a buying organization may send to suppliers?

The three types of requests are Request for Information (RFI), Request for Proposal (RFP), and Request for Quotation (RFQ).

How does the purchasing situation affect the supplier selection process?

The purchasing situation, classified as new task, modified rebuy, or straight rebuy, affects the definition of the problem, criteria formulation, qualification, and choice steps in the supplier selection process.

What role does a category sourcing strategy play in the supplier selection process?

A category sourcing strategy helps to effectively and efficiently conduct a tendering and supplier selection process by defining objectives and criteria for each sourcing category.

Outlines

00:00

📚 Introduction to Supplier Selection

This paragraph introduces the lecture on supplier selection by Professor Finn Winstram, who outlines the importance of this process within purchasing and supply management. It is positioned as the fourth process in the PSM wheel, following sourcing strategy development. The lecture will reference various sources, and supplier selection is defined as a process encompassing identification, evaluation, and contracting with suppliers. The paragraph also touches on the reasons why organizations might seek new suppliers, such as new product offerings, market changes, or technological shifts, and emphasizes the need for cross-functional collaboration in the selection process.

05:00

📈 Criteria and Procedures in Supplier Selection

This section delves into the criteria and procedures involved in supplier selection. It mentions that price, quality, and delivery are common criteria, but other factors like sustainability may also be considered. The paragraph discusses the importance of the relative importance of these criteria and the procedures to be followed, which may vary based on public procurement legislation. It also highlights the need for input from the purchasing situation and objectives, which can influence the criteria and procedures. The lecture distinguishes between different tendering processes and mentions the two-stage process of qualification and selection to reduce workload for both buyers and suppliers.

10:01

🔍 Distinguishing Supplier Selection Criteria

The third paragraph focuses on the different levels of criteria used in supplier selection, including organizational, product or service, and condition levels. It explains the relevance of distinguishing between these levels due to varying degrees of ambiguity and uncertainty. The paragraph also discusses the types of tendering procedures, such as non-competitive purchases, formal negotiations, closed tenders, and open tenders, and how the choice between these depends on the purchasing situation and objectives. Additionally, it outlines the types of requests that may be sent to suppliers during the tendering process.

15:01

📋 The Role of Requests in the Tendering Process

This paragraph explains the role of different types of requests in the tendering process: Requests for Information (RFI), Requests for Proposal (RFP), and Requests for Quotation (RFQ). It describes these as a funnel process, though not all steps are mandatory for every tendering situation. The paragraph details how RFIs are used for market intelligence, RFPs for proposals on fulfilling requirements, and RFQs for exact specifications of goods or services. It also touches on the negotiation process that may follow these requests and how the steps may vary based on the type of buying situation.

20:01

🎯 Supplier Selection in Different Purchasing Situations

The final paragraph provides a framework for how different purchasing situations may affect the steps in supplier selection, including problem definition, criteria formulation, qualification, and choice. It classifies purchasing situations based on new tasks, modified rebuys, and straight rebuys, and relates these to the sourcing portfolio quadrants proposed by Kraljic. The paragraph concludes with a summary of the key takeaways from the lecture, emphasizing the four major steps in tendering and supplier selection, the application of criteria at different levels, and the variation in criteria and processes based on purchasing objectives and situations.

Keywords

💡Supplier Selection

Supplier selection is the process by which a buying firm identifies, evaluates, and contracts with suppliers. It is a core part of purchasing and supply management, integral to the PSM wheel framework. In the video, supplier selection is discussed as a critical process within the sourcing part of the wheel, following sourcing strategy development and preceding contracting. The script emphasizes the importance of this process in aligning with competitive priorities and category-specific strategies.

💡Tendering

Tendering is defined as the process where a buying organization invites bids from different suppliers for its needs. It is a precursor to supplier selection and is part of the sourcing strategy. The script mentions that tendering can be followed by a separate contracting process, indicating the sequential nature of procurement activities.

💡PSM Wheel

The PSM (Purchasing and Supply Management) Wheel is a reference framework used for structuring teaching and understanding the various processes within purchasing and supply management. The video uses the PSM Wheel to position supplier selection as the fourth process in the upper half of the wheel, specifically within the sourcing part.

💡Sourcing Strategy

Sourcing strategy development is mentioned in the script as a process that results in category-specific strategies, which are essential before executing a tendering and supplier selection process effectively. It sets the stage for defining how an organization will approach the market to meet its needs.

💡Contracting

Contracting is a process that follows supplier selection, where the terms and conditions of the supply relationship are formalized. The script notes that contracting can be a separate process from supplier selection, indicating that it involves finalizing the agreement with the chosen suppliers.

💡Criteria

Criteria are the standards or factors used to evaluate suppliers during the selection process. The script identifies price, quality, and delivery as prevalent criteria in supplier selection. Other criteria such as effectiveness and sustainability are also mentioned, highlighting the multifaceted nature of evaluating suppliers.

💡New Suppliers

The concept of needing new suppliers is discussed in the context of changes in the buying firm's offerings, supply markets, or technological conditions. The script suggests that these changes may necessitate entering into a supplier selection process to identify new suppliers or reconsider existing ones.

💡Qualification Stage

The qualification stage is part of the supplier selection process, where suppliers are evaluated based on certain criteria to determine their suitability. The script describes this as a means to reduce the workload for both the buying organization and suppliers by excluding those that do not meet necessary quality management processes before the final bidding process.

💡Selection Stage

The selection stage follows the qualification stage and involves the final decision on which suppliers to contract with. The script indicates that this stage often uses quantitative tools and focuses on product features and conditions after supplier features have been assessed in the qualification stage.

💡Purchasing Situation

The purchasing situation refers to the analysis of business demand and supply market, which is essential for defining the context for the supplier selection process. The script describes how different purchasing situations, such as new tasks, modified rebuys, and straight rebuys, can affect the steps and criteria used in supplier selection.

💡Tendering Procedures

Tendering procedures are the methods used by an organization to solicit bids from suppliers. The script outlines four varieties of tendering procedures ranging from non-competitive purchases to open tenders, which are chosen based on the purchasing situation and objectives.

💡Requests to Suppliers

Requests to suppliers, such as Requests for Information (RFI), Requests for Proposals (RFP), and Requests for Quotation (RFQ), are part of the tendering process. The script describes these as a funnel process to narrow down potential suppliers based on the information and proposals they provide.

Highlights

Supplier selection is one of the main processes within purchasing and supply management.

Tendering can be defined as the process by which a buying organization puts up its needs for bidding by different suppliers.

After category strategy development, it is possible to effectively and efficiently execute a tendering and supplier selection process.

Supplier selection involves identifying, evaluating, and contracting with suppliers.

Many studies emphasize the value of long-term buyer-supplier relationships, but new suppliers may be needed due to new products or changing supply markets.

Purchasing and supply management is essentially a cross-functional business process.

Price, quality, and delivery are the most prevalent criteria in supplier selection, but other criteria like sustainability are also important.

Different tendering processes and selection methods exist, influenced by the purchasing situation and objectives.

Tendering procedures range from non-competitive purchases to formal open tenders, each with varying levels of formality and time investment.

Request for Information (RFI), Request for Proposal (RFP), and Request for Quotation (RFQ) are common steps in the tendering process.

Supplier selection processes vary by purchasing situation, such as new tasks, modified rebuys, and straight rebuys.

Qualification and selection stages in supplier selection aim to reduce the workload for both the buying organization and suppliers.

Supplier selection criteria can be applied at the level of the supplier organization, the product/service involved, and the conditions (price and delivery).

Different types of requests (RFI, RFP, RFQ) serve as a funnel process to narrow down suitable suppliers.

The purchasing situation affects the supplier selection process, influencing problem definition, criteria formulation, qualification, and choice.

Tendering and supplier selection criteria and processes vary by the objectives for the purchase item or sourcing category.

Transcripts

welcome to this lecture on supplier

selection my name is finn winstram

professor in purchasing and supply

management at the Rotterdam School of

Management Erasmus University and holder

of the chair endowed by the Dutch

Association for purchasing management

Navy this elector was originally

developed for the course purchasing and

supply management a core course in

supply chain management master's program

at RSM during the presentation I will

refer to a number of sources you will

find the full references of these

sources at the end of the presentation

this elector deals with supplier

selection one of the main processes

within purchasing and supply management

in the PSM wheel which we often use as a

reference framework in structuring our

teaching supplier selection in

combination with the tendering process

is the forth process within the upper

half of the wheel the sourcing part

tendering can be defined as the process

by which a buying organization puts up

its needs for bidding by different

suppliers tendering and supplier

selection follows sourcing strategy

development which who results in

category specific sourcing strategies

such as for instance advocated by the

crowd each portfolio only after a

category strategy has been defined

is it possible to effectively and

efficiently execute a tendering and

supplier selection process after the one

or several suppliers have been selected

the next sourcing process is contracting

I have been referring to supplier

selection but what is it exactly Bale

defines it as the process by which the

buying firm identifies evaluates and

contracts with suppliers note that this

is a slightly broader definition than in

the PSM wheel of the previous slide

where contracting is a separate process

if you interpret barrels contracting to

me picking the winner or winners there

is still room for a separate contracting

process identifying imbalance definition

refers to listing potential irrelevant

or illegible suppliers evaluating in

this definition refers to scoring the

qualities of suppliers and/or their

offerings it will be clear that supplier

selection is an important process within

purchasing and supply management and in

this quote from the work of grousing

colleagues supplier selection and by the

way retention is primarily framed as the

manifestation expression of the

purchasing functions competitive

priorities I would add in relation to

what I said on the previous slide that

such priorities are not only defined at

the level of the PSM function as a whole

but also a most importantly at the level

of each sourcing category

why new suppliers while many studies

have emphasized the value and the actual

existence of long-term buyer supplier

relationships every now and then a

buying organization may need new

suppliers and hence needs to enter into

a supplier selection process this may be

because the buying firm has started to

offer new products and services to its

customers and has decided to not fully

produce those offerings in-house or

supply markets or technological

conditions change any of the listed

conditions and perhaps some more may

lead to the need for new suppliers or at

least the need to reconsider the

selection of suppliers with whom the

buying organization is doing business

when starting a supplier selection

process fetish choices need to be made

in some of these choices the purchasing

department may be in the lead but as we

argue for most of the processes

purchasing and supply management is

essentially a cross-functional business

process what could argue that there are

two main areas in which choices need to

be made which criteria to apply and

withstanding and selection procedures to

follow as described in the bottom half

of the slide viola refers to studies

that have identified price quality and

delivery as the most prevalent criteria

and supplier selection but other

criteria apply as well in effectiveness

sustainability another important choice

is obviously the relative importance of

the different criteria regarding the

procedures to follow

buying firms have a choice of different

tendering processes to follow and

selection methods to use organizations

that fall on the public procurement

legislation however have less freedom

which procedures to follow later on in

the SI lecture I will say a few words

about different tendering processes in

general the choices regarding criterion

procedures should be guided by two

groups of inputs reflected in the upper

half of the slide the purchasing

situation in terms of demand the supply

and purchasing objectives the objectives

are obviously closely related to the

criteria to be used but partly also go

beyond that the objectives could also

pertain to the number of supplies to be

selected and their geographical spread

for instance as discussed earlier these

objectives are typically defined in a

category sourcing strategy which helps

to effectively and efficiently conduct a

tendering a selection process however

not all organizations may have explicit

category sourcing strategies or not for

all of their buying needs and the

objectives may then need to be

identified during the tendering process

defining the purchasing situation

basically refers to the analysis of

business demand and supply market the

second process in the sourcing part of

the PSM wheel from slide 2

what are the qualitative and

quantitative needs of the buying firm

what is the current and future capacity

of the supply market etc many studies

argue that it is helpful to define the

buying situation for which the supplier

selection process needs to take place

and the marketing and organizational

buying behavior literature data merged

in the 1960s referred to three main

situations new tasks modified rebuy and

straight rebuy new task refers to

situation where a buyer has a new need

and it cannot or very limited Lee so

rely on previous information and

experiences straight rebuy o refers to a

situation where a buyer buy something

that is already very familiar with it

and modified rebuy is a mixture of the

two other extreme situations think for

instance of an organization that needs

to buy a familiar item but now from a

different supply market for instance

because it opens a production location

elsewhere and it needs to use local

suppliers for political or trade set of

reasons one can imagine that the supply

selection process is different for these

three types of situations as we will

argue in more detail later on in this II

lecture within the overall process of

tendering a supplier selection we can

make a distinction between the

qualification stage and the selection

stage this two-stage process is mainly

meant to reduce the workload both for

the buying organization and the supplies

suppliers that are not suitable for

instance because they do not have the

necessary quality management processes

in place or excluded before the final

bidding process this two-stage process

is by no means Universal sometimes

buying organizations go straight into

the final selection for instance when

only a few suppliers are expected to or

invited to but

paid in the tender process as you can

see in the slide the board and

colleagues argue that there are two

steps before qualification and final

selection problem formulation and

formulation of criteria this amounts to

identify the situation objectives and

criteria as we discussed in the previous

slide the borin colleagues also indicate

that in the first two steps qualitative

decision-making tools are most

appropriate while in the phases of

qualification and final selection

quantitative tools can be used we will

discuss these tools in more detail in

part two of our a lecture on supplier

selection

when thinking about supplier selection

criteria it may be helpful to

distinguish three main levels of

criteria even though in publications

such as Bell and the board at all these

three levels are not explicitly

distinguished first at the most

aggregate level we have the criteria or

features of the supplier organization

this could include its financial

stability or location for instance

second we have the product or service

involved including its performance and

sustainability for instance thirdly we

can distinguish the conditions including

price and delivery you will recognize

these different levels of supplier

product and conditions for instance when

Bale refers to studies that have

identified price quality and delivery is

the most important selection criteria

which are affect product or condition

level criteria well also refers to

production capacity flexibility

information and communication systems

these are all supplier level criteria

while the product and condition level

are perhaps not always clearly separated

distinguishing supplier level versus

product level characteristics is

relevant it is relevant because the

ambiguity or uncertainty regarding these

characteristics may differ scores for

supplier performance dimensions are

perhaps less precise and information is

particularly for new suppliers more

difficult to gather in some situations

the information on one of the three

levels is simply not there think of

selecting a supplier that will become

involved in collaborative product

development there is no product yet to

select on most importantly perhaps is

that in the qualification process as

described earlier buyers typically look

at supplier features and only in the

final selection will look at product

features and conditions

at the start of this lecture I have

defined tendering as the process by

which a buying organization puts up its

needs for bidding by suppliers and in

slide five we have argued that the

choice for specific tendering procedure

depends on the purchasing situation and

the objectives but what main alternative

procedures does one have regarding

tendering there is no universally

accepted classification of different

tendering procedures but from vaillar

discuss distinguishes four varieties

which capture most of the variety in

practice please note that we are not

referring to former formal tendering

procedures on the public procurement

legislation such as in the European

Union most of the four varieties have a

specific equivalent in public

procurement law let's review the four

varieties from left to right from low

formality and time investment to high

formality and time investment

non-competitive purchase means absence

of competitive procedures or formal

evaluation of supplier bits one or

several suppliers are directly

approached to close a contract although

some negotiations of terms may still

take place in formal negotiations the

second alternative are somewhat more

competitive where some suppliers may not

get an order in the end then there are

two main varieties of what are called

tendering procedures in the more narrow

sense closed tenders are on the

invitation only

whereas open tenders are open to

everyone well open tenders are mostly

known from the public sector they can

and are also applied in the private

sector the choice between these four

varieties depends on the purchasing

situation for instance non-competitive

tendering may be chosen when one is

dealing with a very small order and the

supplier is an exclusive owner of a

baton or there is already a very

successful relationship in place an open

them there is typically chosen for large

volume purchases a better buying firm is

not fully knowledgeable about suitable

suppliers for instance because it is a

new task by as part of the tendering

process various requests may be sent out

to suppliers particularly in the closed

and open tender procedures as just

discussed while there is no agreed-upon

terminology in general we can

distinguish three different types of

requests to suppliers

requests for the information request for

proposal and request for quotation

together these requests may be seen as a

funnel process but not all steps have to

be executed each time we follow bail in

describing these requests first a

request for information or RFI is used

when the buyer seeks to gain market

intelligence regarding what alternatives

and possibilities are available to meet

the buyer needs some suppliers may not

respond or the buyer may deem that the

supplier is not very suitable reducing

the set of potential suppliers in the

next phases second a request for

proposals or RFP is issued when this

buyer has a sense of the marketplace and

has a statement of work or

specifications containing a set of

performance requirements that the buyer

needs fulfilled supplier proposals on

how to fulfill the buyer needs could

differ for instance in terms of the

technology they want to apply based on

the proposals the binder may decide to

further narrow the set of suppliers that

is asked to make submit an actual bit or

quote this set of suppliers are the so

called qualified or approve

vendor's this was also mentioned in

slide six in general there is no rule

that disqualification states as we'll

also discussed earlier takes place only

after the suppliers have responded to

the RFP sometimes it can already take

place after the responses to the RF I

third a request for quotes or quotations

is issued when the buyer can develop a

statement of work that stays the exact

specifications of the goods or services

needed after these requests a buyer may

enter the negotiation process with one

or several suppliers but not necessarily

so in the case of an RFQ a clear winning

supplier may offer already emerged and

further negotiations are not necessary

all the three steps may be used

consecutively but not necessarily so one

could start directly with an RFQ in the

case of a standard or familiar items

this would constitute a straight rebuy

perhaps one would like to start with an

RFP in the case of non-standard or

complex items or when the buyer only has

set functional specifications and is

interested to learn about different

technological solutions finally a bear

buyer may decide to start with an RFI

when it has a completely new requirement

and is not familiar with a relevant

supplier market this would constitute a

new task by situation

[Music]

finally we go back to slide five and

provide a framework of how the

purchasing situation may affect the four

different steps defined earlier problem

definition criteria formulation

qualification and choice in the columns

you see a classification of different

purchasing situations the board and

colleagues classify these situations

based on the new task modified to be by

a straight rebuy classification from the

marketing and organizational buying

behavior literature and combine this

with a different quadrants from the

crowd each category sourcing portfolio

this results in for buying situations

what the board and colleagues are

basically suggesting is that for the

supplier selection process in a new task

buying situation it does not matter

which quadrant from the Crowder's

portfolio one is dealing with there is

just one call in the case of a new task

by the specific challenges for supplier

selections is that there is no

previously used criteria and here and

there are no historical records

available making selection process more

challenging and potentially more costly

there is a lot of uncertainty and new

task buying situations on the right hand

side you see two different straight

rebuy situations in case of a routine

item there are many suppliers that could

supply the item however because of the

low value of the items it will not pay

off too frequently search for and select

suppliers the choice of the supplier is

fixed for a reasonable period of time

and the suitability of the supplier is

typically reconsidered periodically and

if necessary a new selection will take

place in the case of bottleneck and

strategic items the choice of the

supplier is also more or less fixed

small changes in

location of the items are usually dealt

with by the existing supplier in these

cases with a high supply risk there are

virtually no supplies to choose from

immediately either because of a highly

unique specification or because of the

scarcity of the material as a result the

choice set is often much smaller the

city models are primarily used as a

means for periodic evaluation or

monitoring of the existing supplier or

suppliers leverage items finally the

second column from the left according to

the board at all typically involve

modified rebuy situations there are many

supplies to choose from while the

high-value and saving or improvement

potential of the items justifies

proactive search and frequent selection

of suppliers so in conclusion we can

summarize the takeaways from this

lecture on supplier selection the

process as follows one four major steps

in tendering and supplier selection can

be defined problem definition criteria

formulation qualification and choice

second selection criteria can be applied

at the level of the supplier and the

level of the product service and its

conditions and qualification usually

takes place using supplier related

criteria and thirdly the criteria

applied and the process adopted for

supplier selection and tendering vary

they vary by the objectives for the

purchase item or sourcing category and

they vary by the purchasing situation as

for instance classified in terms of new

tasks modified 3 - 3 3 by or classified

in terms of the purchasing portfolio

such as proposed by trolleys routine

items leverage items etc

this concludes our lecture on supplier

selection part 1 on this slide you will

see the references that have used during

this election