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Introduction to Engineering Management

Chapter Thirty
Supplier Evaluation

 Copyright © May 20, 2024 by Robert Wayne Atkins, P.E.
All Rights Reserved.

The following information is Chapter Thirty in my book: Introduction to Engineering Management.

Supplier evaluation is a function that almost all engineering managers should become involved in even if they have no previous experience in supplier evaluation. The reason is because each and every supplier can have a significant impact on the quality of the raw materials and components parts that are purchased and used by the organization where the engineer manager works. Those suppliers are the source of the initial quality of everything that becomes a part of the products and services sold by the engineering manager's organization. This means that the best way an engineering manager can improve his organization's products and services is to improve the quality of the items his company purchases. This can be achieved if the engineering manager is part of the supplier evaluation review team.

Any change to a purchased part should require the engineering manager's signature. The reason is because it is physically impossible to put “everything” into the “blueprint specifications” for a part. A purchasing agent at one company was able to save 40% of the price of a purchased part by buying a plastic part instead of a metal part. The plastic parts passed all the incoming inspection tests. But when the plastic parts were delivered to the manufacturing operation, the production line was shutdown. The reason is because the plastic part would fail when exposed to the normal friction and heat that the metal part could easily withstand. There were no friction or heat specifications on the “blueprint” and there were no friction or heat quality tests at incoming inspection because they were not needed for the metal part the company had been using for more than 50 years. But the purchasing agent did not know this and the purchasing agent made his decision simply based on price. If the signature of the engineering manager had been required to change from a metal part to a plastic part then this disaster could have been avoided.

The Benefits of Supplier Evaluation

The supplier evaluation process will yield an approved supplier list that includes all the suppliers who can meet the organization's standards for quality, quantity, cost, on-time delivery, service, and information sharing on a timely basis. Existing suppliers who are no longer able to meet these objectives will be removed from the approved list.

The approved supplier list will allow the organization to obtain competitive bids on the things they purchase. And it will allow the organization to respond quickly if an existing supplier becomes unreliable and the supplier needs to be replaced.

The supplier evaluation process can also provide feedback to the suppliers so that the suppliers can continuously improve their operations, reduce their costs, and improve the reliability of their deliveries.

The supplier evaluation process is the best method to use to continuously improve the organization's supply chain.

The Supplier Evaluation Team

The overall supplier evaluation process should begin with a decision of who will be on the evaluation team. Each potential team member should be considered based on each person's area of expertise (accounting, manufacturing, engineering, sales, quality, etc.) in relation to the contribution that person can make to the success of the team. Once the team has been formed then the team can make decisions about the importance of the specific evaluation issues that are discussed in the remainder of this chapter.

Inclusion and Exclusion from
the Supplier Evaluation Process

Your organization only needs to carefully evaluate suppliers that can have a significant impact on the future success of your organization. For example, if there are more than a dozen different supplier in your area who would be happy to sell you replacement light bulbs for the lighting fixtures in your facility, and only a few of those bulbs are replaced each year, and there is less than a 2% difference in the price of those light bulbs at the different suppliers, then this is probably not the type of supplier that you need to include in your organization's formal supplier evaluation process. However, these suppliers should be on your list of approved suppliers because this will authorize your organization's purchasing agents to do business with them.

However, if one or more suppliers provide your organization with a product that is critical to the future success of your organization, then those suppliers should be part of your organization's formal supplier evaluation process. And the suppliers that pass the formal evaluation process should be included on your list of approved suppliers.

The Two Basic Types of Supplier Evaluation

Supplier evaluation needs to be done on potential new suppliers and on existing suppliers.
  1. New Suppliers: Potential new suppliers need to identified and evaluated to determine which suppliers can meet the quantitative and the qualitative standards of the purchasing organization. This process will ensure that the organization's list of approved suppliers is always up-to-date and that the list includes all the suppliers that could meet the organization's needs.

  2. Existing Suppliers: Current suppliers need to be routinely evaluated to verify that they are still able to meet the quantitative and the qualitative standards of the organization. The evaluation should document that those suppliers are successfully implementing continuous improvement to enhance the quality of their products, and reduce the cost of those products, and improve the reliability of their deliveries.

The Important Issues that Need to Be Considered

Some of the following issues may or may not be critical to an organization. Each organization will need to determine which of the following issues are relevant to the selection of a supplier and those are the issues the organization should consider when evaluating each supplier. It is also possible that different issues may be very important in the selection of different groups of suppliers and each supplier group should be evaluated on the issues that are relevant to that group.
  1. Financial Issues: Does the supplier have a reasonable balance sheet, income statement, and cash flow statement that indicate that the supplier is a well-managed company and that the supplier will continue to be in business for a long time? Are the products that are sold by the supplier competitively priced in relation to their competitors?

  2. Quality Issues: Does the supplier have a reputation for selling high quality products that have long life expectancies? If the supplier makes the products, then does the supplier use acceptance sampling and control charts to monitor the quality of their processes? Does the supplier have evidence of continuous improvement in their processes? Is the supplier ISO 9001 certified?

  3. Quantity Issues: Is the supplier currently at full capacity? Does the supplier have the capacity to obtain, or to make, the quantities that will be required if they are awarded a contract?

  4. Delivery Issues: What is the supplier's reputation for on-time deliveries to their other customers? What communication system does the supplier use to notify their customers if a delivery will not arrive on time? How much advance notice do they normally give their customers if they know that a promised delivery will be late?

  5. Compatibility: Is the supplier's image compatible with the image of your organization? Is the supplier engaged in business practices that are not acceptable to your organization, such as the way they treat their employees, and whether or not they employ individuals who are underage, or who do not have valid work permits? Is the supplier engaged in environmental practices that are unacceptable to your organization? What are the supplier's procedures for dealing with waste management, waste reduction, and recycling?
For each of the above issues that your organization believes is important, you will need to make a decision on the actual metrics that you will use to evaluate that issue so that you can compare different suppliers. These metrics are sometimes referred to as Key Performance Indicators (KPIs).

The Supplier Evaluation Process

The supplier evaluation process can be more complex or less complex depending on the needs of the organization. A single step in the process can be expanded into two or more steps if more issues need to be addressed. Two or more steps in the evaluation process can be combined into a single step if fewer issues need to be addressed.

In this chapter the overall supplier evaluation process will be described using eight basic steps. But as mentioned above, some of the steps could be expanded, or combined, depending on the needs of the organization.
  1. Identification of potential future suppliers.
  2. Preliminary qualification of a future supplier.
  3. Visit a future supplier's facility.
  4. Share existing specifications with the supplier and request a quote.
  5. Issue a trial purchase order to the supplier.
  6. Carefully and thoroughly inspect the items received from the supplier.
  7. Create the appropriate and necessary acceptance sampling plans for future shipments from the supplier.
  8. Award future contracts to the supplier and have regular feedback meetings with the supplier.
Each of the above eight steps will now be discussed in more detail.

Step 1: Identification of Potential Future Suppliers

This involves identifying all the existing suppliers that the organization is currently using, and including the new suppliers that the organization wishes to evaluate. A tentative schedule needs to be prepared that includes when each group of suppliers will be evaluated, the timetable for evaluating those suppliers, and the issues that will be considered in the evaluation of each group of suppliers. Then the various evaluation tasks should be delegated to specific individuals and there should be a deadline for completing each of the evaluation tasks. Each individual should also clearly understand exactly what that person needs to accomplish in order to successfully complete the tasks assigned to that person.

Step Two: Preliminary Qualification of a Future Supplier

A separate questionnaire needs to be prepared for each major group of suppliers. The questionnaire for each group of suppliers should only include the important information that the organization wishes to consider for that group of suppliers. This will simplify the initial collection of that data and it will simplify the future evaluation of that data. Each questionnaire should only include questions that can be answered by the supplier. It is okay to include quantitative questions and qualitative questions on the questionnaire. An example of a quantitative question would be the number of hours (or shifts) that they work per day because this would be related to their potential future capacity. An example of a qualitative question would be their recent continuous improvement projects which would indicate their current emphasis on quality.

After the questionnaires have been designed then there are two ways to qualify future suppliers.
  1. Visit the supplier's website. Use the information on that website to answer some or all of the questions on your questionnaire. If you do not discover some type of information on their website that would disqualify the supplier then you can do the following.

  2. Notify a potential supplier that you are interested in doing business with the supplier in the future. Ask the supplier if you can send a questionnaire to the supplier to obtain the preliminary information that your organization would like to know. When you receive their reply then you can make a preliminary decision on whether or not a supplier should be evaluated in more detail, or if the supplier should be eliminated from further consideration.

Step Three: Visit the Future Supplier's Facility

Ask a supplier if you can visit their facility. Suppliers will usually respond to your request in one of three ways:
  1. Some suppliers will agree to your request because they are proud of their facility and they do not have any technology or processes that are of a confidential nature.

  2. Some suppliers will agree to your request but they will let you know that a few areas of their facility can only be accessed by company personnel. This is normal if the facility has a clean room environment or if they have patented equipment or processes that give them a competitive advantage.

  3. Some suppliers will politely refuse your request. You will need to make a decision if their refusal is logical based on the responses of the other suppliers that are in the same group of suppliers that you are considering. It could be that the supplier is experiencing problems at their facility that they know would disqualify them from being considered.
If you are able to visit a supplier's facility then you will be able to confirm the information on the questionnaire that they completed. Depending on the type of information you desire, it may be necessary to have an appointment with more than one person during your visit, such as a different employee in finance, and manufacturing, and purchasing, and quality. During your visit you should be able to determine the overall level of sanitation, automation, the approximate age and condition of their equipment, the productivity within the facility (number of idle machines or processes), and the technical competence and the general attitude of their employees. You can also ask specific questions about the quality strategies they use in different areas. A reasonable question would be, “Why is this specific quality characteristic being measured at this specific location?” Their answer should indicate whether the characteristic is simply easy to measure or if it has a significant impact on future manufacturing operations or on final product performance. You should also be able to form an opinion about the prevailing culture at the different levels of management within the company.

Be very polite during your visit to a supplier's facility. Do not hesitate to compliment a supplier on something that they are doing exceptionally well. Do not criticize a supplier on something that they are doing that does not meet your approval. Any negative issues can be addressed sometime in the future in a way that would help the supplier correct any shortcomings that were discovered. After you have collected all the information you require, then your supplier evaluation team can review all the information that has been collected and the team can decide whether a supplier should be eliminated from the list, or if a supplier should continue to the next step in the evaluation process.

Step Four: Share Existing Specifications
with the Supplier and Request a Quote

Some of the products that many organizations purchase on a regular basis are carried in the normal inventory of a lot of different suppliers. Examples would be copier paper, machine screws, electrical wiring, and liquid soap for washing hands. It should be relatively easy to select one or more of these products to use for an initial order with a new supplier.

Some of the items that an organization purchases on a regular basis are custom made to the precise engineering specifications that have been created by the purchasing organization. The organization could select one of these items to use for an initial order with a new supplier.

Step Five: Issue a Trial Purchase Order to the Supplier

After an item has been selected then the organization should issue a purchase order to the supplier for a specific quantity of that item. If appropriate, the order should include the organization's engineering and quality specifications for the product. The purchase order should include a reasonable delivery date that will allow the supplier an adequate amount of time to process the order and either pull the product from inventory, or make the product from scratch.

Step Six: Carefully and Thoroughly Inspect
the Items Received from the Supplier

When the shipment arrives the entire shipment should be 100% inspected to verify the quantity and quality of everything that was included in the shipment. This will provide factual data for calculating the metrics that will be used to evaluate the performance of the supplier. If some of the items fail the incoming inspection procedure then the organization will need to make a decision on whether or not to give the supplier another chance. If a second chance is not considered to be appropriate, then the supplier will not be added to the approved supplier list.

However, if all the items successfully pass the rigorous incoming inspection procedure then the supplier can be added to the approved supplier list.

Step Seven: Create the Appropriate and Necessary Acceptance
Sampling Plans for Future Shipments From the Supplier

Based on the results of the initial rigorous incoming inspection, a decision needs to be made on how future shipments from that supplier will be evaluated. This is a decision that should be made by the quality department or by a quality engineer. This inspection procedure needs to be documented in writing and all future shipments for this product from this supplier will be subject to this incoming acceptance sampling plan. However, as time passes, if the supplier proves to be an extremely reliable supplier of excellent quality products, then the quality engineer can reduce (not eliminate) the amount of incoming inspection required for this product from this supplier.

Step Eight: Award Future Contracts to the Supplier and
Have Regular Feedback Meetings with the Supplier

  1. Initial Feedback: The appropriate individuals at the supplier's facility should be notified that they have been added to the organization's list of approved suppliers and that the supplier will be receiving more orders in the future. Specific feedback from the initial incoming inspection analysis should be shared with the supplier so that the supplier will know that they did a good job, and they will know the reasons why they did a good job.

  2. Regular Feedback: It is important to provide feedback to each supplier on a regular basis. The frequency of the feedback will depend how often the supplier delivers products or services to your organization, the financial value of those deliveries, and the impact those products or services can have on the products and services you sell to your customers. The feedback can be provided monthly, quarterly, semi-annually, or on some other frequency. The purpose of the feedback is to help a supplier understand what they are doing right and the areas in which they need to improve. This feedback should help the supplier improve their performance and at the same time enhance the supplier's profitability. The feedback should also accomplish these same two goals for your organization.

Conclusion

When the supplier evaluation process is done correctly it will help an organization accomplish the following:
  1. Identify suppliers that are selling lower quality items at a higher cost and that are providing poorer service.

  2. Identify suppliers that are selling the best quality items at the lowest cost and that are providing superior service.

  3. Provide feedback to each supplier so the supplier can continuously improve their quality, lower their cost, enhance their service, and this will increase the profitability of the supplier.

  4. The end result will be that your organization will be buying superior quality items at the best possible price. And your organization will be able to sell the best quality products to your customers for the lowest possible price. And your organization's reputation and profitability will increase.

Supplier Evaluation Forms

Each organization should have a different Supplier Evaluation Form for each category of suppliers that the organization does business with. There should be a specific form for the periodic review of existing suppliers, and a different form for the evaluation of a potential new supplier.

A multitude of different Supplier Evaluation Forms are available on the internet. However, two forms are included in this chapter. The form below is an example of the type of form that could be used to evaluate existing suppliers. The second form is an example of the type of form that could be used to evaluate a potential new supplier.

Existing Supplier Evaluation Form

Existing Supplier Form








































On-Site Supplier Evaluation Form

On-Site Evaluation Form