Supplier Selection Criteria — The Ultimate Guide for Procurement Beginners

As an experienced Procurement Manager from amongst others Ahold Delhaize and Royal Friesland Campina, selecting the best suppliers will yield the best results and get an organization close to its goals; especially in today’s fiercely competitive business landscape.

For this article, we will dive into the ways to select the best supplier for your organization through setting criteria. Examples will be provided to help you kickstart your supplier selection process.

After this article, you will understand how to set criteria when selecting a supplier, allowing you to evaluate and choose the best one that aligns with the goals and specifications of your organization.

I have created a free-to-download, supplier questionnaire template. It includes a PDF file that contains the questions that you can ask your suppliers to assess them effectively if they are the best partners for your procurement process. 

What is Supplier Selection?

Supplier selection is the process of identifying, evaluating, and choosing the most suitable suppliers that will provide an organization’s goods and services. This is done by setting metrics, measures, and criteria to evaluate whether the potential suppliers are reliable, competent, trustworthy, and can meet the organization’s goals. 

It is a crucial aspect of the procurement process as the performance and reliability of suppliers can significantly affect the organization’s overall operations. It ensures that the organization carefully selects its suppliers, resulting in less risk and a streamlined procurement process. 

Simply put, it is the process of finding the most compatible procurement partner. Supplier selection is often included in the RFP Process.

What are Supplier Selection Criteria?

Supplier selection criteria are the measures, metrics, and key characteristics an organization looks for in a potential supplier. It includes important specifications and requirements that suppliers should meet to be a serious candidate.

Strategic decision-making and careful selection of suppliers can lead to an improved procurement operation, better quality, fewer costs, minimized risk, and an overall efficient operation. This is all possible by setting criteria comparing their capabilities, stability, and products and services. 

Well-defined supplier criteria will allow procurement managers to easily distinguish the most suitable supplier from all the candidates.

Factors to Consider in Supplier Selection and Evaluation

In setting criteria for supplier selection and evaluation, a procurement manager should consider the factors and key elements an organization looks for.

This will help define the overall supplier selection process and create accurate selection criteria that will meet the specifications and requirements of procurement operations.

Here are the things a procurement manager should consider:

1. Price and Cost 

Despite the importance of quality, it is also important for organizations to strike a balance between effectiveness and cost. As this might entail comprising quality or service levels, selecting the most expensive supplier may no longer be a good option. 

Instead, businesses should seek suppliers who offer a price that does not compromise on quality and allows them to retain profitability while meeting their customers’ needs. A good way to determine if a supplier can deliver at the desired price is to gather information from them and discuss it through the RFx process. 

2. Capabilities

The capability of a supplier to meet current and future requirements, maintain its quality, and deliver on time, are important factors in supplier selection and evaluation. Organizations have to assess whether suppliers can meet their demands in terms of volume, quality, and timeframe. 

The evaluation of a supplier’s scale guarantees their ability to cope with increasing demand as their market size increases. Organizations should request samples of products before purchase to evaluate the quantities. 

Aside from these, organizations also need to assess the technological capabilities of suppliers, such as how they deliver cutting-edge solutions, and how they stay on top of industry trends. 

This is also a reason to work through the RFx process. Through this process, you can indicate in a scalable manner what your expectations are for the upcoming periods regarding the required capacity, and you have confirmation on paper that the supplier can meet this

3. Services and Financial Stability

Before working with a supplier, consider an assessment of the service provided by a supplier. In addition, the criteria of service may include friendliness, responsiveness, and a comprehensive understanding of an enterprise’s needs. 

To avoid interruptions in the procurement process, suppliers must be stable. To determine their solvency, and for assessing all financing risks they may present, an analysis of prospective suppliers can be useful. It is more likely that long-term contracts are to be fulfilled and complied with by the financially stable supplier. 

There are various ways to determine if a supplier is creditworthy. During my time as a procurement manager, I primarily used the following three methods:

1. Financial analysis based on financial statements, etc.
2. Credit reports from specialized agencies such as CreditSafe or Graydon.
3. Lastly, and perhaps most importantly, by engaging in conversation with the supplier. Ensure you establish a good relationship with your supplier, where you can openly discuss such matters with each other.

4. Convenience

Convenience is important for businesses in need of frequent supplies. You might also evaluate how easy it is for you to order products, how quickly you get supplies, and how willing the supplier is to accommodate your employer’s needs.

Logistics, lead times, and shipping costs can be significantly influenced by the geographical location of the supplier. For businesses that rely on “Just In Time Manufacturing” or require swift response to customer demands, the assessment of proximity is critical. In contrast, to gain economies of scale or access to unique resources, some industries may prefer foreign suppliers. 

Here it is also important to determine your choice to what extent you can establish a sustainable relationship with this supplier. It may well be that a supplier on the other side of the world can handle the volumes, is financially sound, and is even slightly cheaper than the alternatives that are closer by. Then you can ask yourself whether this minimal saving outweighs the transportation and thus also the environmental impact.

5. Ethical and Social Responsibility

Organizations must align themselves with suppliers, who adhere to ethical practices in an era of increased corporate social responsibility. Ethical policies, working practices, the impact on the environment, and sustainability commitments by suppliers should be examined by organizations. 

It is not only about enhancing a brand image but also mitigating the risk of negative publicity and potential legal problems by working with socially responsible suppliers.

Vice-versa, the values and missions of the suppliers should align with the organization and should be valued. A supplier’s involvement in society, including their contributions to charitable organizations can also be considered to be part of their responsibilities. 

6. Risks

Understanding the risk can help you determine if your supplier is a good one, given that they are often relied upon to supply their customers’ products. You might analyze the risk of price increases or supply availability. 

Software for Managing Supplier Selection Criteria

1. Kissflow Procurement Cloud

Kissflow Procurement Cloud provides end-to-end procurement solutions to help with your procurement process.

It also helps improve vendor relationships, thanks to the software’s ability to collect all vendor and supplier data into one platform.

This makes it easier for users to set up their metrics. The product software is easy to integrate with other accounting tools, ERP systems, and other business software.

2. SAP Ariba

SAP Ariba is a cloud-based procurement software that provides spending management, and supply chain services that allow suppliers and buyers to connect and do business, worldwide.

Provides other functions such as sourcing, contracting, supplier management, and payment management.

3. Precoro

Precoro is a full-fledged procurement software that eliminates manual work processes to save time, resources, and money. It is all about removing delays to make purchasing seamless and secure.

4. GEP SMART

GEP SMART supplier collaboration software is an all-in-one platform that simplifies the process of collecting, storing, sharing, and tracking supplier information.  It offers a range of tools to manage supplier relationships effectively, making it easier for vendors to provide data and for manufacturers to collect it.

The software automates data capture and standardizes communication, resulting in accurate information that promotes smooth collaboration between suppliers and manufacturers. Additionally, GEP SMART provides vendor collaboration dashboards, allowing suppliers to manage their profiles, catalogs, and pricing.

This feature reduces the workload and administrative tasks for procurement teams, enabling them to concentrate on essential supply chain operations.  With GEP SMART, businesses can streamline their supplier management processes and improve efficiency in their procurement operations.

Procurement Expert’s Advice on Supplier Selection Criteria

For this article, we asked an experienced procurement expert to share her insights to help answer common questions about supplier selection criteria.

Conclusion

Supplier selection involves identifying, evaluating, and choosing the most suitable suppliers. Setting well-defined criteria is crucial for effective supplier selection, as it can lead to improved procurement operations, cost efficiency, and minimize risk. Considering factors like price competitiveness, capabilities, and ethical practices ensures organizations align with reliable suppliers, contributing to overall success.