Is Your Supplier Selection Process a Source of Competitive Disadvantage?

We’ve recently published a new research paper, Is your Supplier Selection Process a Source of Competitive Disadvantage?

It looks at the pre-qualification process, a key part of the wider sourcing/procurement cycle. As well as telling you a little more about it here, I’ve expanded on one particular point mentioned in brief in the paper that is something of a bête noire in my mind.

But back to the content. Here’s how we start.

“Pre-qualification – not the most exciting topic in the world is it? And yet…

Consider firms who end up as our suppliers, but really should never have go to that point. Firms who generate reputational or operational risk for us; firms who go bust or get into financial trouble; firms who aren’t actually capable of doing what they claimed they could. Firms who maybe aren’t even allowed (in a legal or regulatory sense) to do the work we’ve employed them to do.

Firms who really we should have weeded out from the selection process long before we even got close to awarding them the contract.

Then, there are those potential suppliers who never made it. Firms we rejected because their turnover wasn’t large enough to get through our pre-qualification hurdle. Firms who weren’t very good at answering our trick questions about quality certifications… Might one of those have been the supplier who actually would have come up with a stunning, innovative idea that would have given us real competitive advantage? We’ll never know.

Then we have the sheer cost of the process, often not identified clearly, in terms of the time , effort and resource that goes into the process…”

You get the point. As well as the sheer cost of the pre-qualification process, and the time required, it can either be a positive part of the procurement process or a source of real and potentially significant competitive disadvantage.

So, in the paper we look at the four purposes of the pre-qualification process – supplier identification, registration, verification and selection. We discuss those four factors in some detail. Selection is interesting, for example, as it’s the area that often confuses suppliers who assume because they’re “qualified” they should automatically be able to tender. Not always so. We may have more qualified suppliers than we want to take through to tender stage. So it is key to carry out that selection properly.

We also look at how to actually execute a successful pre-qualification process, and examine the use of third parties to assist in the pre-qualification process. Finally, we look at some of the other key issues: how do suppliers perceive all of this, for instance? Remember, we said earlier that discouraging good suppliers through clumsy or inappropriate processes is clearly not a very smart idea, yet too many processes lead to exactly this result.

Some of this may seem pretty obvious to the experienced amongst you. Yet we still regularly see organizations making what we’d consider obvious mistakes in their pre-qualification processes. For instance, arbitrary rules are applied, which eliminate bidders based on their revenues. So buyers decide that if the contract value is $5 million per year, a supplier needs an annual turnover of perhaps three times this value ($15 million) in order to qualify to bid.

The question of course is “why?” If we are talking about manufactured goods, then it is right and proper to examine the potential supplier’s capacity. If their current facility is running flat out, what would be the implications of awarding them this contract? Could they increase production hours, or quickly increase capacity with some capital investment? Or would they have to sub-contract or even build a new factory? A contract with a considerably lower value than $5 million might be too much for them to handle comfortably, so awarding them the contract might represent an unacceptable potential risk for the buyer.

But a similar contract for services – whether cleaning services or management consultancy – probably has a very different risk profile. It may be fairly simple for the supplier to manage that additional volume. They may not even require more staff, but if they do, supplementing the current workforce will probably be relatively straightforward and can be done quickly. And if the contract in question is aimed at a trading type business, the size of the contract may have no relationship at all to the current revenues in risk terms.

So selection processes must be appropriate to what is being purchased. Yet many buyers persist with set threshold levels for qualification and disqualification. And greater use of e-Sourcing is not necessarily helping the situation. Buyers are tempted to use standard templates, PQQ, or RFP documents, which by definition cannot be appropriate for very different spend categories. However automated the sourcing process can be made, we haven’t seen any technology that eliminates the need for thought and judgment from the buyer in terms of what questions need to be asked of the potential suppliers, and which factors are truly critical in terms of supplier selection.

But back to the paper: there’s a lot more content, interesting and useful we hope, and as a valued member of Spend Matters PRO, you can download it here now.

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