Vendor Selection and Vendor Rating

A ven­dor (or sup­plier) is any per­son or firm that pro­vides mate­ri­als, com­po­nents, tools, equip­ment or ser­vices to a busi­ness: a steel sup­plier to a fac­tory, a phar­ma­ceu­ti­cal dis­trib­u­tor to a hos­pi­tal, an elec­tron­ics dealer to a col­lege. Ven­dor selec­tion is the process of choos­ing the most suit­able sup­plier from those avail­able. Ven­dor rat­ing is the process of mea­sur­ing how well a sup­plier actu­ally per­forms once busi­ness has begun. Selec­tion hap­pens before or at the time of choice; rat­ing hap­pens dur­ing and after the rela­tion­ship.

Both mat­ter because an organ­i­sa­tion's out­put can be no bet­ter, and no more punc­tual, than its inputs. A wrong sup­plier brings rejected mate­r­ial, late deliv­er­ies, short­ages and cus­tomer com­plaints; a good one brings con­sis­tent qual­ity, reli­able deliv­ery and lower total cost. Choos­ing a sup­plier is there­fore not a small cler­i­cal deci­sion; it affects the whole oper­a­tion. For­mal study of how buy­ers weigh these cri­te­ria goes back at least to Dick­son's 1966 analy­sis of ven­dor selec­tion sys­tems.

Why ven­dor selec­tion is impor­tant

A poor sup­plier can cause poor-qual­ity mate­ri­als, pro­duc­tion delays, higher cost, sud­den short­ages, cus­tomer com­plaints, lower pro­duc­tiv­ity and more wastage. A good sup­plier sup­ports smooth pro­duc­tion, qual­ity con­sis­tency, timely deliv­ery, cost con­trol, lower risk and bet­ter coor­di­na­tion.

A sim­ple exam­ple

Sup­pose a bak­ery needs flour every week and has three options. Sup­plier A is cheap but its qual­ity is poor. Sup­plier B has good qual­ity but often deliv­ers late. Sup­plier C offers good qual­ity, a fair price and timely deliv­ery. The bak­ery should most likely choose C, because the deci­sion should rest on over­all per­for­mance, not price alone. That is the heart of ven­dor selec­tion.

Objec­tives of ven­dor selec­tion

• Right qual­ity: mate­ri­als that meet spec­i­fi­ca­tions every time.
• Timely deliv­ery: mate­ri­als arrive when required.
• Rea­son­able cost: com­pet­i­tive and fair total cost.
• Reli­a­bil­ity: depend­able sup­pli­ers who keep promises.
• Lower oper­a­tional risk: fewer delays, rejec­tions and stop­pages.
• Long-term rela­tion­ships: sta­ble, effi­cient sup­ply part­ner­ships.

Fac­tors con­sid­ered in ven­dor selec­tion

Qual­ity

Does the sup­plier meet the required stan­dard, keep defects low and stay con­sis­tent? For an auto­mo­bile maker, poor brake parts threaten safety and rep­u­ta­tion, so qual­ity often mat­ters more than a low price. Buy­ers look at rejec­tion his­tory, qual­ity cer­ti­fi­ca­tion and the sup­pli­er's own inspec­tion sys­tem.

Price and total cost

Price mat­ters, but buy­ers exam­ine the basic price together with trans­port cost, dis­counts, pay­ment terms and hid­den costs. The low­est quo­ta­tion is not the cheap­est if qual­ity is poor, deliv­er­ies are late or extra inspec­tion is needed. The com­par­i­son should be on total cost, not quoted cost.

Deliv­ery per­for­mance

Does the sup­plier deliver on time, how often are there delays, and can it han­dle urgent demand? A late deliv­ery can stop pro­duc­tion even though the order was placed cor­rectly.

Capac­ity and capa­bil­ity

Can the sup­plier han­dle large orders, increase sup­ply when demand rises, and does it have the machines, staff and tech­ni­cal skill needed? A small sup­plier with good qual­ity may still fail when vol­ume grows.

Finan­cial sta­bil­ity

A finan­cially weak sup­plier may sud­denly stop oper­at­ing, fail to buy its own raw mate­ri­als or delay orders. Buy­ers there­fore check finan­cial state­ments and credit stand­ing.

Rep­u­ta­tion and expe­ri­ence

How long has the sup­plier been in busi­ness, what is its mar­ket rep­u­ta­tion, and do other cus­tomers trust it? Past per­for­mance is a strong guide to future per­for­mance.

Loca­tion

A nearby sup­plier usu­ally offers faster deliv­ery, lower trans­port cost and eas­ier com­mu­ni­ca­tion. A dis­tant sup­plier may still be cho­sen for spe­cial qual­ity or lower cost, but dis­tance adds lead time and risk.

Ser­vice and sup­port

Quick response to com­plaints, replace­ment of defec­tive mate­r­ial, tech­ni­cal guid­ance and emer­gency help become very impor­tant in long-term rela­tion­ships.

Lead time

Lead time is the time between plac­ing an order and receiv­ing the mate­r­ial, usu­ally mea­sured in days. Short and reli­able lead times allow smoother plan­ning and lower safety stocks.

Flex­i­bil­ity

A good sup­plier can respond to urgent demand, design changes, quan­tity changes and revised deliv­ery dates. Flex­i­bil­ity is espe­cially valu­able when demand is uncer­tain.

Other fac­tors

Many buy­ers also con­sider com­mu­ni­ca­tion and infor­ma­tion sys­tems, com­pli­ance with laws and labour stan­dards, envi­ron­men­tal prac­tices, and will­ing­ness to share improve­ments.

The ven­dor selec­tion process

1. Iden­tify the need: what item, what spec­i­fi­ca­tion, how much and by when. With­out a clear require­ment, good selec­tion is impos­si­ble.
2. Search for pos­si­ble sup­pli­ers through exist­ing ven­dor lists, mar­ket research, cat­a­logues, web­sites, refer­rals, ten­ders and trade fairs.
3. Request infor­ma­tion (RFI): a request for infor­ma­tion col­lects details of each sup­pli­er's capa­bil­ity before any for­mal offer.
4. Request quo­ta­tions or pro­pos­als (RFQ / RFP) cov­er­ing price, deliv­ery terms, qual­ity details, pay­ment con­di­tions and ser­vice sup­port.
5. Com­pare alter­na­tives on the cho­sen cri­te­ria.
6. Eval­u­ate per­for­mance fac­tors such as qual­ity his­tory, deliv­ery record, capac­ity, rep­u­ta­tion and cost; this may include a visit to the sup­pli­er's plant.
7. Select the sup­plier offer­ing the best over­all value and place the order.
8. Review per­for­mance con­tin­u­ously, which leads into ven­dor rat­ing.

Pro­posal eval­u­a­tion

Pro­posal eval­u­a­tion means exam­in­ing each sup­pli­er's offer and assign­ing scores against every require­ment. If three sup­pli­ers quote, the buyer should not choose at ran­dom or on price alone, but score each pro­posal sys­tem­at­i­cally on the agreed fac­tors.

Need for ven­dor rat­ing

A sup­plier that was good at the start may later deliver late, slip on qual­ity, raise prices unfairly or become incon­sis­tent. Ven­dor rat­ing helps the buyer to:

• iden­tify the best sup­pli­ers and remove weak ones;
• give sup­pli­ers objec­tive feed­back and improve rela­tion­ships;
• nego­ti­ate from facts;
• develop backup sources;
• allo­cate future busi­ness and sup­port long-term plan­ning.

Rat­ing cri­te­ria com­monly include qual­ity, price, deliv­ery, ser­vice, lead time, con­sis­tency, flex­i­bil­ity and response to com­plaints. The three empha­sised most often are qual­ity, cost and deliv­ery.

Meth­ods of ven­dor rat­ing

The cat­e­gor­i­cal method suits a small sup­plier base, lim­ited data or gen­eral eval­u­a­tions. The weighted point method is the one most often exam­ined.

Worked exam­ple: weighted point method

Sup­pose a man­u­fac­turer buys a cast­ing from three ven­dors and uses the fol­low­ing weights: qual­ity 40, deliv­ery 30, price 20, ser­vice 10 (total 100). Last half-year's records are:

Step 1: qual­ity rat­ing

$$\displaystyle \text{Quality rating} = \frac{\text{Units accepted}}{\text{Units received}} \times 40$$

X: $\displaystyle \frac{960}{1{,}000} \times 40 = 38.4$. Y: $\displaystyle \frac{920}{1{,}000} \times 40 = 36.8$. Z: $\displaystyle \frac{990}{1{,}000} \times 40 = 39.6$.

Step 2: deliv­ery rat­ing

$$\displaystyle \text{Delivery rating} = \frac{\text{On-time deliveries}}{\text{Total deliveries}} \times 30$$

X: $\displaystyle \frac{18}{20} \times 30 = 27$. Y: $\displaystyle \frac{20}{20} \times 30 = 30$. Z: $\displaystyle \frac{15}{20} \times 30 = 22.5$.

Step 3: price rat­ing

The low­est price (₹48) earns full marks; oth­ers are scaled down.

$$\displaystyle \text{Price rating} = \frac{\text{Lowest price}}{\text{Vendor's price}} \times 20$$

X: $\displaystyle \frac{48}{50} \times 20 = 19.2$. Y: $\displaystyle \frac{48}{48} \times 20 = 20$. Z: $\displaystyle \frac{48}{52} \times 20 = 18.46$.

Step 4: ser­vice rat­ing

The ser­vice scores are already out of 10: X = 8, Y = 6, Z = 9.

Step 5: total

Inter­pre­ta­tion: Ven­dor Y ranks first, although it has the weak­est qual­ity and ser­vice, because of its per­fect deliv­ery record and low­est price. The mar­gin over X is only 0.2 points, so a small change in weights would reverse the result: if qual­ity were weighted 45 and deliv­ery 25, X would lead. When totals are this close, the buyer should look at the indi­vid­ual fac­tors, per­haps split the busi­ness between X and Y, and ask Y to improve its qual­ity.

A shorter ver­sion of the same idea: with weights qual­ity 50, deliv­ery 30 and price 20, a sup­plier scor­ing 45 + 20 + 18 = 83 loses to one scor­ing 40 + 28 + 17 = 85, even though the first has bet­ter qual­ity. The full pic­ture decides.

Worked exam­ple: cost ratio method

Sup­pose two ven­dors quote ₹50 and ₹48 for the same part. Records show the extra costs each ven­dor causes, expressed as a per­cent­age of pur­chase value:

$$\text{Adjusted price} = \text{Quoted price} \times (1 + \text{total penalty})$$

P: $50 \times 1.06 = 53.00$, so ₹53.00. Q: $48 \times 1.14 = 54.72$, so ₹54.72. Ven­dor P is cheaper in real­ity by ₹1.72 a unit, despite the higher quo­ta­tion.

Score­cards and approved ven­dor lists

A ven­dor score­card tracks per­for­mance reg­u­larly, often monthly or quar­terly, on mea­sures such as per­cent­age accepted, on-time deliv­ery, price vari­ance and com­plaint response. It lets man­age­ment see quickly who is improv­ing, who is declin­ing and who is con­sis­tently strong, and it gives sup­pli­ers clear tar­gets.

An approved ven­dor list con­tains sup­pli­ers who have already been eval­u­ated and accepted. It saves time in future pur­chas­ing, improves con­sis­tency, reduces risk and pro­tects qual­ity stan­dards. For impor­tant items, many organ­i­sa­tions allow pur­chases only from approved ven­dors, and rat­ing results decide who stays on the list.

Ven­dor rat­ing and long-term rela­tion­ships

Rat­ing is not only for reject­ing poor sup­pli­ers. It helps buy­ers dis­cuss weak­nesses with sup­pli­ers, encour­age bet­ter ser­vice, reward strong per­for­mance and build depend­able part­ner­ships. Many firms run sup­plier devel­op­ment pro­grammes for ven­dors who score well on some fac­tors but poorly on oth­ers. A good rat­ing sys­tem improves the per­for­mance of both buyer and sup­plier.

Sin­gle sourc­ing and mul­ti­ple sourc­ing

Ven­dor strat­egy mat­ters as much as ven­dor choice. Just-in-time sys­tems tend to favour a few close, long-term sup­pli­ers, while crit­i­cal items with uncer­tain sup­ply often jus­tify a sec­ond source.

Ven­dor rat­ing in mod­ern busi­ness

Global sup­pli­ers, fast-chang­ing demand, lean inven­to­ries, just-in-time pur­chas­ing and strict qual­ity require­ments mean that even a small sup­plier fail­ure can cre­ate major oper­a­tional prob­lems. Sup­plier eval­u­a­tion is there­fore a con­tin­u­ous activ­ity, not a one-time for­mal­ity.

Prob­lems caused by poor ven­dor selec­tion

• repeated rejec­tion of mate­r­ial and poor-qual­ity out­put;
• deliv­ery delays and stock short­ages;
• higher pro­duc­tion cost and emer­gency pur­chas­ing;
• dam­aged cus­tomer ser­vice and an unsta­ble sup­ply chain.

Chal­lenges in ven­dor rat­ing

• lack of accu­rate per­for­mance data;
• too many sup­pli­ers to track;
• bias or sub­jec­tiv­ity in scor­ing and in choos­ing weights;
• chang­ing sup­plier con­di­tions;
• dif­fer­ent pri­or­i­ties for dif­fer­ent mate­ri­als.

Rat­ing sys­tems should there­fore be sim­ple, fair, based on records and updated reg­u­larly, and the weights should reflect what mat­ters most for each cat­e­gory of item.

Qual­i­ties of a good ven­dor

A good ven­dor is reli­able, qual­ity-con­scious, punc­tual, respon­sive, finan­cially sta­ble, coop­er­a­tive, flex­i­ble and trans­par­ent. A strong sup­plier behaves like a long-term busi­ness part­ner.

Ven­dor selec­tion, pur­chase orders and pur­chase man­age­ment

Ven­dor selec­tion decides who should sup­ply; the pur­chase order is the for­mal order placed after that choice. Ven­dor rat­ing sup­ports pur­chase man­age­ment by iden­ti­fy­ing pre­ferred sup­pli­ers, strength­en­ing nego­ti­a­tion, reduc­ing risk, main­tain­ing qual­ity stan­dards and pre­vent­ing repeated poor per­for­mance.

Exam-ready sum­mary

Ven­dor selec­tion is the process of choos­ing the most suit­able sup­plier for mate­ri­als, com­po­nents or ser­vices, con­sid­er­ing qual­ity, total cost, deliv­ery, capac­ity, finan­cial sta­bil­ity, rep­u­ta­tion, loca­tion, ser­vice, lead time and flex­i­bil­ity. Ven­dor rat­ing is the con­tin­u­ing eval­u­a­tion of sup­plier per­for­mance, usu­ally on qual­ity, cost, deliv­ery and ser­vice. Com­mon rat­ing meth­ods are the cat­e­gor­i­cal method, the weighted point method, the cost ratio method and the score­card sys­tem. In the weighted point method each fac­tor's score is mul­ti­plied by its weight and the totals are com­pared. Good ven­dor selec­tion and rat­ing ensure smooth pro­duc­tion, con­sis­tent qual­ity, cost con­trol and reli­able sup­ply.

Key terms

Ven­dor

A per­son or firm that sup­plies mate­ri­als, com­po­nents, equip­ment or ser­vices to a busi­ness.

Ven­dor selec­tion

Choos­ing the most suit­able sup­plier from avail­able alter­na­tives.

Ven­dor rat­ing

Mea­sur­ing and scor­ing a sup­pli­er's actual per­for­mance over time.

Request for infor­ma­tion (RFI)

A request to poten­tial sup­pli­ers for details of their capa­bil­i­ties before for­mal offers.

Weighted point method

A rat­ing method in which fac­tor scores are mul­ti­plied by weights and added.

Cost ratio method

A rat­ing method that adds qual­ity, deliv­ery and ser­vice costs, as a per­cent­age, to the quoted price.

Ven­dor score­card

A reg­u­lar report of a sup­pli­er's per­for­mance on key indi­ca­tors.

Approved ven­dor list

A list of eval­u­ated sup­pli­ers from whom pur­chases are per­mit­ted.

Mul­ti­ple sourc­ing

Buy­ing the same item from more than one sup­plier to reduce risk.

Com­mon ques­tions

What is the dif­fer­ence between ven­dor selec­tion and ven­dor rat­ing?

Ven­dor selec­tion chooses a sup­plier before buy­ing; ven­dor rat­ing eval­u­ates how the cho­sen sup­plier per­forms dur­ing and after the pur­chase.

How is the weighted point method applied?

Choose fac­tors, give each a weight, score every ven­dor on each fac­tor (for exam­ple accepted ÷ received × weight for qual­ity), add the weighted scores and rank the ven­dors. In the exam­ple the totals were 92.60, 92.80 and 89.56.

How is the price rat­ing cal­cu­lated in ven­dor rat­ing?

Divide the low­est price quoted by the ven­dor's price and mul­ti­ply by the price weight, so the cheap­est ven­dor gets full marks: ₹48 ÷ ₹50 × 20 = 19.2.

Why should a ven­dor not be selected on price alone?

Because rejec­tions, late deliv­er­ies and poor ser­vice add hid­den costs. In the cost ratio exam­ple the ₹48 quo­ta­tion became ₹54.72 after penal­ties, against ₹53.00 for the ₹50 quo­ta­tion.

What are the advan­tages and dis­ad­van­tages of sin­gle sourc­ing?

It gives closer rela­tion­ships, eas­ier coor­di­na­tion, vol­ume dis­counts and stan­dard­i­s­a­tion, but cre­ates heavy depen­dence and high risk if the sup­plier fails.

What is an approved ven­dor list?

A list of sup­pli­ers who have passed eval­u­a­tion; it speeds up buy­ing, keeps qual­ity con­sis­tent and reduces risk.

Ref­er­ences

1. Dick­son, G. W. (1966) "An analy­sis of ven­dor selec­tion sys­tems and deci­sions". Jour­nal of Pur­chas­ing, 2(1), 5–17.
2. Chary, S. N. Pro­duc­tion and Oper­a­tions Man­age­ment. McGraw-Hill Edu­ca­tion (India).
3. Heizer, J., Ren­der, B. and Mun­son, C. Oper­a­tions Man­age­ment: Sus­tain­abil­ity and Sup­ply Chain Man­age­ment. Pear­son.
4. Chopra, S. and Meindl, P. Sup­ply Chain Man­age­ment: Strat­egy, Plan­ning, and Oper­a­tion. Pear­son.
5. Bedi, K. Pro­duc­tion and Oper­a­tions Man­age­ment. Oxford Uni­ver­sity Press.

Related read­ing

• What is Pur­chase Man­age­ment?
• Stores Man­age­ment in Oper­a­tions Man­age­ment
• Inven­tory Man­age­ment in Oper­a­tions Man­age­ment