Evaluation of Supplier Performance and Efficiency: A Critical Analysis

Introduction

Over the past decade, the traditional purchasing and logistics functions have evolved into a broader strategic approach to materials and distribution management system known as Supply Chain Management. Supply chain management involves the flow of material, information and finance in a network consisting of customers, suppliers, manufacturers, and distributors. It begins with raw materials, continues through internal operations, and ends with distribution of finished goods to the ultimate users. The main aim of supply chain management is to integrate various suppliers to satisfy market demand. The short-term objective of supply chain management is primarily to increase the productivity and reduce the entire inventory along with the total cycle time. Whereas the long-term objective is to increase customer satisfaction, increase the market share, and profits for all members of the supply chain (Tan, 2001).

In supply chain management, coordination between a manufacturer and a supplier is typically a difficult and important link in the channels of distribution. Since suppliers are manufacturer’s external links, the coordination with the suppliers is not easy unless the systems for cooperation and information exchange are properly integrated. The coordination between a manufacturer and suppliers is important because, the failure of non-coordination results in excessive delays which ultimately lead to poor customer services. Consequently, inventories of incoming parts from suppliers or those of finished goods at the manufacturer and distribution centres (DCs) may accumulate. Hence, the total cost of the entire supply chains will rise. Manufacturers are able to assist their suppliers by providing knowledge, skills, and experience, and to benefit in turn from suppliers’ improved delivery performance and from fewer production disruptions that are caused by poor quality materials. The suppliers also can benefit by becoming more competitive than other suppliers as performance improves and costs go down. Thus, supplier development is a vehicle that can be used to increase the competitiveness of the entire supply chains.

Supplier evaluation is one of the fundamental steps to evaluate a supplier’s efficiency on the adaptability towards one’s organization. Supplier evaluation techniques adopted in an organisation are mainly based on simple, weighted scoring methods which primarily rely on subjective judgments and opinions of purchasing managers or staff involved in the supplier evaluation process. In this approach, the experience and contextual knowledge of purchasing staff is utilized to assign weightages arbitrarily to the supplier performance attributes. Consequently, the final ranking of the suppliers is heavily dependent on the assignment of these weights, which are often difficult to specify in an objective manner. It is the major limitation of the weighted scoring method for supplier evaluation.

Companies usually spend a large amount of their sales revenue on purchasing of raw material and components. So, decision on selecting a competent supplier is important for successful implementation of supply chain management. Supplier evaluation is one of the most critical activities of purchasing management in a supply chain, because of the key role of supplier’s performance on cost, quality, delivery and service in achieving the objectives of a supply chain. The cost of raw materials, component parts and services purchased from external vendors or suppliers is significant for most manufacturing firms.

In the actual business scenario, there are two problems encountered in evaluating suppliers. Supplier evaluations are usually done in a group setting. In group evaluations, although it is relatively easy to get concurrence on the importance rankings for the first little supplier performance attributes, it is difficult to reach consensus beyond the first few attributes of performance. Secondly, in most of the firms, the evaluation process is based only on supplier performance outcomes such as price, quality and delivery. While these outcome measures are important in evaluating supplier performance, they only deal with part of the supplier evaluation problem. For example, a supplier may be achieving high levels of performance by utilizing enormous amounts of resources and thus be an inefficient performer. Thus, in order to comprehensively evaluate the performance of suppliers, it is also necessary to consider the type and amount of input resources utilized in generating performance outcomes.