What criteria should be considered when evaluating suppliers and awarding contracts?
One important task for buyers is to choose a competent supplier who can deliver the contract at optimal costs. Nowadays, when a buying organization raises a need, it may attract interest from many suppliers. If buyers select a supplier without caution, they may face a risk of contract failure. Therefore, buyers should invest time in developing a comprehensive award criteria table to select the most suitable supplier. The key question is: which criteria should be used to evaluate suppliers? According to CIPS study guides, buyers should consider the following critetia. Buyers are flexible to select appropriate criteria, depending on specific situations.
- Price
- Whole – life costs
- Technical merits
- Environmental, social and governance (ESG factors)
- Added value
- …
Price
Price is typically the most common and basic criteria for awarding a contract, and it is often presented in bids or quotations. As a skilled buyer, you need to clarify what is included in a quoted price to avoid unexpected costs. You need to communicate with suppliers to clarify some information:
- Is this the final price after discount?
- Is there any price variance for batch quantities?
- Does the price include the shipping costs?
- Does the price include the tax?
- Is there any conditions on payment terms? Some suppliers may offer low price with shorter payment periods…
It is very important to clarify all information revolving around the price, so buyers can make an accurate comparison between supplier’s prices.
Whole – Life Costs
When buying machines or assets, buyers need to consider all costs incured during its useful life, including:
- Acquisition costs: This refers to total amount of money spent to acquire an asset, including the purchase price, shipping and delivery fees, tax and duty costs, installation and set up costs…
- Tooling costs: This refers to the costs of necessary tools that helps a machine operate properly such as mold, fixture, cutting tools…
- Insurance: This refers to insurance premium that a buying company pays to the insurance company to protect their assets against damage, theft, fire and other risks.
- Operating costs: This refers to costs associated with running a machine such as electricity, water, labors…
- Maintenance costs: This refers to costs that aim at keeping a machine in a good working condition during its useful life, including routine services (oil changes, inspection costs), repair costsdue to wear and tear, replacement of parts (filters, belts or tires…)
- Training costs: Most machines or assets have complicated operation processes, so the operators need a specialized training to operate a machine or an asset properly, ensuring safety for operators and asset durability.
- Storage costs: Buyers need to assess how much space an asset take up and what is required to store an asset in a safe place.
- Disposal costs: This refers to costs of removing an asset when it is no longer usable. In some countries, a buying organization has to pay a fee to dispose of assets in landfills. Additional costs may include handling hazadous materials or chemicals within the machine.
Whole – life costs should be considered as an important award criterion, helping to keep a company’s budget on track.
Technical Merits
Technical merits refer to the quality and strength of a purchased product based on its technical aspects like how well it works (its performance, its reliablity, its durability, its safety…), how effectively it meets the specification, how innovative it is…To assess supplier’s technical merit, buyers need to evaluate supplier’s production methods and technologies in place, their compliance with standards and regulation, their technical qualifications, their product samples…Technical merit is considered a key award criteria as it determines both the quality of a purchased product and supplier’s innovation capabilities.
Added value solutions
When multiple suppliers offer their products of similar quality and price, a buying organization may prioritize a supplier that provides added values. These added values can include:
Innovation: The supplier continously strive for innovating their core operations and potentially launch new products with exceptional quality and lower costs
Shorter lead time: The supplier is able to fulfill customer’s orders in a short time, reducing waiting time and improving responsiveness.
Support and training: Suppliers are ready to provide immediate support when concerns arise. They also provide a buying organization with thorough training when operating an asset to ensure proper and safe operation of the asset.
Good reputation: A supplier with a good reputation can enhance a buying organization’s credibility in the eyes of its customers.
…
Environmental, Social and Governance (ESG)
Recently, many businesses have started caring about ESG, so they also take it into account when evaluating their suppliers.
Environmental: This refers to supplier’s impact on environement. Environmental compliance is demonstrated though carbon emissions, energy use, waste management, the use of recycle materials…
Social: This refers to how well suppliers treat people both inside and outside their business. It can be expressed through their respect for human rights, diversity within the organization, community engagement…
Governance: This refers to how suppliers run their business. To assess supplier’s governance, buyers look at:
- Governance structure: It outlines the roles and responsiblities of governing bodies in a company and clearly states that who is reponsible for making decisions and how those decision are made. A top of governance structure involves a board or executive managers, who are responsible for making strategic decisions. The second tier of governance structure includes middle management, who implement strategies set by leadership, oversee the performance of their lower tiers and make decisions within the scope of their authority. The third tier of governance structure consists of staff members who are assigned specific tasks and contribute to the company’s strategic goals. A clear governance structure is very especially important in a company with multiple departments and employees, as it formalizes the roles and responsibilities of each individual and ensure effective implementation of corporate policies, processes and procedures.
- Supplier’s internal practices and policies that guide a company how to operate its business to ensure that all business activities are transparent, ethical and fully compliant.
To assess supplier’s ESG aspects, buyers may request copies of supplier’s policies related to corportate structure and ESG such as
- Corporate social responsibility policy
- Ethics policy that covers code of conduct, compliance with law, anti corruption and bribery, conflicts of interest, confidentiality and data protection, diversity, equity and inclusion, reporting and whisteblower protection
- Environmental policy.
These policies indicates their commitment and orientation toward ESG. Additionally, buyers can request suppliers to provide their ESG performance report or conduct site visits to identify any gaps between stated policies and actual practices.
We provide CIPS practice questions with answers and detailed explanation, besides they are updated regularly to reflect the actual exam. If you want to consolidate your knowledge before the exam, you can check the links below. The discount code is CIPSEXAM25.
L4M1: https://www.udemy.com/course/cips-l4m1-practice-test-short-learning-guide/?couponCode=CIPSEXAM25
L4M2: https://www.udemy.com/course/cips-diploma-l4m2-practice-test/?couponCode=CIPSEXAM25
L4M5: https://www.udemy.com/course/cips-practice-test-commercial-negotiation/?couponCode=CIPSEXAM25
L4M7: https://www.udemy.com/course/level-4-diploma-whole-life-asset-management-l4m7/?couponCode=CIPSEXAM25
L4M8: https://www.udemy.com/course/cips-l4m8-practice-in-procurement-and-supply/?couponCode=CIPSEXAM25
L5M2: https://www.udemy.com/course/cips-l5m2-daniel-do/?couponCode=CIPSEXAM25
L5M3: https://www.udemy.com/course/l5m3-daniel/?couponCode=CIPSEXAM25
L5M4: https://www.udemy.com/course/l5m4-advanced-contract-and-finance/?couponCode=CIPSEXAM25
L5M5: https://www.udemy.com/course/l5m5-daniel/?couponCode=CIPSEXAM25