Traditional evaluation models

by Dr. Robert A. Kemp

Supplier evaluation is a critically important element of our supply chain management process. This article, the second in a five-part series on the topic, identifies and compares traditional models for evaluating suppliers. In the April/May issue, I urged you to do three things: 1) evaluate your existing supplier evaluation system; 2) determine the size of the supplier list and categorize them by the A-B-C process; and, 3) examine your team process for evaluations. For those who did this, and for new readers, please keep these three items in mind as you read this article.

In the 1950s, members of the National Association of Purchasing Agents (now the Institute of Supply Management) were concerned about supplier evaluation. It commissioned a team to address the problem. The team responded with a major report on the status of supplier evaluation. The report identified three models ranging from quite simple to very complex. Fortunately for us, the three models have stood the test of time. Each has spawned many adaptations over the years. Now, computer and Web-based communication techniques make it relatively easy for us to create even more complex models for the supplier evaluation process.

The original models were: 1) the categorical model, 2) the weighted-point model and 3) the cost ratio. The names suggest a degree of difference and complexity. For example, the categorical model asks us to select critical categories of supplier behavior and rate suppliers on a simple scale that can be totaled.

The math and process of the categorical model is quite elementary. Indeed, the scoring process could be yes or no, or satisfactory to unsatisfactory.  Even so, when a set of suppliers is evaluated using the same categories and scoring process, we have a system to compare them and identify the preferred supplier in the group.

By definition, the weighted-point model implies more sophistication. We have factors to be scored and weights that let us compare the meaningfulness of the factors and give importance to factors in comparison with the other factors. The evaluation team must agree on the importance of factors and weights before it can evaluate its suppliers.

Once weights are agreed upon, it is straightforward math to again calculate the numbers and identify the preferred supplier in the group.

Just by its name, the cost ratio model seems the most complex, and it is.  For that reason, it has never been widely used, and that is unfortunate because it provides a set of numbers that compare suppliers by the costs they cause for our operations. To the extent that our systems can identify and measure the costs attributable to each supplier, this system also provides us a working model to compare suppliers with the goal of selecting the lowest-cost supplier.

It should be clear that getting to a measure based on cost is better than one based on factors and even better than one that uses weights on those factors. The cost ratio method is more complex.

Due to space limitations, my examples are quite simple and consider only three or four factors for each model. You may tailor the number of factors to match the importance of your supply decision.

Robert Kemp is a consultant, speaker and the former president of the Institute for Supply Management. He can be reached at .

This article appeared in the June/July 2002 issue of MRO Today magazine. Copyright, 2002.

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