5 Key Criteria for Supplier Evaluation in the Construction Sector - S... https://sipmm.edu.sg/5-key-criteria-supplier-evaluation-construction-s...

by Ng Shi Yun, PDPM

Supplier evaluation is the process to access new or existing supplier base on their
delivery, price, production, and quality of management, technical and services. A
standard supplier evaluation framework shall be used in all cases for the existing
and potential suppliers.

The supplier evaluation framework can help to set up a benchmark and corrective
action plan for the existing supplier. Company can decide to reward supplier
based on their excellence performance and penalizing or de-listing them if the
performance is not in standard. Supplier Evaluation and Management had been
practiced in manufacturing industry and Construction Projects.

The diagram above shows the five key criteria of supplier evaluation in
construction sector.

Quality, Cost, and Delivery (QCD)

The most important criteria in construction industry is material quality, delivery
dependability, and cost. The most important factor of supplier selection should be
the quality level of the procurement items. Product quality should consistently
meet specified requirements since it can directly affect the quality of the finished
goods. Not only product quality reliability, supplier characteristics like delivery

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lead time shall be consider carefully.

Unit price should not be the only criteria in supplier evaluation. Total cost of
ownership is an important factor. Total cost of ownership includes the unit price
of the material, payment terms, cash discount, ordering and carrying cost, logistics
and maintenance costs, and other more qualitative costs that may not be easy to
assess.

Supplier must value add their product by providing good services when needed.
For example, when product information or warranty service is needed, suppliers
must respond on a timely basis. Selecting services and products from suppliers
with excellent delivery ability can reduce or get rid of waste related with
purchasing raw materials such as inventory, storage cost, and cost related with
multiple times of material transferring.

Many company adopt to “Just-in-Time” (JIT) Inventory process to reduce the cost
of ‘’waste”. Supplier need to make the delivery on-time based on company request.
Supplier that perform excellent delivery ability can provide additional value to the
company by reduce the risks of material running out, saving on unnecessary
transportation costs, reduce the need to storage and cost inventory related cost.

The diagram above shows the application on Quality, Cost, and Delivery.

Long-Term Relationship
Some company will develop long term relationship with potential supplier. This is
applicable to the supplier which falls under the category of high volume of
spending and play critically to the company’s business. With this approach, both
party need to share their mutual goals, establish metrics to guide the relationship
and develop a series of ongoing discussion on how issues and conflicts can be
resolved in a mutually beneficial manner over the times. These relationships may
also involve joint cost-savings projects and new product-development efforts.

Financial Stability
Financial status of the supplier should be carefully evaluated as its directly affects
its ability to serve the customer. Analysis of Credit Reports plays an important

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roles in financial evaluation. Credit Report contain information about supplier

financial status. Credit report contain information on the experience,
management, and facilities of the potential supplier. A related supplementary
procedure is independent analysis of the supplier’ financial statement. The
purchasing officer can obtain information regarding the supplier’s financial
stability, pricing policies, and general operating efficiency by applying the tools of
ratio analysis to the supplier’s balance sheet and income statements.

Total Quality Performance and Philosophy

Supplier quality capabilities can be evaluated by using the supplier certification
programs. Certification is about the setting of criteria regarding of quality levels as
demonstrated through the use of statistical process control and such elements as
process capability studies of a supplier’s equipment, record-keeping abilities, and
others. If a supplier meets some but not all of the criteria, it may reach a
“preferred” status and will remain on the construction organization’s bidders list.

If a supplier meets all the criteria and has demonstrated that it can sustain these
levels, then it may be granted “strategic” status and be placed on the construction
organization’s bidders list. By the use of the strategy above, company can reduce
their supply base by only awarding to those suppliers who can become certified or
awarding the supplier who become certified first. Those supplier with low abilities
will not be able to become certifies, hence the supply base will be reduced.

The certification criteria can be changed and updated as recertification is required.

Thus, the “hurdle” can be raised higher and higher until there are only one or a
few suppliers left. The price and productivity hurdles can also be used in
combination with certification. Construction organizations can add criteria to
make it more difficult to be a preferred or strategic supplier.

Certification programs are only as good as their design. The characteristics that
determine certification must be well thought out and realistic. Part of the single-
source philosophy is that, through cooperation and input from the construction
organization, suppliers will be able to reduce the project’s materials costs. When
designing a certification program, careful attention should be paid to the selection
of criteria. Good certification should include issues regarding equipment
capability, quality assurance, financial health of the supplier, production
scheduling methods, value analysis abilities, and cost-accounting methods.

Long-Term Relationship
The exponential growth of internet use has made the dream of E-commerce be
more realistic. The expanding market for E-commerce is too huge to ignore for all
business. Rapid developments in the technology are improving and provided on-
line services very quickly. E-commerce adoption has its organisational and
business implications . It is not a magical solution to revolutionise a business.

Careful strategic planning and strategies are needed. In order to succeed in this
innovative and unique medium, it requires a diverse and multi-directional
approach. In the construction industry, the potential benefits are considerable
owing to the nature of the business. Comparatively, the construction industry is
not performing on par with other business sectors in E-commerce. However, it is
encouraging to see a number of models and initiatives coming to the surface to
bring traditional construction processes on-line. External internet organisations
also see a huge potential in construction E-commerce. Standardisation and
consolidation of systems is a major requirement to help support the effective
models and genuine developments.

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Comprehensive and collaborative efforts are required to make the most from
E-commerce in the industry, and only those models that understand the complex
business of construction will survive.

Conclusion
Construction organizations are not competent at identifying the capabilities of
their suppliers and often rationalize decisions for the supplier selection based on
convenience. This integral function supplier selection process should be integrated
into the supply chain management environment so that the availability of bulk
materials is ensured.

The common mistakes made by many company in supplier selection can be

avoided with five factors for success. Prime contractors should assess the core
competencies and capabilities of each supplier and then ask if that supplier could
be replaced. Since exit the market for various reasons, prime contractors should
be prepared to establish alternative partnerships.

Lastly, the prime contractor should share information with all strategic suppliers
and request their input.

References:

Benton, W.C. Jr. & McHenry, Linda F. (2010). “Construction Purchasing and
Supply Chain Management.” New Delhi: Tata McGraw Hill

Patil, A.A. & Kumthekar, M.B. (2016) “Supplier Evaluation and Selection Methods
in Construction Industry”. International Research Journal of Engineering and
Technology, Vol. 3 Issue 6.

Research Gate (2017). “E-Commerce and the Construction Industry” Retrieved

from https://www.researchgate.net/publication, accessed 21/08/2017.

Wawasan Open University (2017). “Supplier Selection and Evaluation”. Retrieved

from https://procurementmanagement.pressbooks.com, accessed 21/08/2017.

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