Vendor Development

The field of purchasing, which is a subset of materials management, centers on supplier or vendor selection. One of the major challenges for today’s purchasing managers in any industry -be it service or manufacturing-is selecting the right vendors for their components, parts and supplies. Selection of vendors includes determining the vendors and the amount of order to be placed on each vendor. Choosing the appropriate vendors is extremely important since total quality management and customer satisfaction, are the goals of almost all organizations. The performance of vendors has a significant impact on the productivity, quality and competitiveness of an organization. The importance and difficulty of selecting suppliers is complicated. According to the latest business trends, some of the important things which need to be considered are – the increase in the value of purchased parts as a percentage of total revenue for manufacturing firms; growth in imported parts and supplies; and the increased rate of technological change accompanied by shorter product life-cycles. High technology firms purchase materials and services up to 80% of their total product costs. Japan purchases up to 40%more supplies and materials for their automobile industries compared with their counterparts in the United States and Europe. Most organizations typically spend 40% to 60% of the revenue of their end products on purchased parts. Selection of vendors based on quality, price, delivery, service and capacity generally ensures buyer satisfaction.

The initial purchase price of an item is only one element of the total cost. There are other associated costs such as cost of establishing vendors, transportation and storage costs and costs of receiving poor quality material. Companies try to achieve a balance between price and quality material. Companies try to achieve a balance between price and value of a purchased part or material during the acquisition process. Usually vendors are selected by their ability to offer the best cost or quality package. Quality level may be specified to the vendors in a variety of ways: commercial standards, design specification, samples, market grades, brand or trade names, functional specifications and tolerances. There are several other additional factors that need to be considered as well while selecting vendors. One of the pioneering research results in vendor selection by Dickson (1996) provides a benchmark on the trends in the importance of vendor selection. The article documented the multi-objective nature of vendor selection and ranked the importance placed on 23 selection criteria by 170 industrial purchasing agents and managers.

Summary of Dickson’s (1966) findings.

There are several methods available to select vendors and to determine the quantities to be ordered from the selected vendors. These methods can be broadly classified into descriptive, empirical and optimization based approaches. The descriptive methods select vendors by evaluating the qualitative factors related to the vendors such as reputation, expertise, organization and communications. The empirical methods evaluate vendor characteristics through relative weighting schemes. The optimization methods minimize various costs associated with purchasing to meet certain requirements in terms of quality, lead time and demand.

A vendor is a special case of a supplier where the components are sold or leased to a broad segment of the marketplace. Vendor is not a new term for contractor.  Contractors can be directed to perform agreed-upon work within cost, schedule, and quality parameters.  Vendors do not work this way.  Thus, it is important for the procuring organization to understand its limited ability to control the marketplace and to develop ways in which to influence it.