5 Key Criteria for Supplier Evaluation in the Construction Sector

Written by Ng Shi Yun, MSIPMM

by Ng Shi Yun, MSIPMM

5 Key Criteria for Supplier Evaluation in the Construction Sector

Written by Ng Shi Yun, MSIPMM

by Ng Shi Yun, MSIPMM

by Ng Shi Yun, MSIPMM

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.

Supplier evaluation in Contruction sector

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 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.

Application on Quality, Cost, and Delivery

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 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 multidirectional 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.

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 capabili¬ties 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 capabili¬ties 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 suppli¬ers 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.

About the Author: Ng Shi Yun has several years of experience in the specialised field of procurement for the construction industry. She is a qualified member of the Singapore Institute of Purchasing and Materials Management (MSIPMM). She is currently completing the course on Professional Diploma in Purchasing Management (PDPM) at SIPMM Academy.

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