An Analysis Of Vendor Selection Systems And Decisions
GARY
w.
DICKSONUniversity of Minnesota The problems associated with deciding how one vendor should be selected from a number of potential alternatives recently has re- ceived a substantial amount of consideration by people in the pur- chasing profession. From the purchasing literature, it is fairly easy to abstract a list of at least 50 distinct factors (characteristics of vendor perfonnance) that are presented by various authors as being mean- ingful to consider in a vendor selection decision.' Each authority sug- gests about five or ten items, and close analysis shows considerable variation in the factors that are considered appropriate for the evalua- tion of potential suppliers.
Not only is there little agreement upon what factors should be considered when selecting a vendor, there has been little attention focused upon the way in which the nature of the purchase affects the decision. It seems very reasonable to assume that the factors consid- ered when selecting a vendor for nuts and bolts are not the factors that are appropriate when selecting a supplier for a computer. Further- more, no system has been developed to show how, in any particular instance, the pertinent factors should be weighted relative to one an- other." Should price, for example, be considered more important than the vendor's perceived ability to meet quality standards? Does the same relationship between price, quality, and all other pertinent fac- tors hold for all purchases, or are the importance relationships between tne factors that are considered in the vendor evaluation and selection also a function of the item to be purchased?
Since the effectiveness of a purchasing decision is a direct function of selecting the proper vendor, the above questions are important. Re- gardless of whether a purchasing department has a formal vendor
1The following sources provide good examples of the disparity in the factors suggested for the evaluation of potential suppliers: Evaluation of Supplier Per- formance (New York: National Association of Purchasing Agents, 1963), pp. 11- 18; Department of Defense, Armed Services Procurement Regulations (Revised March, 1965), Section 1-903, p. 165; and Moving Ahead With Chrysler, A Sup- plier's Guide (New York: The Chrysler Corporation, 1964), p. 29.
• Evaluation of Supplier Performance, op. cit., p. 8, recognizes the importance of factor weightings but presents no system for determining the weightings.
5
6 JOURNAL OF PURCHASING February analysis system or an informal system resting only upon the buyers' experience and judgment, it is important to know what factors on which to evaluate vendors and how to weight these factors relative to one another.
Before work can progress on the problem of relative weighting of factors, some preliminary information descriptive of the factors them- selves must be obtained. In an attempt to obtain a list of factors in current use for vendor evaluation, a survey was made of both finn and individual vendor selection practices. Although this survey was pri- marily of a descriptive nature (how vendors are selected), many im- plications of a normative nature (how vendors ought to be selected) can be drawn from these data. The research reported here provides a foundation for further research on the relative weighting of appropri- ate factors and should be of interest to buyers, purchasing agents, and purchasing management for a number of other reasons.
The survey provides a great deal of information about the vendor selection practices of others, since both firm practices and individual opinions are reported. Also, a specific and detailed list of factors for vendor evaluation is presented and evaluated. Using this list, the reader can compare his values concerning factor importance with the consensus' of the survey respondents in four specific cases. Finally, some generalizations both descriptive of current practice and helpful in developing suggested vendor selection systems are presented.
QUESTIONNAIRE RESEARCH
To gather the information desired concerning the selection of ven- dors, data were obtained from purchasing agents throughout the United States and Canada by means of a mail questionnaire. Since there was no available list of the whole population of purchasing agents, the membership list of the National Association of Purchasing Agents was used in the selection of a random sample to which to send the questionnaire. From this list, the names and business- addresses of approximately 300 potential respondents were obtained.P After several pre-tests, a four-page questionnaire consisting of three parts evolved.
Parts I and II were concerned primarily with information descriptive of the respondents' businesses and the vendor selection practices of these firms. The third part of the questionnaire examined the decision behavior of the individual purchasing agents in the selection of a ven- dor. The return from the initial request letter sent to the 273 purchas- ing agents was 113 questionnaires (41.4%). Fifty-seven persons re- turned a second questionnaire sent to allnon-respondents, bringing the totalresponse up to 170 (62.3%),
• The sample size was based upon economic considerations, trading off cost versus the volume ot information to be obtained. The original request to the National Association of Purchasing Agents was for approximately 300 names, of
which 273 were provided. .
1966 An Analysis of Vendor Selection Systems andDecisions 7 Sample Characteristics
- The respondents represented typical commercial organizations throughout the country, with the exception that manufacturing per- haps was overrepresented (67.8% -of the firms represented were en- gaged principally in this activity.) Both large and small firms were included in the sample with about equal representation. Roughly 20 per cent of the firms fell in each group and 60 per cent of the sample was made up of intermediate size organizations. These categories were determined by measuring both sales volume and number of employees.
About 22 per cent of the respondents stated that they were operating as a subsidiary of a larger organization and that their answers referred to local operations. All other respondents' answers were for the main purchasing department of their organization. Table I shows the median figures for a few of the characteristics of the firms represented in the sample.
TABLE I
ATTRIBUTES OF FIRMS REPRESENTED IN THE SAMPLE'
CHARACTERISTIC
Size of organization
Size' of purchasing department Number of buyers
Annual sales volume Annual purchasing volume
MEDIAN
794 Employees 6 Employees 4 Employees
$13,000,000
$4,600,000 VENDOR SELECTION PRACTICES BY FIRMS
The second part of the questionnaire explored how firm practices and procedures influence the process of selecting a supplier. As might be expected, it appears that those orders which involve large dollar volumes are subject to the most attention by purchasing agents. Asking for the submission of bids from prospective suppliers on some orders but not on others gives an indication of which orders receive particular attention. Table II shows that respondents felt that the request for the submission of bids (and therefore more detailed analysis) is associated with the economic value of the order. The first category in Table II, for instance, states that 30 of the respondents estimated that 90% of thedollar voLumeof orders placed by their firms were preceded by bid requests, whereas the second column shows that only 17 felt that 90%
• Because 32 of the organizations represented in the survey did not sell a product, a ratio between the median sales and purchases is not appropriate. In general, the purchases ot the non-selling organizations tended to be somewhat smaller than thoseotfirms selling a product. For the organizations for which the figure is meaningful, purchases represented approximately 50 per cent or 'total annual sales.
8 JOURNAL OF PURCHASING February of thenumber of all their orders were treated in this manner. Exam- ination of both the frequency distributions .and their medians reflects the emphasis on purchases involving large dollar amounts.
TABLE II
PERCENTAGE OF THE PLACEMENT OF ORDERS PRECEDED BY REQUESTS FOR QUOTATION BY DOLLAR
VOLUME AND BY NUMBER
By Dollar Volume By Number
Class Frequency Frequency
90% and over 30 17
75% under 90% 22 16
50% under 75% 28 26
15% under 50% 36 36
6% under 15% 15 34
under 6% 16 29
Total Responding 147 158
Median 56% 31%
Only 44 (19.6%) of the firms represented had a formal method of vendor .analysis, i.e., a rating system based upon written procedures.
TableIIIshows the factors used to rate potential vendors by the exist- ing systems.
TABLE ill
FACTORS USED IN VENDOR RATING SYSTEMS
FACTOR
Quality of product Price
Delivery, dependability of promises Service
Technical capability Financial strength Geographical location Reputation
Reciprocal arrangements Other factors
Per Cent of Systems Using Factor
96.6 ..
93.9 93.9 81.8 63.6 51.5 42.4 42.4 15.1 12.1
Somewhat surprisingly, over one-third of the responding firms stated that they kept no formal records of vendor performance for use in subsequent vendor selections. The information that is retained, how- ever, consists, in general, of the same factors mentioned in the vendor
1966 An Analysis of Vendor Selection Systems lindDecisions 9 rating systems. Table IV depicts the availability of information on vendor performance. Asin the rating systems, the emphasis on' qual- ity, delivery, and service is apparent.
TABLE IV
INFORMATION RETAINED ON VENDOR .PERFORMANCE Type of Information
Delivery experience
Defective material experience Repair service rendered Technical service rendered All service rendered None of the above
Frequency 77 75 38 35 30 59
Per Cent 45.8 44.6 22.6 20.8 17.8 35.1
In response to a question about the obligation to place an order with the low bidder, only 19 persons (11.9%) said they felt such an obligation. Although this question actually deals with individual rather than firm practices, it was included in the section on organizations because its responseisrelated directly to previous data. Those respond- ents who answered negatively were asked for the factors that they felt would override a low bid. Table V shows that the factors named rein- force the previous emphasis upon quality and delivery as factors that are critical to vendor selection decisions.
TABLE'V
FACTORS MENTIONED THAT WOULD OVERRIDE LOW BID FACTORS
Quality Delivery Service
Past experience Reputation Facilities
Technical ability and services Financial responsibility
Failure to comply with specifications Multiple sources of supply
Frequency 84 84
38
32 12 11 11 8 6 3
An examination of these three separate and somewhat inde- pendent indices of factors pertinent to vendor evaluation and selection (existing rating systems, retained information, and special circum- stances that would lead to overriding a low bid) yields a remarkably consistent list of important factors. The ability of potential vendors to
10 JOURNAL OF PURCHASING February meet quality standards and delivery schedules stand out as the two most critical factors in the vendor selection process. Price, service, financial position, technical capability, and past experience appear as factors of secondary importance.
This analysis of firm vendor. selection practices, however, gives only one view of the way vendor characteristics are evaluated. So far, the influence of the item to be purchased upon the selection of the vendor has not been considered. The effect of the individual who chooses the vendor also has been only touched upon. To further an- alyze the vendor selection decision and to allow for comparison with the results indicated from organizational practices, the third part of the questionnaire examined individual opinions about the selection of vendors in four specific instances.
VENDOR SELECTION OPINIONS BY INDIVIDUALS
The cases that were selected to be used in the examination of vendor selection decision-making by individuals (which appear as Exhibit I) were designed to be widely variable with regard to the items to be purchased and also with respect to the background of the purchasing situation. These cases had to be concise enough to present considerable information to the respondents while at the same time fulfilling the constraint of limited length. A list of 23 factors that might possibly be of importance when evaluating potential vendors was abstracted from the purchasing literature and used in the test of the evaluative criteria in vendor selection. The factors used are shown in ExhibitII.
EXHIBIT I
CASES USED IN THE STUDY OF VENDOR SELECTION DECISION-MAKING
CASE A: A large company whose principal product is industrial. chemicals has scheduledthe repainting of the interior walls of its manufacturing plant. The painting is complicated due 10 the fact that all painted surfaces are subject to severe chemical fumes which tend to make paint deteriorate. Fortunately the surfaces to be painted are of a common substance, cement. It is estimated that 10 barrels of paint will be sufficient for the project. The necessary labor will be furnished under contract by a reliable paintingfirm.
CASE B: The purchasing agent of a large university has received a requisition for the purchase of 200 desks. The desks are to be used by faculty in their soon-to-be completed office building. It has been the university's policy to fur- nish allnew office facilities with metal furniture.
CASE C: A very large aerospace manufacturer has received a substantial con- tract to build an orbital laboratory. This five-man satellite to be used for astro- 'norniealresearch, will orbit the earth at a mean distance~f 500 miles. Once the satellite is in its orbit, its position will be stabilized under computer control.
The computers will be. subcoIYtracted. The complexity of the computer and manufacturing tolerances are such that only firms known to be experienced in
1966 An Analysis of Vendor Selection Systems and Decisions 11 precision micro-electronic manufacturing and use of materials such as phenolics, platinum. beryllium, and stainless steel are to be considered. Only two com- puters are 'to be built for the orbital laboratories which are to be launched two years from the awarding of the prime contract.
CASE 0: A division- of a large aerospace corporation is faced with the problem of contracting for art, makeup, and printing services for a five-volume, 2500- page training manual for the company's supervisory and engineering personnel.
The manual will contain 2000 illustrations. Due to the fact that the company is revising its operating procedures, it is necessary that all manuals be completed within ten weeks of the date the contract is awarded.
EXHIBIT II
LIST OF FACTORS USED IN THE STUDY OF VENDOR SELECTION DECISION-MAKING
FACTOR
1. The net price (including discounts and freight charges) offered by each vendor.
2. The ability of each vendor to meet quality specifications consistently.
3. The repair servicelikely to be given by each vendor.
4. The ability of each vendor tomeet specified delivery schedules.
5. The geographical location of each vendor.
6. The financial position and credit rating of each vendor.
7. The production facilities and capacity of each vendor.
8. The amount of part business thathasbeen done with each vendor.
9. The technical capability (including research and development facilities) of
e~hvendor. .
10. The management and organization of each vendor.
11. The future purchases each vendor ...illmake from your finn.
12. The communication system (with information on progress data of orders) of each vendor.
13. The operational controls (including reporting, quality control, and inventory control systems) of each vendor.
14. The position in the industry (including product leadership and reputation) of each vendor.
15. The labor relations record of each vendor.
16. The attitude of each vendor toward your organization.
17. The desire for your business shown by each vendor.
18. The warranties and claims policies of each vendor.
19. The ability of each vendor to meet your packaging requirements for his product.
20. The impression made by each vendor in personal contacts with you.
21. The availability of training aids and educational courses in the use of the product of each vendor.
22. Compliance or likelihood of compliance with your procedures (both bidding and operating) by each vendor.
23. The performance hirtory of each vendor.
12 JOURNAL OF PURCHASING FeOruary Explicit case situations were used for several reasons. In order to make the factor ratings meaningful, it was necessary to put each re- spondent in a similar purchasing situation. The four cases accom- plished this by describing the circumstances under which the pur- chase was made, the items to be purchased, and the organization making the purchase. The wide variety of items and purchasing situa- tions employed (see Exhibit I) made it difficult for respondents to relate their training and experience to all four cases. Therefore, a side benefit from setting a common frame of reference for the respond- ents was to remove as much bias as possible from personal experi- ence and training. Varied purchasing cases also were necessary to allow the analysis of the way in which the nature of the purchase affects the vendor selection decision.
The actual mechanics of completing the decision-making part of the questionnaire were straightforward. Each respondent was asked to read 'each case and to put himself in the position of the purchasing agent responsible for the selection of a vendor to supply the items described by the case. The respondent then was requested to rate the importance he would attach to each of the factors (characteristics of potential vendors) listed, i.e., "evaluate the factors on the basis of whether the factor is of extreme, considerable, average, slight, or of no importance relative to other listed factors when considering poten- tial vendors in this purchasing situation." The importance rating of each of the 23 factors was scored on a 0-4 basis with the "no impor- tance" box established at zero and progressing in sequence to the
"extreme importance" box. Thus, for each combination of respondent, factor, and case, a score was obtained. The analysis of the responses to the decision-making section of the questionnaire can most clearly be presented in two parts-the first dealing with aggregate factor im- portance, and the second treating the influence of the purchased item.
Factor Importance
Table VI shows the aggregate ratings of the 23 factors over all four cases. The ratings are almost exactly in accordance with the findings from the analysis of firm practices. As in the previous sec- tion, the ability to meet quality standards and delivery schedules are rated as the most important factors to consider in the selection of a vendor. A point of interest is that price ranks sixth in importance when all four cases are evaluated together. One deviation from the pre- vious findings is that the service factor is given a relatively low rat- ing. A possible explanation for this positioning is that the four cases selected were atypical with regard to service requirements. Looking only at the aggregate ratings, however, tends to mask somewhat a
1966 An Analysis of Vendor Selection SystemsandDecisions 13 number of variations in the factor ratings. A better analysis can be made by examining the ratings case by case, so that the influence of the item' being purchased becomes apparent.
TABLE VI
AGGREGATE FACTOR RATINGS Quality
FACTOR MEAN RATING
3.508
EVAL.UATION
Extreme Importance Delivery
Performance History
Warranties &Claims Policies Production Facilities and Capacity Price
Technical Capability Financial Position Procedural Compliance Communication System
Reputation and Position in Industry Desire for Business
Management and Organization Operating Controls
Repair Service Attitude Impression Packaging Ability Labor Relations Record , Geographical Location
Amount of Past Business Training Aids
Reciprocal Arrangements
3.417 2.998 2.849 2.775 2.758 2.545 2.514 2:488- 2.426 2.412 2.256 2.216 2.211 2.187 2.120 2.054 2.009 2.003 1.872 1.597 1.537 0.610
Considerable Importance
Average Importance
Slight Importance The Influence of the Type of Purchase
Table VII shows the five factors rated most important in each of the four purchasing situations used in the questionnaire. Despite the variations from case to case, the ability of potential vendors to meet
TABLE
vn
THE MOST IMPORTANT FACTORS BY SITUATION
Importance CASE A: CASE B: CASE C: CASE D:
Rank Paint Desks Computer Art Work
1 Quality Price Quality Delivery
2 Warranties Quality Tech. capabilityProd.Capacity
3 De1ivery Delivery , Delivery Quality
4 Per!.History Warranties Prod. Capacity Perf.History 5 Price Perf. History Perf.History Communication
System
14 JOURNAL OF PURCHASING February quality standards and delivery schedules, and the fact that they have performed well in the past were considered of major importance in every instance. Price, it should be noted, does not appear in the top five factors in either Case C or D. In Case D (Art Work), it just missed the list, being sixth, but in Case C (Computer), price was rated 19th.
In other words, in the case involving a highly complex product and presumably a government contract, price was felt to be of minor im- portance, relative to the other selection factors, in the vendor evalua- tion process.
Price was not the only factor to show wide swings in importance between the four cases. Technical capability, repair service, and war- ranties also were adjudged by the respondents to be very important for some of the purchases and to be unworthy of much consideration in other instances. The factors showing the most consistency in their position in the four cases were: (1) the ability to meet quality stand- ards, (2) the ability to meet delivery schedule, (3) financial position,
(4) performance history, and (5) reciprocal arrangements.
Analysis of variation in the factor ratings implies that agreement among individuals on factor importance seemed to be a function of factor position on the importance continum. In other words, respond- ents agreed on which factors were important and which were very unimportant but could not place the intermediate factors in any con- sistent way. The most significant point is that agreement was shown where it counts most, i.e., on the factors believed to be critical for the selection of the proper vendor in each case.
In the four cases presented, the item to be purchased and, there- fore, the decision to choose a particular vendor varied in complexity.
The aggregate importance ratings reflect this fact. Table VIII shows the average importance ratings for each case and Table IX presents a frequency distribution of the factor ratings, case by case. In the latter table, the frequency in each class represents the number of factors that had a mean rating within the class limits.
TABLEvm
MEAN FACTOR RATINGS BY CASE
CASE
A: Paint B: Desks C: Computer D: Art Work
MEAN RATING
2.058 2.025 2.860 . 2.337
Examination of Tables VIII and IX shows that more factors were rated as being highly important in the cases involving complex prod-
1966 An Analysis of Vendor Selection Systemsand Decisions 15 TABLE IX
FREQUENCY DISTRIBUTION OF FACTOR RATINGS BY CASE
NUMBER OF FACTORS WITH MEAN RATING IN EACH CLASS
CASE A: CASE B: CASE C: CASE D:
CLASS Paint Desks Computer ArtWo ..k
3.5 under 4.0 1 0 3 1
2.5 under 3.5 5 5 13 6
1.5 under 2.5 14 14 6 13
.5 under 1.5 3 4 0 3
under .5 0 0 1 0
TOTAL 23 23 23 23
ucts. In the Computer case (Case C), for example, sixteen factors were of considerable or extreme importance, whereas in the case in- volving a relatively simple product, Paint, only six factors were rated in these categories. The behavior pattern of the respondents indicated that one or two factors may beused to make a vendor selection de- cision for a relatively routine purchase but in a more complex situa- tion, a larger amount of information was believed necessary. Although more factors were rated as being important in the complex situations, the question still is unanswered as to whether they all are used in the actual vendor selection.
SUMMARY OF QUESTIONNAIRE FINDINGS
The study of firm vendor selection practices and the opinions of purchasing agents in four vendor selection cases lead to similar con- clusions about what factors are important in the decision to select a source of supply. There appear to be three factors that are crucial in the choice of a vendor: the ability 'to meet quality standards, the ability to deliver the product on time, and performance history. The latter is difficult to assess because it presupposes past experience with the vendor and it also subsumes a number of other factors. There are a number of other factors that may be critical to a particular vendor selection decision but, because of the nature of the item being purchased, these vary from purchase to purchase. Price, financial strength, technical capability, service ability, warranties, and produc- tion facilities and capacity are examples of this class of factors. In some instances, a number of these "second level" factors may be im- portant in selecting a vendor, while in other cases only one or two may join the "first level" factors as the basis for the de~ision.
A few generalizations may be made about which factors are important to consider in any particular vendor selection. The more complex (technically) the product being purchased, the more factors are likely to be considered, and, in these cases, price is likely to be
16 JOURNAL OF PURCHASING February relatively unimportant. Conversely, in purchases of ordinary products ("nuts and bolts" type purchases), price generally is the primary factor that is considered.
Other than reputation, intangible factors such as attitudes, im- pressions, and desire for business were given very little weight in the selection of a ven-dor. Reputation, while not rated of high import- ance in any instance, became of intermediate importance when the item to be purchased grew in complexity. This implies that a ven- dor's reputation in the industry enhances his chances of getting an order, especially when the product is technically complex. Other factors, such as the amount of past business, labor relations record, packaging ability, and geographical location probably are important only in isolated instances. Reciprocity was completely downgraded by the respondents as an item to be considered in the selection of a vendor. Only in unique instances (depending on the industry or on the individuals involved in the purchase) would reciprocal ar- rangements be likely to make any difference in the vendor selection decision.
IMPLICATIONS OF THE SURVEY FINDINGS:
VENDOR SELECTION SYSTEMS
As we have seen, the nature of the item to be purchased has a major influence on the factors that are considered when selecting a supplier. Individual disagreement on the relative factor importance appears to have a much smaller effect on the choice of factors since it occurs primarily on factors of intermediate importance. These results have implications that directly affect the development of formal ven- dor selection systems. Since a number of firms have such systems (or are developing them), it is useful to relate the findings of this re- search to the general systems that have been designed to aid in the vendor selection decision.
Analysis of the results concerning the way in which individuals influence the vendor selection decision offers particular encourage- ment to those persons in purchasing who support the development of formal vendor selection systems. Enough agreement was found among the respondents on the factor importance ratings to suggest that the "first" and "second" level factors listed in Table VI (includ- ing every factor down to and including "Reputation and Position in the Industry'") could be used as a standard list forming the basis
• There are several reasons that three factors below the "Considerable Im- portance" level are suggested for inclusion. In the first place, there is a natural break in importance scores below these factors. More important, however, is the fact that each of the suggested factors appeared in the ten most important factors for at least one of the four cases.
1966 An Analysis of Vendor Selection Systems and Decisions 17 for the construction of a general vendor selection system. In other words, any existing or proposed system (formal or informal) should include these factors.
The implications of the findings concerning the influence of the purchased item on the vendor selection decision hold less promise for the development of a general vendor analysis technique. Using a descriptive approach, we have evolved a normative list of factors to serve as the basis for a formal vendor analysis system. Unfortu- nately, the descriptive approach is not a valid one to determine how these factors ought to be manipulated, Le., weighted, to make the optimal vendor selection. The basis for this statement, of course, is the fact that a majority opinion on a course of action will not neces- sarily produce the optimal result. There is, however, a very fruit- ful (and valid) approach to the solution of the problem of how the factors ought to be weighted. The basis for this approach is an examination of the cost relationship between various levels of sub- optimal performance on each factor employed in the system. This approach to analyzing vendors is known as the "Cost-Ratio" plan."
Thus, in anyone situation, there is some hope of manipulating the factors in an optimal way. In this study, though, it was found that the factor importance relationships (in a descriptive sense at least) were different for each of the four purchase types. This im- plies a practical problem that must be faced by any universal vendor analysis system, Le., the weighting system may need to be unique for each purchase. The difficulties in determining and actually manip- ulating such a vast number of importance relationships very likely.
would negate the utility of such a complex system. About the only way this dilemma can be resolved is to test for the existence of classes of purchases that would have common factor importance re- lationships. This could be accomplished by studying a number of com- mon purchasing situations and the associated factor performance cost structures.
This study, by presenting a common list of factors to be used in the vendor analysis process, should be useful in adding to the uni- versality and rationality of vendor selection practices. However, the implications of the findings cast some serious doubts on the develop- ment of a universal system for vendor analysis that is appropriate over the entire range of purchasing situations and whose practical limitations do not outweigh its advantages for increased profitability through effective vendor selection.
• Evaluation of Supplier Performance, op, cit., pp. 11-20.