The 7-Step Vendor Selection Process

There is a list of reasons why a company might choose to make use of a vendor. These would include fulfilling core business functions, providing additional services that are essential to the running of the company, as well as acquiring goods that will either serve as raw materials or be sold directly to customers.

One of the most important aspects of project management is choosing the right vendor for the job. This is because the success of a commercial project hinges on assembling the right team and resources.

For manufacturers, it's crucial that vendors deliver raw materials according to a prearranged timetable, otherwise production schedules will fall behind.

If vendors deliver goods  of poor quality, the manufacturer will have to source raw materials from  other sources. Both scenarios will be detrimental for their output.

When vendors fail to live up to their promises, retailers and eCommerce businesses will experience stockouts and lose sales. Orders that have already been registered will fall behind. Lower quality goods will be returned to the stores and will tarnish the retailer's reputation.

All this to say that it's essential to get vendor selection right. If a vendor fails to deliver, the business will suffer.

In this article, we will go through 7 steps which must form part of any robust vendor selection process. You will be able to use these steps as a guide to choosing the best vendor for your particular needs and circumstances.

Step 1: Assess your needs

Before you start the search for the right vendor  to fulfil a particular need in your company, you need to be certain of the problem that you want to solve.  

It is up to hiring managers and the relevant department heads to draw up a list of deliverables and tasks for the vendor. This information should be formulated into a business requirements document which describes the services or goods that the vendor has to supply.

At this point, it would be beneficial to bring together a project team tasked with choosing the right vendor.

They will also have to finalise the list of requirements for prospective vendors.

Here you have to distinguish between the specifications of the product or service that has to be supplied, and the requirements that the vendor as a company has to meet. If you need the vendor to provide a service, this has to be described in detail—especially the level of service that is required.

Condense this list into a scorecard that can be used to assess prospective vendors. The scorecard items must be quantifiable so that it can truly be used as a tool to compare different vendors against each other. Ensure that you have all the most important requirements covered.

Consider adding the following items to your scorecard:

• Specific characteristics of the vendor.
• Areas where you expect the vendor to align with your company values and overall strategy.
• Business policies that are essential to your company.
• Requirements with regards to compliance with government regulations and company policy.
• Specific management directives.
• Finally, list specific constraints that compel you to choose one vendor over another, for example prior agreements or commitments with other vendors.  

Once you have your scorecard ready, you have to prioritise the items. Obviously, some vendor requirements will carry more weight than others.

Some needs may simply be nice to have, and shouldn't appear at the top of your list of requirements.

Take quality as an example. This is usually an  important requirement for most companies. If a vendor provides low quality goods that are delivered long after your prescribed timeline, does it matter that they are able to deliver these goods much cheaper than the competition?

Weighed against quality, affordability should therefore rank lower on the scorecard.

Step 2: Draw up a list of candidates

Once you have your vendor scorecard, the search for the right vendor can begin in earnest.

You need to come up with a  list of potential vendors. The first place to start looking for candidates is vendors you've worked with in the past. You can also make inquiries through your network of contacts.

Search the market for other potential vendors. Some players are well-known and are easy to find. You might also contact a market research company or independant consultant to help you in finding vendors that could meet your requirements.

Another option is to do a websearch. These days, most companies have some kind of an online presence. You might want to send promising vendors a Request for Information (RfI) if you need more information from them to evaluate their suitability.

As a guide, here are a couple of places where you could source potential vendors:

• Consider your current line-up of vendors. You already have a relationship with these vendors and you know what they are capable of.
• Then look at your list of previous vendors. If they performed to expectation in the past, they would probably be good candidates to consider.
• You might also consider recruiting a competitor if it doesn't pose any risk or ethical concern for your business.
• You might contact industry groups that maintain lists of companies.
• You might send out notices through your network of business affiliates for recommendations.
• Finally, you could do a google search for potential vendors that might meet your requirements.

Before making contact with potential vendors, you might have to run them through a type of pre-evaluation. Inquire about the goods and services they provide, plus how quickly they are able to provide them.

At this point, you will be able to order your list of potential vendors by ranking them according to what they are able to deliver as well as cost.

Step 3: Send a Request for Proposal (RfP)

Once you have a list of potential vendors, you can contact them directly by sending an email, making a phone call or visiting them in person.

Send a formal request for information (RfI) to the potential vendors.  You are in essence asking them to send you a proposal which is a sales pitch for why you should make use of their services.

They must also explain how they will be able to meet your list of requirements, what they are able to offer, why they are the best vendor for the job, as well as their cost.

The RfP needs to be clearly written, have an easily understood structure, and give precise instructions on how the vendors need to format their proposals as well as the information they need to contain. You don't want to run into a situation where the different vendors give you such wildly different responses that it becomes impossible to decide between them.

To achieve this aim, the   RfP should have the following components:

• The document should start with an Executive Summary and an Introduction.
• What follows should be the instructions for how the proposal document should be structured and the type of language that is required.
• Give the list of requirements you came up with in the first step. The list should be clearly set out and numbered.
• Include the details of the person in your organisation that can be contacted for clarification purposes.
• Clearly disclose all relevant deadlines and proposal timelines.
  

Step 4: Hold meetings with potential vendors

At this point, you should have a shortlist of potential vendors. The hiring team can now set up a meeting with each. At the meeting, you can go over the details of the project and make sure that the vendor understands what will be required from them. Confirm key details such as delivery schedules and pricing.

This is an important part of your due diligence, because you have to verify if the vendor is capable of doing the work on time and within budget. Go through the RfP in some detail with them. At each juncture, confirm that the vendor understands the work and are able to deliver what you need.

It would also be prudent to inspect samples of their goods, go over their portfolio of past work.

Vendor selection should include getting references from their previous customers. You must also verify a vendor's financials to ensure that they have the resources to deliver the goods and services you ordered, within the timeframe that you need it in your business.

Step 5: Review vendor responses

As each vendor hands in their RfP, it comes time for the selection team to come together and evaluate the responses.

Firstly, evaluate the particulars of each vendor. Where are they located and what is their history? What is their track record with regards to completing projects and what is the  feedback from their other customers?

Review each potential vendor's RfP's based on your list of requirements. Create a vendor evaluation sheet to compare vendors objectively instead of relying on corporate politics or emotion.

When devising your evaluation sheet, weigh the different criteria. Single out the Killer Criteria for special consideration. These would include pricing, key product and service requirements, as well as time constraints. Place the Killer Criteria at the top of your list.

Other criteria to put on your list would be factors that give you an overall impression of the company. Think carefully about cost versus vendor experience. You also have to find some kind of trade-off between choosing the vendor with the lowest prices versus the one with the longest track record.

It might be necessary at this point to request more information from particular vendors in the form of a Request for Quote (RfQ).

Each vendor's evaluation sheet should be scored based on your killer criteria as well as other key requirements.

Step 6: Make a selection

Now it's time to select the best vendor from your shortlist based on their evaluation sheets. Firstly, take the different evaluation scores and rank  your list of vendors based on their desirability.

If you followed this process correctly, the highest or near-highest scoring vendors should be your best candidate.

Often the top ranking vendors will have similar scores with regards to your killer criteria. In those cases, other criteria such as overall impression of the vendors will be the decisive factor.

If it's difficult to choose between your top candidates, you might follow the initial evaluation with additional interviews or factory visits.

If after all these steps you couldn't come up with a clear winner, you have two options. Either your selection criteria wasn't adequate, or you have to widen your net in your search for potential candidates.

Step 7: Negotiate terms and contracts

At this point, you should have identified at least one or more vendors that meet your needs. At this stage, your company can formally inform your selected vendor of their top bid. Make an offer to them that will include a confirmation of scheduling and pricing terms.

Sometimes it might be beneficial to reach out to all your top vendor candidates.  You don't want to close any doors until you've settled on an agreement with your top vendor and all contracts have been signed.

It's time for contract negotiations to begin. Some vendor agreements are highly complex and require the involvement of lawyers from the very start. With others, standard vendor agreements might be sufficient.

Negotiate with the vendor until everyone agrees on the contract terms. Take special attention that all payment terms and compensation conditions are clearly spelled out. Delivery dates and payment schedules should be included.

If anything goes wrong, the agreement should describe the terms of  contract termination. The contract should also delineate the legal protections and remedies afforded to both parties in case of a dispute.

All the relevant executives as well as accounting should sign off on any agreement before you sign a contract. Ensure that everyone agrees with the overall objectives as well as the list deliverables stipulated in the contract.

Conclusion

When you sign a contract with a vendor, there is the firm expectation that your partnership will succeed in solving a problem in your business, or that the vendor will help you to make use of an opportunity in the market.

Selecting the right vendor for the job can make or break a company. That is why you have to pay extra attention to your vendor selection process.

If your vendor selection process is poor, it can have devastating consequences for your business. It will mean that you don't receive the goods and services you need for your operations to function.

Which is why it's important to implement the steps outlined in this article. Obviously your needs as a business will vary. All of these steps might not even be necessary to choose the right vendor for your application.

The goal is to consistently make the right choice of vendor. This will ensure that you get the most value for your vendor spend, improve customer value and perception, and promote company growth.

With the right processes in place, you will be able to enlist vendors that will advance the goals of your company and improve your bottom line. Your success as a company hinges on always selecting the right vendors for the job.