SELECTING AND APPOINTING SUPPLIERS

The selection and the appointment of new suppliers is a fundamental process that must be embedded in any corporation’s overall strategy when approaching a new  marketplace. The correct planning and implementation of a supply chain  policy will ensure a reliable, consistent, on-time, high-quality flow of components, parts and sub-assemblies to the production lines in order to fulfil the customers’ orders in a timely fashion.

The process of choosing a new supplier is structured in eight distinct steps, each with its own scope, purposes and objectives. The eight steps are: preliminary screening; release of RFQs (Request for Quotations) and RFIs (Request for Information); factory survey and auditing; manufacturing of samples; technical evaluation of samples and product qualification; supplier appointment and final qualification of its processes and procedures; request for pre-production.

Let’s now explore the 8 different stages of the process:

• The preliminary screening is the step of identifying and subsequently narrowing down best potential suppliers. It can be carried out keeping in mind some basic requirements such vicinity to our operation location, easy access to multi-modal transportation system; strategically located within specialised industrial clusters providing the necessary support to the supplier through a competent supply chain (raw material, intermediate processes, logistics, etc). 

• After having finalised a short list of potential suppliers that satisfy, at least on paper, the purchasing policy requirements, the next step is to acquire information on the pre-selected partners and to release a Request for Quotation in order to compare prices with our pre-determined purchasing pricing levels. Bench-marking is usually carried out among a list of five to ten potentials. At this stage it is fundamental to collect information that provides useful insights into the nature of the company we will do business with and allow us to form a comprehensive vendor rating done through a RFI. Such information includes operational and financial parameters: evaluation of manufacturing capacity and response to ramp-up demands; quality assurance processes; analysis of their supply chain and their ability to monitor and control their output; ability to innovate and follow the technological requirements demanded by our products; guaranteed levels of quality standards and compliance with the provided specifications; financial details (balance sheet, out-standing bank loans, receivables vs payable ratio, etc.). The company needs to be part of an efficient logistics eco-system allowing for fast handling and delivery of goods, especially when cross-border shipments are requested .

• Once the information received has been evaluated and the pricing is in line with our expectations, it is now time to proceed with the request to produce a sample in accordance with the provided technical specifications and drawings. It is recommended practice to obtain samples from two or three of your short listed suppliers. This will provide a technical bench-marking and the ability to switch between suppliers in case of any quality/delivery default.

• The next step encompasses a physical survey of the supplier’s factory. All of the company’s functions and process are to be audited, from the handling and storing of in-coming material to its allocation and tagging to the handling of out-going finished products in the warehouse. Some components such as ICs (Integrated Circuits and the like) must be stored separately in temperature ad humidity controlled rooms with dedicated security features (CCTVs, restricted access, etc). Special attention must be applied in assessing all of the manufacturing processes with emphasis on in-production and final quality controls as well as the supplier’s ability to monitor and efficiently manage its own supply chain (raw materials, sub-assemblies, surface finishing, etc).

• The relevant technical departments (R&D, Laboratories, Quality) will assess the conformity of the samples against the technical specifications, the drawings and possibly against a “golden sample’ previously provided for reference. Product quality will be measured against the quality assurance requirements stated in the Master Purchase Agreement (MPA) as will also any penalties clauses included in the MPAs. At this point the positive result of the auditing process and the submission of the sample will lead to the full qualification of the supplier who will produce its own final set of specifications and drawings, duly signed and stamped.

• The three final stages are those where the supplier(s) for each product category are finally appointed with a final qualification of all of its processes and procedures applied so far in the manufacturing of the samples. Before the mass production is started it is recommended in same cases to launch a pre-production cycle aimed at evaluating the manufacturing lines in a real production situation.

Finally, it is paramount to address all the legal and contractual aspects of the relationship with the vendor partners. Once the final pricing, delivery terms, buffer stock requirements (if applicable) have been negotiated and agreed on by both parties, such information is to be included in an MPA. The most important items in the MPA are those that address: product and services to be purchased during the period of validity of the agreement along with the prices, delivery terms (Incoterms) and quantities to be purchased annually through monthly or bi-monthly call-offs, levels of buffer stock if required (raw material, Work in Progress, finished and tested products), regulating quality control and quality assurance as well as delivery delays with relevant penalties for default. Also to be considered are the general terms pertaining to cancellations and rescheduling, confidentiality and disputes with governing laws. An additional provision that may be included is that would mitigated any substantial exchange rates fluctuations among the major currencies used when out-sourcing overseas, such as Euro, USD , HKD, CNY, VND, MYR, THB, etc.