A. Deciding which suppliers to appraise Procurement Manual: Good Practice 3
3. Supplier Appraisal
A. Deciding which suppliers to appraise
The first step is to develop a segmentation approach so that risk can be assessed. Typically this is done by looking at supply risk and supplier importance or criticality. Peter Kraljic stated that the strategic importance of a given supply item (and in aggregate a contract or supplier) is related to its profit impact and its supply risk. Profit impact can be volume or value purchased, impact on supply chain “value“value -add”, business growth potential or dependency. Supply risk can be product availability, number of suppliers, ease or cost of switching supplier or the availability of substitute products or services. Segmenting your supply items can, therefore, be mapped out using the Kraljic diagram below.
B. What to check?
C. How to use that information
D.
Dos and Don’ts
Using the Kraljic portfolio purchasing model
Such an approach allows planners, procurement officers and contract managers to position each contract systematically and determine whether appraisal is required. Those falling in the “bottleneck” and “strategic” categories are higher risk so should be properly appraised and checked. Those falling in the “routine” and “leverage” categories may not pose such a risk so may not require the same approach . The strategy also informs how existing suppliers should be developed and what performance targets have been set at a category and supplier level and how these will be achieved and monitored. (see Procurement Guidance 1: Contract Management: Responsibilities and Duties). 1 Procurement Team: University of Exeter August 2010
B. What to check? As part of planning it is wise to consider key questions for suppliers depending on the nature of the purchased (seek advice from procurement if required). For major and more complex spends the Procurement Team will support you through the Pre-qualification Questionnaires (PQQ] and Invitation to Tenders (ITT) stage(s) where many of these issues (along with specific details relating to the individual project) will be sought. The following are examples of these (not necessarily in this order): 1. Company name and number This will allow you to identify exactly what company is applying, particularly if it is part of a group of companies. At the Companies House website (www.companieshouse.gov.uk) you can find out details of: • The company’s financial information and accounts; • The company directors; • How long the company has been in business; • Any company name changes. 2. Financial information To gauge the supplier’s financial health and status, it is important to request information on annual turnover and profit for the past three years, and their VAT number (if any) and bank name. If a supplier is in financial difficulty it may have problems sourcing goods and services for you. If it is at risk of insolvency, your organisation could be left without key goods and services – and out of pocket. The Procurement Team has access to CreditSafe which can check the financial status of suppliers. 3. Staff information It is useful to find out the number of staff in the supplier organisation, how many people work in each business area, staff turnover rates and details of any staff unions and any recent industrial disputes. This provides some insight into the supplier’s staff profile. For example, if the supplier has a high staff turnover then this may point to more serious underlying issues such as low staff morale, which can have an adverse affect on the quality and standard of the goods and services being provided. See also Paragraph 17 (below). 4. Location The company’s location and the location from which goods and services are sourced could be important and worth investigating. Just because a company has a registered office in the UK does not mean this is where the company is located or where the goods and services are provided from. A registered office could be the company’s headquarters, but not where the bulk of staff are based, or it could be the address of its accountant or solicitor. For example, a buyer organisation may engage a supplier to provide a call centre. Although the supplier may be based in the UK, it might host the call centre in India. In the interests of fairness (and subject to EU Procurement Directives) it is not permissible to exclude bids on geography criteria; rather the meeting of key requirements of the contract e.g. response time on site, delivery times. If in doubt seek help from the Procurement Team 5. Group companies It is important to establish whether the supplier is part of a wider group of companies and the nature of those companies – where they are based, their business sector and where the sup2 Procurement Team: University of Exeter August 2010
plier fits into the overall group structure. It is important to get a clearer picture of the supplier’s organisation, business objectives and whether or not it will fit in with the culture of your organisation for the following reasons: • Problems or financial difficulties with other members of the group could affect the supplier; • If the supplier is a new company or does not have a good fin ancial track record then a buyer might ask for a guarantee from the supplier’s parent company if it is in better financial health; • You may not want to engage a supplier if it is part of a company group or has other associated group companies that have a poor reputation or are involved in activities that could adversely affect your organisation’s reputation. 6. Goods and Services Ask for details of the company’s goods and services and the goods and services it is offering to provide. This can be particularly useful when technical goods and services such as computer systems are being supplied. It allows you to quickly establish whether the nature of the goods and services is suitable. 7. Price The more specific cost details you request the better because you can then compare prices and payment terms from various suppliers. 8. Sub-contracting The supplier may want to sub-contract its work for you to third parties. In many instances this would not be appropriate, but for particularly large, complex or diverse projects a buyer may be prepared to allow this. In this case, ensure you find out the following: • Who the sub-contractors are; • Where they are based; • The sort of general business information you ascertained about the main supplier; You would also oblige the supplier to: • Ensure all sub-contractors adhere to the same obligations that the supplier is under; • Take responsibility for all sub-contractors and any problems or defaults that may arise. 9. Quality Assurance Any quality assurance credentials, such as ISO 9000/9001, or specific awards, such as Investors in People, or specific qualifications should be requested. This can help to reassure you that the goods and services provided will be of reasonable quality. Please note that EU rules state that there must be an opportunity to provide “equivalent” supporting information/certificates – other EU member countries may have different standard awarding bodies. 10. Delivery Team You may want to find out which individual staff members will be responsible for delivering the goods and services. Sales staff can often over promise on what can be delivered and when, but it probably won’t be them involved once the contract is signed – it will be the delivery personnel. It may be worth checking whether they can deliver what sales promised. Investigate any discrepancies and request an explanation. See also Paragraph 17 (below). 11. Previous business 3 Procurement Team: University of Exeter August 2010
It is useful to know whether the supplier has done business with your organisation or similar organisations before and how successful these projects were. 12. Insurance Establish what insurance the supplier has in place – such as professional indemnity insurance, public liability insurance and employer’s liability insurance – which it is insured with, how long the insurance has been in place and the nature and terms of that insurance, including the maximum amount covered and if there is a maximum amount per claim. For the University (mainly in more complex, specialist and / or high value contracts) a supplier may be required to have additional or minimum levels of insurance. 13. Health and safety Establish whether or not the supplier has health and safety policies in place, whether or not it has adhered to them in the past (and if and where it has had problems) and how it would uphold health and safety requirements when working for your organisation. See also paragraph 9 above re “equivalent” status. 14. Environmental policies Now that organisations are keen to promote their environmenta l credentials, suppliers are more frequently being questioned about their environmental policies, such as whether they have a sustainability or environmental policy and if they recycle. Any environmental assurance credentials, such as ISO 14001, or specific awards can help to reassure you that the goods and services provided will be subject to environmental considerations. 15. Equality policy What is the supplier’s equality policy and is it followed? You can request further details on whether or not a supplier has been involved in any recent employment tribunal cases, been subject to any equality related investigations (for example by the Equality and Human Rights Commission) or had any awards made against it. It is also worth checking how a supplier implements its equality policies in areas such as recruitment or training and whether it can provide documentary evidence of this. 16. Litigation Ask the supplier about any litigation (whether past, pending, anticipated or threatened) and the nature of it. You can also request information on any investigations the supplier may have been subject to, such as by the Information Commissioner, the Financial Services Authority or the Health & Safety Executive, etc. This is important because it could: • Highlight defects or problems with the supplier’s goods and services; • Show how the supplier has dealt with problems when they have arisen before, whether collaborative or adversarial; • Indicate that the supplier might still be in the middle of that litigation or investigation, which could adversely affect the amount of time, effort and resources (including staff resources) that it can dedicate to your project.
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17. Contact names It is usual to request contact names at the supplier from, for example, financial, operations and sales departments, so that as and when further information is required it can be requested from a named individual. Check if there is an individual responsible for your project. 18. References You can ask the supplier to provide referees for you to consult regarding the supplier’s business and its ability to provide the goods and services you need. You can ask the supplier whether you can visit any sites where it is providing similar services so that you can talk to the individuals and organisations about the nature of the services and their delivery. In doing this you must ensure that there is fairness of opportunity for all suppliers. 19. Other information There are a wide range of research materials available for finding out more about the supplier. The internet is particularly useful for checking information provided by the supplier and for researching whether the company has been involved in any litigation or has made the news for any other reason. 20. Industry or sector-specific information This should form part of your due diligence regarding the supplier. For example, public-sector bodies would normally want to ensure that: • any procurement directives regarding supplier selection are complied with, such as EU legislation on the co-ordination of procedures for the award of public works contracts, public supply contracts and public service contracts; • suppliers will co-operate with any particular legislation that affects that public sector body, such as the Freedom of Information Act 2000; • the supplier consults with and co-operates with the public-sector body as much as possible and is completely transparent and open in relation to goods and services provided – particularly in relation to price, standards and delivery timetables. Public-sector organisations will want to avoid being criticised by third parties such as government bodies or the media, or be subject to any inspection or investigation. Public-sector bodies should show that the relevant rules, regulations and laws have been followed. They should also document a proper audit trail regarding the appointment of the supplier and its provision of goods and services.
If i n doubt contact the Pr ocur ement Team
C. How to use that information The tender document should help you to form a general picture of the supplier, its business and its offering. This form should not be a tick-box exercise that is simply filed and never consulted again. Instead, the completed form should provide a platform for you to ask further questions and match what the supplier is saying with reality. A formal evaluation process, perhaps with a set of scoring criteria, increases the objectivity of appraisal conclusions and is mandatory for EU procurements). The output from both the tender form and the due diligence process are usually encapsulated within, and superseded by, a formal written contract between your organisation and the supplier. The final contract usually has a so-called “entire agreement clause”, which means that: 5 Procurement Team: University of Exeter August 2010
Everything said or done before entry into the contract (including tender processes and answers) will not apply (apart from if a party has been fraudulent, in which case that party cannot exclude their fraudulent actions pre-contract by using an entire agreement clause in the contract itself); • Only the written terms and conditions in the final contract will apply. This means that any assurances given to your organisation that don’t find their way into the final contract will not apply. It is very important, therefore, to remember that any assurances obtained from the supplier during the tender process, as well as any subsequent enquiries, should be incorporated into the terms and conditions of the final contract otherwise the entire agreement clause in the final contract will mean that such assurances will not apply. •
D. Dos and Don'ts
Do appraise suppliers when the contracts involved are high value, long term and business critical Do check the supplier’s statistical details with Companies House Do request referees or supplier site visits Do remember that supplier assurances only apply if they are included in the final written contract
assume that delivery personnel can fulfill what sales has promised Don't forget to check that the supplier has rigorous policies in place on equality, environmental issues and health and safety. Don’t
Other useful references Procurement Manual: Good Practice 1: Contract Management Responsibilities and Duties Procurement Manual: Good Practice 2: Risk Management and Handling Change Procurement Manual: Good Practice 4: Assessing Supplier Performance
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