Supplier Selection by Damian Beil Stephen M. Ross School of Business July 2009

Abstract: Supplier selection is the process by which firms identify, evaluate, and contract with suppliers. The supplier selection process deploys a tremendous amount of a firm’s financial resources. In return, firms expect significant benefits from contracting with suppliers offering high value. This article describes the typical steps of supplier selection processes: identifying suppliers, soliciting information from suppliers, setting contract terms, negotiating with suppliers, and evaluating suppliers. It highlights why each step is important, how the steps are interrelated, and how the resulting complexity provides fertile ground for ORMS research.

Today the average U.S. manufacturer spends roughly half its revenue to purchase goods and services [1]. This makes a company’s success dependent on their interactions with suppliers. The role of procurement managers (buyers) within companies has become extremely important, often involving staggering dollar values: A recent cross-industry survey of companies — in areas ranging from aerospace to semiconductors — placed companies’ average total spend per procurement employee at $115 million [2]. With so much of a company’s money on the line, and increasing reliance on outsourcing of many complex services and products, the job of a buyer is not only important but also challenging. Buyers must define and measure what “best value” means for the buying organization, and execute procurement decisions accordingly. To identify best value, the buyer must interface with technical, legal, and operations experts within the buyer’s company, and act as an expert negotiator and coordinator across many internal and external parties. Supplier selection is the process by which the buyer identifies, evaluates, and contracts with suppliers. The challenges