Supplier selection best practices

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Supplier selection can be an opportunity found or an opportunity lost. Not only should it be viewed as a point solution, but also as an infrastructure de-cision and an integral part of the enterprise strategy. In ARC’s view, supplier

selection is a business decision, not a technical decision. As a business deci-sion it should follow a business process. ARC feels this business process should be organized into four distinct phases -- Justification, Definition, Se-

lection, and Continuous Improvement.

The process starts with a clear and achievable charter from manage-ment. This charter normally involves some form of business

performance measures. Selection is a team activity. Once the team is formed, their first objective is to develop a business strategy that in-cludes statement of purpose, scope, methodology, high-level criteria,

and vision.

This strategy is essentially the first deliverable in the process. It is reviewed with management, and when approved the team moves into Justification.

Justification specifies in value terms why it makes sense to execute the proc-ess, and it should be a point of reference throughout the process. Value is derived from asset utilization, which is the primary source of justification,

and reduced total cost of ownership, which is usually the secondary source of value. The magnitudes of both are influenced by the length of the life cy-cle, which also needs to be a factor.

Justification leads to Definition. This phase is where the detailed selection criteria are developed and is by far the most time and energy intensive. It needs to reflect the company’s manufacturing strategy as well as fit for pur-

pose criteria such as availability, or regulatory compliance in the case of the food or pharmaceutical industries. From a technological perspective, state of the art technology, which supports justification both in terms of performance

objectives as well as life-cycle objectives, must also be specified.

Definition is the basis for Selection. There are two steps in the selection phase. The first involves generation and distribution of the request for pro-

posal (RFP), while the second is selection itself. For clarity’s sake, it is very important that organization of criteria in the RFP exactly follows the pur-chase specification. The organization of the selection matrix should also

follow the RFP. If not, confusion and unneeded complexity will result. Se-



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lection should utilize a matrix approach and provide the team the opportu-nity to assign an importance to each criteria and a degree of compliance for

each candidate relative to each criteria. ARC recommends the use of Kepner Tregoe techniques for the decision process. This approach will result in a dynamic model of the decision process, which is demonstrable to interested

individuals not directly involved in the decision-making.

The final step in the selection process is Continuous Improvement. As with any business process, there must be a place for continuous improvement, and

that is the case here. Since the selection phase is quantifiable, if it is repeated on a regular basis it will provide a measure of improvement or the absence of it. This can provide the basis for managing the relationship with the success-

ful vendor.

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Although not directly a part of the selection process, there needs to be a

commercial basis for doing business. This area establishes a common under-standing between the buyer and seller. This common understanding should include much of the Strategy in terms of purpose, criteria, priority, and vi-

sion. It also needs to be specific about what is in scope and out of scope, define the roles of contractual entities, define abbreviations,

and list the required codes and standards. At a high level, it should define the acceptable characteristics of the governing system, sub-

ordinate systems, and associated hardware and software.

With regard to this process, the selection

should be described in detail, including the relative responsibilities of the bidders and buyer. There should be “instructions to bid-

ders” which cover everything from contents of the proposal to quality assur-ance. Since services are a large portion of the selection, there needs to be a reference system defined to serve as a basis for benchmarking the candidates.

This system should be representative in size and complexity.

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Supplier selection is first and foremost a team process. The team should have a good understanding of the issues, a sense of urgency, balanced judg-ment, critical technical knowledge, and the respect of their peers and

management. They should be chosen not only as decision makers, but also as the doers that will ultimately follow through on the decisions they make.

The team needs to understand their mission and feel they are empowered by

management to successfully complete it. On one side, they must feel an obli-gation to make decisions that optimize the corporation’s performance, while on the other side they need to secure the support of their peers by conveying

an understanding of the rationale to ensure successful implementation. The team should not be any larger than it needs to be to satisfy the preceding re-quirements. Generally, a team of six to eight people is a good size, but this is

not an absolute.

To avoid confusion, it is important to state that the team dynamics discussed in this story cut across the four phases of the selection process. The impor-

tance of the pervasive nature of team dynamics throughout the selection process warrants closer analysis not only because the team makes the process work, but also because the comprehensive team deliverable is a strategy

document that serves as a basis for the process and a mechanism for convey-ing the results of the process.

The dynamics begin with a team discussion of the Mission Statement pro-

vided by management. The purpose of these discussions is to translate the mission statement into the team’s vision statement. This is the point where the team begins to forge its identity and take ownership of the project. The

Vision Statement is also a natural segue into defining justification and quan-tifying measurements for success.

Discussions establishing current reality are where the team comes together

with a common understanding of the problems and challenges. The insight that the team gains into the problems associated with the selection process results from their common experiences. The challenges the team faces are a

result of the vision and justification they have just agreed on. This is essen-tially the defining of the problem to be solved.



The next logical step is for a consultant or expert in the focus area to present the possibilities. This should be a learning experience for the team in which

they are challenged to consider a range of current solutions as well as a roadmap to their ultimate solution. If everything in this presentation is ac-ceptable to the team, then either the consultant has not been forward

thinking enough or the team is not being conservative enough. It is incum-bent on the team to use their knowledge to create a target solution that is rational and reasonable. With the problem and solution in hand, the team

should be able to establish the filters or high level criteria that are discussed in the definition story.

Definition extends the high level criteria, which it is critical for the team to

create, to the details associated with each class of automation. Definition presents the largest threat to team dynamics and overall project success of all the four phases of supplier selection. ARC feels it is not reasonable to expect

the team, who are experts in manufacturing automation, to also be experts in the details associated with the hardware and software that they must choose. It is more important for the team to understand the range of technology and

functional choices available and the merits of each, so they can make thoughtful decisions about what best satisfies their requirements. Requiring the team to become immersed in technical detail will force them to lose sight

of the best available solution from both a technical and business perspective.

Team members will always bring preferences and prejudices to the selection process. The best practice for addressing this issue is to identify supplier

proponents and utilize a very structured rating tool that is highly consistent. The proponent concept does not create champions for each of the suppliers, but rather assigns the team member with the most knowledge about a par-

ticular supplier the responsibility to accurately represent that supplier’s offering to the rest of the team.

The Proponent does not win or lose with his supplier. He votes with the

team for the candidate the team feels best satisfies their requirements based on what the team member has learned from his assigned supplier and their impressions from the other proponents. Aside from the proponent role, team

member voting usually forges the team into a single unit. Ideally, the tool is configured identically to the matrix in the selection story, supports weighting and ranking, and is structured as precisely as the specifications and ques-

tionnaires in order to instill clarity. Healthy team dynamics will ensure an understandable, supported, and correct selection.



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Justification may be as simple as replacing a “mission critical” automation system after a catastrophic event; however, in most cases it is in support of a business initiative with definable requirements. These projects have capital

expenditure ROI targets and are meant to satisfy a unique set of “Key Per-formance Indicators” (KPIs). Some businesses have evolved their KPIs into a Balanced Scorecard as a convention. If performance

measurements were not previously institutionalized, this would be a good place to start.

The criterion for selection should directly support these KPIs and

should be measured in Value to the company. When considering the value derived from the investment it is first important to insure the selection will satisfy the utilization requirements dictated by the

business initiative, this is essentially the justification. It is also im-portant to consider the inherent total cost of ownership (TCO) benefits that are inherent a new purchase. However, system selection should

be based on enhanced asset utilization and reduced TCO proposed by the supplier candidates.

The concepts of value and incremental value are important enough to war-

rant an example. Consider a major natural gas pipeline company that has the opportunity to increase sales by 30 percent along a particular segment, but they are capacity limited. This opportunity triggers a business initiative with

an Asset Utilization Solution that involves adding an intermediate compres-sor station and bringing more horsepower online. One supplier offers a solution utilizing economic compressor dispatching based on modeling line

pack. This solution provides Enhanced Asset Utilization because it reduces fuel costs by 5 percent. Another supplier offers remote maintenance of con-trols and with the compressor station fifty miles away, there is a significant

Reduced TCO in maintenance. The value of each of these offers must be fac-tored into the decision.

Enhanced asset utilization is a result of improved asset usage and constraint

elimination, provides incremental value over asset utilization, and always involves a business initiative. TCO is another name for life-cycle cost. Re-duced TCO occurs when value is increased with the reduction of TCO. This

is a process or platform initiative.

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You should take a life-cycle perspective when considering life-cycle cost. Initial installed cost is only a small part of the overall TCO. Installed cost is

typically less than 25 percent of the overall cost of ownership. Typically, the life cycle of an automation investment will range between ten and fifteen years depending on the industry. Over this period, maintenance, training,

reengineering, and finally retirement of the asset will account for the other 75 percent of the cost.

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The Definition of your requirements will consume the largest amount of time in the selection project. It is not unusual for it to account for over 80

percent of the time and effort. It needs to reflect the company’s manufactur-ing strategy and the KPIs discussed earlier. It is also very important for the

definition to define “fit for purpose”, this term relates to the must

have capabilities of your choice. For example, if you are a phar-maceutical manufacturing company, the ability to satisfy regulatory requirements such as good manufacturing practices

(cGMP) is critical. If you are in the heavy industries where main-tenance turnarounds are few and far between, on-line software upgrade capability is critical to keep your investment current.

It will also be necessary to have a detailed specification for each class of system or major software package that you are consider-ing. This specification is critical because without it you will not be

able to differentiate between the suppliers, and the process will become emo-tionally charged. The result can be a loss of any chance for consensus. It should have a best in class focus and be supplier neutral. As mentioned ear-

lier, it should also reflect your unique requirements and indicate the relative importance of each. For clarity and understandability, it should require the suppliers to respond on a point-by-point basis.

When positioning your definition of requirements, you should consider all other associated systems and software including both field devices and busi-ness systems. Your definition and ultimate decision can have a significant

impact not only on your area of interest but also on the rest of the enterprise.

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A commitment to standards is critical. Standards reduce uncertainty, im-prove productivity and extend the life of your investment. With respect to

standards, technology is delivered in three flavors:

• Standards – promote choices and deliver the benefits mentioned above.

• De facto Standards – limit choices usually to a common source of supply

such as Microsoft.

• Proprietary approaches – eliminate choices.

The advancement of technology can provide both anxiety and excitement to

the selection team. If the team needs to deal with an existing legacy infra-structure, there is anxiety because the legacy represents a point on the curve that needs to be bridged to the current technology under consideration. This

situation is magnified by the obvious acceleration in the technology. When you can approach your decision with a clean sheet of paper, the decision be-comes more exiting. You have the opportunity to make unencumbered use

of the technology for maximum performance.

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The definition of your purchase specification will have a major impact on the commercial aspects of your decision. The first consideration needs to be ex-tending your economic investment. A requirement for standards needs to be

a part of the detailed product specification. Requirement for standards will



ensure your selection will enjoy the long life typically associated with core standards. The specification also needs to emphasize the requirement to

keep the selection current in an economical and predictable manner as the product evolves through revisions in hardware and version releases in soft-ware. Finally, thought needs to be given to developing an integration

strategy for moving legacy software and systems forward with your selec-tion. A consultant probably needs to be used to develop a roadmap for the integration if it cannot be accomplished at commissioning.

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Several pure commercial decisions need to also be addressed in the definition

phase. To determine a fair price, the prevailing market level price needs to be determined. This will probably need to be accomplished by drawing a correlation between offered pricing between suppliers and consultant in-

volvement. The second deals with cost creep. It is not unusual for scope changes or modifications to return suppliers and customers to the negotiat-ing table. ARC recommends the use of extended unit pricing framework,

negotiated before commitment, as the best way to both control cost creep and to predict future cost when scope changes or modifications are required. Fi-nally, the definition should be used as the purchase specification to insure

you get what you need.



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You need to select only what you need. Definition is an extension of the jus-tification process. Similarly, as you go through selection, you must correlate your decisions and judgments to the conclusions reached in the

justification phase. Use a selection matrix to strictly compare speci-fication criteria between suppliers. ARC suggests that your selection matrix be based on Kepner Tregoe techniques. ARC has

implemented these in a spreadsheet format. This approach will provide a basis for comparison that facilitates the selection process and provides an audit trail. The matrix can be used to test the de-

cision initially and demonstrate the decision trail at a later date. The selection matrix must accommodate the buyer’s priorities, a best of class prioritization to emphasis current value and invest-

ment preservation to emphasize life-cycle value. It does not make sense to wait for the ideal solution and in fact it probably does not exist. It does make sense to exercise a best available solution rationale and quickly move to take

advantage of your decision.

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The team is the key to a successful supplier selection process. Management must charter the team with clear and achievable objectives. Every team will

be made up of individual preferences and prejudices. ARC suggests an ap-proach using advocates for each supplier. The advocate does not lose if his supplier loses. It is the advocate’s job to insure that his supplier’s offering is

represented accurately to the team. As a part of the team, all advocates col-laborate in the discovery process with the suppliers and a joint decision of the successful suppliers. This collaboration binds the

team together.

It was mentioned earlier that the detailed product definition could consume more that 80 percent of the time and effort of the team.

Developing a detailed purchase specification can be a Herculean task and more times than not the results are not what you ex-pected. This shouldn’t be a surprise; team members do not

normally focus on the automation industry, they are normally fo-cused and expert on the company’s business and needs. It is our

position that the team should not develop the details, but they should under-

stand them and edit a detailed definition to reflect the company’s needs. This approach provides the team the time to focus on project details and gen-eral business requirements.

The process the team follows is straightforward and logical:

1. The team establishes the current reality.

2. The team works with the team to develop an ultimate position.

3. The team moves to a position that they feel is realistic and satisfies the needs of the company. This is the definition that is reflected in the Purchase Specification.

4. Strategy filters are instituted that are actually the requirements, which were established previously.

5. Finally, alternatives to candidate suppliers and approaches are evalu-

ated.

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Selection is not a destination but an ongoing journey. As we discussed, selec-tion is also a result of a best available choice rationale. As such, there is the need for continuous improvement. The successful supplier will continue to

enhance their product, and it is important to have a process in place that al-lows you to continue to enhance your purchase to keep it current and deliver maximum functionality.

Regularly exercising the selection matrix and graphing the results to deter-mine progress or absence of it can measure the results of working with the successful supplier to facilitate convergence between the strategic solution

and the best available solution. Keeping the platform current is a commercial function and is discussed earlier.

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Simply stated, closing the cycle means revisiting two correlations as a final due diligence check. The first is correlating Selection to Justification, and the

second is the on-going correlation of best choice and strategic solution in the improvement.

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By correlating the selection to the justification the team and its management can be confident that the best available solution that meets the original justi-

fication has been made. This represents a project closing activity. The correlation between the best strategic solution and best choice and the defini-tion is an activity that should take place throughout the life of the production

facility. By doing this, continuous improvements can be made. �



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Manufacturers often try to go through the selection process alone. This can be a mistake that results in lost opportunity. Manufacturers are certainly the expert on what they want to accomplish in terms of the business proposition,

but there is no way they can stay current with all the possible choices today. The process described in this document may seem simple, but it involves a considerable amount of detail that can become complex. Teams consisting

only of internal resources can easily fall prey to internal biases or groupthink that could lead to wrong conclusions. At very least, an outside specialist help can often shorten the time to work through the details of the process.

There are several places to go for help. The right kind of advice should come from as neutral a third party as possible. The neutral third party should be thoroughly familiar with the process described here. The outside party

needs to have domain expertise in the core decision area. Technical compe-tence is only one desirable aspect. Business best-practices expertise is equally important.

System suppliers and system integrators have technical knowl-edge and perhaps good business practice capabilities. They can be of assistance to you only if you are certain that you will

use them in the implementation of the project. It is very diffi-cult for suppliers to act as unbiased participants, since in the end, they want your on-going manufacturing system business.

Management consulting firms can provide assistance. Often they are used to help answer the question “what business do we want to be in”. From this exercise the genesis of the specific

manufacturing project may be born. Management consulting firms, however often lack in the domain expertise, when it

comes to the details of manufacturing systems and suppliers capabilities.

ARC has been working with several of our clients in this specific area. Since this is available to our advisory service clients only, our people are often al-ready familiar with your requirements. Our staff consultants can provide a

well thought out methodology, purchase specifications by class of product and decision support tools.

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Supplier selection best practices