Vendor Analysis: Definition, Criteria, and Evaluation Process

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Vendor Analysis: Definition, Criteria, and Evaluation Process

Project Management · Chapter 7: Vendor Selection and Contract StructuresSection 7.2 · lesson 42 of 7311 min · free with a free account

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In this lesson

Judging the supplier organization behind a quote, not just its price.

  • Distinguish vendor analysis from proposal evaluation
  • Apply criteria such as capability, capacity, financial health and quality systems using checkable evidence
  • Calculate total cost over the relationship to compare vendors fairly
  • Monitor vendors with on-time and defect rates on a scorecard

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Transcript

Everything said in the video, section by section (1,335 words). Read along, or search it.

Opening Case

Is the Cheaper Tray Supplier Cheaper

Rosalind is a purchasing analyst at Cresthaven Regional Foods. She has two quotes for the plastic trays that hold its prepared salads: 20,000 trays over a year. Harrowgate Trays quotes 0.90 a tray, 18,000 in all. Linden Seal Packaging quotes 1.00, or 20,000. Victor, her manager, asked for the lowest price, and on price the answer looks clear. But is the cheaper supplier really cheaper? That depends on the organization behind the quote.

Definition

Assessing the Organization Behind the Offer

A vendor is an outside organization that supplies a project for payment. Vendor analysis assesses that supplier as an organization: its skills, resources, finances, methods, record, and exposure to trouble. The goal is to judge whether it can deliver reliably, over the whole period the project depends on it. Delivering once isn't the same as delivering every month for two years. It isn't proposal evaluation. Proposal evaluation scores a document: what's offered, at what price. Vendor analysis examines the organization that must keep those promises. A proposal shows what a vendor intends. Records, financial statements, inspections and other customers show what happens after the work is won.

Timing and Depth

Before, At and After Selection

Vendor analysis happens at three moments. Before selection, it removes vendors that can't do the work. At selection, it gathers the evidence so the choice can be explained. And through the contract, it continues as monitoring, because organizations change. Key staff leave, finances shift, and other customers use up capacity. Match the depth to what a failure would cost. An easily replaced item needs a short check. A vendor whose failure would stop the project deserves a deep one. Either way, write the findings down.

Evaluation Criteria

Evidence Beats Claims Across the Criteria

These criteria are commonly used. Each is a question about the organization, answered with evidence: information that can be checked, unlike a claim, which is what the vendor says about itself. Capability: does it have the skills and tools to do this work at the required quality? Capacity: does it have enough people, equipment and time free, for this volume, on these dates? They're separate. A bakery may be able to make wedding cakes, and still have every oven booked for the month of the wedding. Financial health: is it likely to stay in business for the whole relationship? Small doesn't mean unhealthy, and large doesn't mean safe. Quality systems: how does it prevent, find and fix defects? A vendor with no recorded problems at all may simply not be recording them. References and past performance. Security and compliance. Total cost over the relationship. And risk: what could go wrong, and how dependent would we be?

Worked Example

Total Cost of Two Carton Vendors

Total cost turns the evidence into money. It's the price, plus setup, delivery, defect cost and late-delivery cost, over the relationship. Take 8,000 printed cartons over two years, in 24 monthly deliveries. Alder Carton Works quotes 1.50 each, and Birchfield Packaging 1.70. Alder's price is 12,000, and Birchfield's 13,600. Alder wins on price by 1,600. But Alder's setup is 600, against 300. Its records suggest 5 percent defects, against 1, at 2.50 a defective carton. And 6 late deliveries, against 1, at 150 each. Add delivery charges of 600 for each vendor, and Alder's other costs come to 3,100, against Birchfield's 1,250. Totals: Alder 15,100, Birchfield 14,850. The pricier vendor is cheaper by 250. But if Alder's defect rate were really 2 percent, its total would be 14,500, and it would win by 350. So the analyst works on the evidence, not just the arithmetic.

Quick Check

A Labeling Machine Over Three Years

Quick check. Two vendors for a labeling machine, over three years. The first, Corvin, charges 9,000, plus 600 a year for support, plus 300 to install. The second, Dunmore, charges 10,200, plus 200 a year, plus 150 for training. Which has the lower total cost? Pause, and decide. Dunmore, by 150. Corvin totals 9,000 plus 1,800 plus 300: 11,100. Dunmore totals 10,200 plus 600 plus 150: 10,950. Corvin's 1,200 price advantage disappears once three years of support are counted.

Selection Funnel

Vendor Risk, Dependency and a Narrowing List

Vendor risk is an uncertain event, tied to a vendor, that would harm the project. It might fail financially, lose its only plant to a fire, lose a key person, or raise prices once you're committed. Dependency is how far you can't carry on, or can't switch, without this vendor. It raises the harm of every vendor risk, because a buyer with no alternative can't walk away. The process moves from many vendors to one, with more effort per vendor as the number falls. A long list of perhaps twelve, from market knowledge and earlier dealings, faces cheap pass-or-fail checks. A short list of perhaps five gets summary evidence and an indicative total cost. Due diligence then investigates the last few, using the full criteria, and preferring independent evidence. Scoring and selection follow, with written findings in hand. Then monitoring begins, and its record becomes past performance for the next selection. Each removal carries a written reason.

Reference Checks

Ask Previous Customers for Facts

A reference check is a structured contact with a previous customer, to learn what working with the vendor was really like. Ask for facts, not praise. How similar was the work? How often did delivery match the promise? How were defects fixed? How many of the last twenty deliveries were late? Know the limits. Vendors offer customers they expect to speak well of them. Those customers may have been smaller, more tolerant, or served by a team that's since left. Reduce the bias. Ask for a full customer list and choose some yourself. Ask each reference for another name, and compare answers with your own records. Record the same questions for every reference, who answered, and when. Any answer that contradicts the vendor's claims goes back to the vendor.

Monitoring

On-Time and Defect Rates by Quarter

After selection, monitoring checks whether the vendor delivers as agreed. It rests on agreed measures, a scorecard against targets, and review meetings that agree actions, owners and dates. Two measures go a long way. On-time rate: on-time deliveries over total deliveries. Defect rate: defective units over units delivered. Quillon Supply's targets are at least 90 percent on time, and at most 2 percent defects. In quarter one: 19 of 20 on time, 95 percent, and 40 of 4,000 defective, 1 percent. Quarter two: 17 of 20, 85 percent, and 2 percent defects, right at the limit. Quarter three: 15 of 20, 75 percent, and 3 percent defects. One quarter shows a position. Two or more show a direction. A review after quarter two would have asked for causes while the problem was small. One caution. With only 20 deliveries, a single late one moves the rate by 5 points, so read single changes with care.

Quick Check

Twenty of Twenty-Five on Time

Quick check. This quarter a vendor made 25 deliveries, and 20 arrived on time. The target is at least 90 percent. Where does it stand? Pause, and decide. 80 percent, below target. 20 divided by 25 is 0.8. That's short of the target, so it belongs on the next review meeting's agenda, with causes and actions.

Case Resolved

Rosalind Recommends Linden

Back to Rosalind and the trays. She didn't stop at the price. Receiving records for earlier small orders were available. Harrowgate had delivered 9 of 12 on time, and its seals had failed on several pallets. Linden had delivered 11 of 12 on time, and had an independent quality audit report and a written method for fixing seal defects. Harrowgate's own references were warm, but described much smaller orders, so she treated them as weak evidence. Harrowgate's pattern would cost about 1,900 in rework and discarded product, and 1,500 in rush freight: 3,400, against about 900 for Linden. Totals: 21,400 for Harrowgate, 20,900 for Linden. She recommends Linden, by about 500, and says the estimates come from small orders, so the advantage isn't certain. Victor must explain a higher price line, and relying on one supplier becomes a dependency she'll watch on a quarterly scorecard.

Key Takeaways

Organization, Evidence, Total Cost, Monitoring

To recap. Vendor analysis assesses the organization behind an offer, before, at and after selection. Evidence beats claims, and every kind of evidence has limits. Total cost, not price, compares vendors fairly. Monitor with agreed measures, a scorecard and review meetings, because direction matters more than one quarter.

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Universities that work with NCCRS

Project Management carries a NCCRS credit recommendation. These universities work with NCCRS; some are UPI Study's signed partners. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.

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FAQ

Questions students ask us

About Vendor Analysis: Definition, Criteria, and Evaluation Process

What is vendor analysis in project procurement?
Vendor analysis assesses a supplier as an organization, including its skills, resources, finances, methods, record and exposure to trouble, to judge whether it can deliver reliably for as long as the project depends on it. It differs from proposal evaluation, which scores a document. It happens before selection, at selection, and through the contract as ongoing monitoring.
How do you compare vendors using total cost instead of price?
Total cost adds setup, delivery, defect and late-delivery costs to the quoted price over the whole relationship. In one example, a vendor quoting 12,000 for cartons beat a rival's 13,600 on price, but its higher setup cost, 5 percent defect rate and six late deliveries brought its total to 15,100 against 14,850. The pricier vendor was cheaper by 250.
What is the difference between vendor capability and capacity?
Capability asks whether a vendor has the skills and tools to do the work at the required quality, while capacity asks whether it has enough people, equipment and free time for this volume on these dates. They are separate questions: a bakery may be able to make wedding cakes yet have every oven booked for the month of the wedding.
Why are vendor references weak evidence on their own?
Vendors usually offer references they expect to speak well of them, and those customers may have been smaller, more tolerant, or served by a team that has since left. To reduce the bias, ask for a full customer list and choose some yourself, ask factual questions such as how many recent deliveries were late, and compare answers with your own records.

About the Project Management course

How many college credits is Project Management?
Project Management (Business 230) carries a NCCRS credit recommendation for 3 semester credits. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.
How much does Project Management cost and what is included?
$250, paid once, with lifetime access: all 73 video lessons, a practice quiz after each, the graded work and final exam, and an official transcript when you finish. Students who want several courses choose UPI Study PRO instead.
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UPI Study has signed partner agreements with universities such as Thomas Edison State University, University of the People and Charter Oak State College, and works with universities such as Penn State, SNHU and SUNY. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities. Use "Find my college" on this page to check yours.
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