Factors Considered in Supplier Evaluation Finance

Financial assessment can reduce, but not eliminate the risk of concluding business with a company with a doubtful financial situation. Yet, this can lead to information that contributes to decision making when choosing sources or when considering bids for tenders. The following issues should be checked:

  • The assessed turnover of the enterprise over three years
  • The profitability and the relationship between gross and net profits of the enterprise over three years.
  • The value of capital assets, return on capital assets and return on capital employed.
  • The scale of borrowing and ratio of debts to assets
  • The possibility of takeover or merger affecting ability to supply.
  • Whether or not the firm is tied to a small number of major customers, so that if one or more withdrew their businesses it might cause the firm financial difficulties.
  • Whether or not the organization has sufficient capacity to fulfill the order.

Production Capacity

Production capacity represents the “limited capability of a production plant to produce products in a specified period, normally expressed in the number of products per unit of time”. The issues examined include:

  • The maximum productive capacity in a normal working period.
  • The extent to which capacity is currently over or under committed-for example, a full order book may raise doubts about the supplier‟s capacity to take on more work or else you have to wonder if substantial amount of capacity is underutilized.
  • How existing capacity might be expanded to meet future increased demand
  • The percentage of available capacity utilized by existing major customers
  • What percentage of capacity would be utilized if the potential suppliers were awarded the business of the purchaser? This can also be assessed in terms of annual turnover, but in any cases, care should be taken to avoid making the supplier overly dependent on one or two customers.
  • What systems are used for capacity planning?

Production facilities

When evaluating the production facilities, attention should be on aspects such as:

  • Does the supplier have a full range of equipment to accomplish the ordered product?
  • How can the shortage of equipment and machinery covered?
  • Are the machines modern and well maintained? (Failures may compromise delivery);
  • Is the plant configuration appropriate?
  • Is there evidence of “good management?
  • Does the provider use modern systems, such as CAD (Computer Aided Design – Computer Aided Design), CAM (computer aided manufacture – computer-aided production) and FMS (flexible manufacturing systems – flexible manufacturing systems)?
  • Is the safety and labor protection satisfactory?

Human Resources

No organization can be better than its employees. The information that must be looked at includes:

  • The number of workers in working in production and administration
  • Utilization of human resource i.e. whether the available staffs are used economically, or the organization is overstaffed with many employees idling or understaffed.
  • The name, professional qualification and experience of technical and managerial staff.
  • Employee empowerment and development programs.
  • Worker representation and recognized trade unions
  • Days lost due to industrial unrest in the last five years
  • The organization culture towards quality, customer and motivation to fulfill customer requirements.


The key aspects examined when evaluating suppliers ability to meet the quality requirements include

  • Has the supplier met the quality approval criteria of other organization such as the Ford quality Awards, the Ministry of Defence, British Gas or others?
  • To what extent does the supplier know about and implement the concept of total quality management?
  • What procedures are in place for the inspection and testing of purchased materials?
  • What relevant test and inspection process does the supplier use?
  • Does quality control cover an evaluation of quality for subcontractors?
  • Can the supplier guarantee that the purchaser can safely eliminate the need for all incoming inspection especially JIT deliveries?


This is especially important in evaluating providers of standardized products, or works such as construction or installation of computer systems. It important to find out;

  • The similar projects undertaken by the same supplier.
  • Projects in progress with the same supplier or contractor.
  • The unique features of the projects already done by the provider.
  • What innovation that can be introduced by the supplier?
  • Customers that the provider can identify as referees

Environmental and ethical factors

Sustainable development, green procurement and climate change are key factors affecting purchasing function. The environmental and ethical factors that should be considered include:

  • Has the responsibility for environmental management been allocated to a particular person?
  • Are materials obtained, so far as possible from sustainable sources such as timber?
  • What is the lifecycle cost of the suppliers‟ products?
  • What energy savings if any do the supplier’s products provide?
  • Does the supplier have a comprehensive waste management plan to control harmful waste?
  • Is the organization guided by procurement code of ethics that regulates receiving of gifts and entertainment hospitality?
  • How is the conflict of interest handled?

Information System

The emergence of E-procurement, integrated financial management and information system are some of factors that make investment in modern IT infrastructure necessary. The key questions that should be explored include:

  • Does your organization have a website?
  • What information does the website provide?
  • What business activities does your organization process electronically?
  • How does your organization:
    • Reduce or eliminate paper transactions?
    • Reduce inventory?
    • Provide real-time information on product availability and stocks?
    • Make the collaborative planning?
    • The integration and the supply chain?

(Visited 580 times, 1 visits today)

Leave a Reply

Your email address will not be published. Required fields are marked *