Cost‐Based Supplier Performance Evaluation

Cost‐based management of the supplier base becomes increasingly important as the array of business factors that affect a firm's ability to compete expands. The purchasing function, through its integral interface with the supplier base, can institute a performance measurement system that both quantifies suppliers' performance in terms of cost and enhances the buy‐sell relationships. A cost‐based supplier performance evaluation system provides a justifiable and rational method for evaluating key supplier performance factors. The system is predicated on the recognition that material price is only a fraction of the cost of the purchased material. It identifies supplier non‐performance costs and accurately reflects the actual cost of doing business with suppliers. In this article the authors discuss the development of a cost‐based supplier performance evaluation system, based on their work with an electronics firm. The relevance of the system to purchasing and the buy‐sell relationship is presented, and the system logic is detailed. Additionally, the implementation approach is overviewed and application conclusions are drawn.