The Speculative Future of Supplier Evaluation Compiled by: Erik Kruse, SCRC

If corporations continue to increase their use of manufacturing and services outsourcing, then the demand for supplier evaluation should increase. It should also follow that there will be an increase in the overall demand for supplier evaluation techniques that produce more reliable results which are less costly to generate.

Technological advances have resulted in an overall push toward the prevalence of firms whose form more closely resembles that of a virtual organization structure than any other. A virtual organization is defined here as “a temporary network of independents linked by integrated technology to share skills, costs, and access to one another’s markets (1).” In other words, advances in technology have contributed to an increase in the outsourcing of both manufacturing and services.

Illustrative examples are plentiful. For example, in the early 20th century, Ford was the epitome of vertical integration. The company made its own steel, tires and parts and turned them into automobiles. Throughout much of the last century, many other companies were similarly interested in controlling their own destiny through vertical integration. They were reluctant to use others as a resource. Some companies were even focused on impossible objectives, such as being world class at everything (1).

Today, however, companies cannot afford to be second rate at anything. Technology has decreased the effectiveness of many trade barriers. For example, at one time, geographical barriers more effectively limited a customers’ access to the best products and services. But thanks to advances in technology, like the telephone, today’s customers are less likely to accept second best. As a result, researchers have suggested that vertical integration will be replaced by “virtual integration (1).” While these speculations may not come to fruition in the near future, the simple fact that academics have made arguments of this type supports the notion that companies are increasing their dependence on outsourcing.

Of course, along with outsourcing comes the need for evaluating the supplier. Since disparate industries have distinctly different needs, there are various standards upon which suppliers are evaluated. For example, the automotive industry’s standards for supplier evaluation are different than the standards in the software industry. These industries support governing bodies like the Automotive Industry Action Group (AIAG) and the Software Engineering Institute (SEI). Each organization supports industry-specific techniques to evaluate the price, quality, and on-time performance capabilities of suppliers.

Automotive Industry Action Group
AIAG was founded in 1982 by a group of managers from Chrysler, Ford, and General Motors. Their purpose was “to provide an open forum where members cooperate in developing and promoting solutions that enhance the prosperity of the automotive industry.” Today, AIAG’s focus is “to continuously improve business processes and practices involving trading partners throughout the supply chain (2).”

Software Engineering Institute
SEI was founded in 1984 by the U.S. Department of Defense (DoD). Their mission is to “provide the technical leadership to advance the practice of software engineering so the DoD can acquire and sustain its software-intensive systems with predictable and improved cost, schedule, and quality (3).” The institute’s methods have been widely adopted in the software industry.

Given the existence of the aforementioned organizations, what supplier evaluation standard should a company use if it operates in the automotive industry and is outsourcing software that goes in its final product? This just one example of a complication that makes it unlikely that one “omnipotent” standard for inter-industry supplier evaluation will ever emerge. But will further standardization lead to improvements? In other words, will reducing the number of standards lead to a decreased devotion of time and money for supplier evaluation? Will companies then be able to place more confidence in the information gained from supplier evaluation? Only time will tell.

References:

(1) Rahman, Z. and Bhattachryya, S. (2002). Virtual organisation: a stratagem. Singapore Management Review.

(2) Automotive Industry Action Group (AIAG). http://www.aiag.org

(3) Software Engineering Institute (SEI). Carnegie Mellon. http://www.sei.cmu.edu

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