Supplier Performance Evaluation: Industrial Products Corporation and Branco

Executive Summary

Evaluation is an important part of supply chain management because it helps administrators to identify a group of vendors that share similar values with their organisations and have the competencies to meet their unique procurement needs. Stemming from this need for alignment, the importance of supplier evaluation to business process management has been premised on the need for managers to create a good working relationship with their key suppliers. The partnership between Industrial Products Corporation (IPC)’s managers and Branco has been undermined by the difficulty in maintaining a good working relationship because of the latter’s poor performance. The recent supplier evaluation report shows that Branco’s performance has fallen below the minimum expected standards. Particularly, it has registered poor performance in three critical areas of quality, continuous improvement and deliveries. These inadequacies have caused widespread disruptions in IPC’s operations and triggered production delays, which have affected the company’s sales.

This report explains the effects of Branco’s performance on its relationship with IPC. The goal is to find actionable solutions that will salvage the long relationship that both companies have shared over the years. In the first section of this document, the role and application of supplier evaluation will be explained and details about the importance of this process to IPC’s business success explained. In the second section of the report, Branco’s performance and business risk to IPC will be analysed in detail to explain the extent that the vendor’s non-conformance problems have heightened IPC’s business risk. In the third section of this briefing, a set of recommendations will be proposed to manage the issues between IPC and Branco. Lastly, a summary of the main findings will be detailed and key recommendations reiterated.

Introduction

Identifying the right type of supplier is a critical process for any successful business because vendors play an important role in helping organisations to meet their procurement needs. Therefore, most managers desire to develop productive relationships with the right suppliers to improve their efficiencies and competencies. Zeng, Tse and Tang (2018) say that supplier evaluation aids businesses to build mutually beneficial relationships with their vendors. However, if the process is mismanaged, it could cause significant disruptions and cost escalations that could impede business operations.

Subject to the effects of supplier evaluations, Buhmann, Taylor and Giuliani (2019) caution that a mismatch between a firm’s procurement needs and its supplier’s capabilities to meet them could portend serious ramifications for the business, including undermining its credibility and ability to operate as a going concern. To this end, supplier evaluation emerges as a critical activity in business management because it allows managers to identify new or existing groups of vendors that will enable them to achieve their goals (Koster, Vos and Schroeder, 2017). In this regard, it is believed that organisations, which want to develop long-term business-to-business relationships, need to pay attention to supplier evaluation processes (Koul, Sinha and Mishra, 2016: Schoenherr, 2018). Similarly, they should be a priority area in business management for companies that spend many of their resources on procurement.

Industrial Products Corporation IPC’s relationship with its main vendor, Branco, is subject to the effects of supplier evaluation processes discussed above. The recent appraisal showed that Branco’s performance declined below the minimum expected standards. Particularly, the supplier’s poor performance in three critical areas of quality, continuous improvement and deliveries have caused widespread disruptions in IPC’s operations and triggered production delays, which have impacted the company’s sales. The need to address Branco’s poor performance is at the centre of discussions presented in this report because they are aimed at finding actionable solutions to avert a further deterioration of performance. The findings highlighted in this document will be useful in understanding the role and application of supplier evaluation and explaining the effects of low supplier rankings on corporate performance.

The Role and Application of Supplier Evaluation

It is important to understand the role and application of supplier evaluation before reviewing the competencies of vendors because the process underlines the basis for developing long-term relationships between companies and their business partners. Typically, firms use sets of qualitative and quantitative techniques to undertake supplier evaluations because the procedures allow them to cover a broad range of issues during the assessment (Okwu and Tartibu, 2020). Identifying the right type of technique to use depends on the nature of a firm’s internal objectives and the characteristics of prevailing market conditions (Chen et al., 2017).

Based on a combination of the above-mentioned factors, two companies could use the same supplier evaluation method and get mixed results. This is because the process of conducting a supplier evaluation process depends on an organization’s main goals and procurement needs (Treumer and Comba, 2018). For example, some businesses relying on evaluation procedures to meet their continuous improvement goals based on their relationship with existing suppliers (Micheli and Cagno, 2016). Others undertake supplier evaluation processes to identify groups of the best in class vendors that will help them to meet their procurement needs. Firms that are entering new markets and start-up businesses prefer this type of evaluation.

The existence of varying objectives in supplier evaluation processes means that companies have no specific framework for conducting this type of process. Consequently, different firms use their metrics to evaluate the performance of their suppliers. For example, some organisations use questionnaires to obtain data for review, while others prefer to use scorecards to achieve the same objective (Zunk, 2015). In some cases, procurement managers choose to conduct site visits as part of their supplier evaluation activities, while others may simply seek third-party standard certifications as a benchmark for undertaking their review processes (Okwu and Tartibu, 2020). The technique used depends on a company’s goals and market dynamics.

Despite the existence of different objectives for conducting supplier evaluations, some select models have been extensively used to develop several review frameworks. For example, the 10Cs of supplier evaluation developed by Ray Carter has been used as a basis for identifying a company’s primary objectives and evaluating the competencies of potential suppliers in helping it to meet its procurement needs (Korrapati, 2016). The “10Cs” of the model refers to competency, capacity, commitment, control, cash, cost, consistency, culture, clean and communication as the main criteria for performing supplier evaluation processes. Based on the merits of this model, it has been used to identify groups of suppliers to consult and the ones to avoid. Some organizations have also applied the technique to develop strong procurement management policies that streamline their supply chain activities (Korrapati, 2016). Others have used the ten areas of evaluation mentioned above to negotiate for better prices with their key vendors. Nonetheless, based on its broad application in corporate circles, observers have hailed the 10 Cs model for helping companies to conduct effective supplier evaluation processes, subject to the freedom it gives them to concentrate on areas that are relevant to their business goals. Some analysts have also appraised the 10Cs model for helping companies to develop a broader understanding of their suppliers’ abilities to fulfil their procurement needs (Korrapati, 2016). Such techniques have been used to develop supplier evaluation processes in many companies. IPC uses a weighted scoring system developed internally to conduct similar evaluations. The section below explains some of the key findings reported in the last few months and their effects on the company’s business risk.

Branco’s Performance and Business Risk to IPC

It is important to understand the extent that Branco’s performance poses a risk to IPC’s operations. In the context of this evaluation, the concept of business risk will be used to the extent that Branco’s performance would cause IPC to make inadequate profits because of non-conformance issues. Branco’s effect on IPC’s performance is similar to the risk that the inadequate supply of raw materials poses to the operations of a company that relies on the timely production of goods and services. Stated differently, Branco’s poor performance poses a high level of risk to IPC’s operations. Based on this relationship, this review underscores the importance of Branco’s input to IPC’s operations. However, before exploring the effects of Branco’s performance and business risk to IPC, it is important to understand the frequency of its non-conformance issues through a breakdown of its quarterly performance based on the recently updated supplier evaluation report. According to figure 1 below, Branco’s performance rating has declined since the start of the second quarter.

Although the decline in performance happened for two consecutive quarters after that, it did not raise alarm until the company’s performance declined below the minimum standards stipulated in the supplier agreement. According to figure 1 above, results from the fourth and fifth quarters of assessment demonstrate this worrying trend. The data highlighted above have been based on a review of a select group of supplier scoring criteria that included quality, delivery and continuous improvement. The lowest performance score was reported in “continuous improvement.” Delivery and quality also registered poor results respectively.

Branco’s poor performance heightens IPC’s business risk profile because it provides packaging materials, which support activities that occur at the tail end of the company’s production process. A delay in the supply of this vital product means that customers may not get their deliveries on time, if not at all. If the problem is unmanaged, low sales will be reported and it will further slow down production (Makó, Csizmadia and Heidrich, 2018). Based on the potential ramifications of its supply chain activities, Branco serves an important role in IPC’s business operations. An in-depth assessment of its influence on IPC’s operations shows that Branco’s poor performance poses a heightened operational risk for the company because it can influence its operational and administrative processes.

Branco’s poor performance also heightens IPC’s business risk profile by increasing its strategic risk, which relates to the operations of the business. This type of risk comes from stakeholder relations and the prevailing business environment (Souza et al., 2020). For example, failing to make timely deliveries because of faulty packaging cartons may affect IPC’s relationship with its customers who are its key stakeholders. Similarly, disappointed customers may easily go to their competitors. The presence of rivals in the market is an inescapable reality in the business environment that has forced IPC to rethink its strategic plan. The need to maintain good relationships with its suppliers for long periods has further complicated its ability to undertake its business processes optimally. Therefore, Branco’s poor performance increases IPC’s business risk by posing a threat to the company’s strategic management plan, which is built on maintaining a good relationship with its customers and IPC’s competitive position in the market because clients could easily embrace the competition if their needs are not met.

Branco’s poor performance also carries a significant financial risk to IPC because it could influence its financial structure and nature of transactions in the industry if low sales are reported for long periods. The relationship between the vendor’s poor performance and this type of risk is exemplified in the effects of low sales on a company’s main revenue stream (Al Shubiri and Jamil, 2018). This link should be reviewed with the understanding that sales are an important revenue stream for most companies. Therefore, if sales dwindle because customers fail to place enough orders, IPC may be unable to meet its financial obligations because of diminished revenue streams (Mohd Noor, Ismail and Mohd. Shafiai, 2018; Pallas, 2015). Its financial risk profile would equally increase and in turn, heighten the firm’s business risk.

Lastly, Branco’s poor performance increased IPC’s risk of noncompliance because the latter is supposed to adhere to several legal requirements governing its operations. As explained in this report, Branco’s supplies are essential to IPC’s operations. Therefore, the company’s noncompliance risk could be significantly increased if Branco fails to meet its contractual obligations. This observation is in line with the views of Hernández-Trasobares and Galve-Górriz (2016), which encourages companies to adhere to the highest quality standards in procurement management. For example, IPC adheres to industry packing and delivery standards, which govern most of its operations. If Branco does not supply goods that meet the same standards, the risk of noncompliance increases.

Overall, Branco’s poor performance is detrimental to IPC’s operations because it increases its business risk profile in the areas of compliance, financial and operational risk assessments. Collectively, these areas of operational performance are pivotal to the company’s processes and have far-reaching consequences on different areas of the company’s operations (Katiyar, Barua and Meena, 2018; Al Shubiri and Jamil, 2018). In this regard, Branco’s poor performance needs to be addressed quickly to minimise the possibility of affecting other parts of IPC’s operations. However, finding the right strategy to complete this task could be a difficult undertaking because different factors have to be considered before selecting the right course of action to take. For example, one of the considerations could be the difficulty in ending the relationship with Branco based on its strategic importance to IPC’s operations. Therefore, as proposed by Luan (2016), there needs to be a proper plan to address such problems without necessarily causing significant alterations to the existing relationship between both parties. The section below contains proposals on how the relationship between Branco and IPC should be managed moving forward.

How the Issue Should be Managed Moving Forward

Based on the potential threat of Branco’s poor performance to IPC’s operations, it is important to address this issue urgently. Based on this need, IPC should use the best alternative to a negotiated agreement (BATNA) model to address the prevailing problem. This model works by encouraging companies to pursue the best course of action when negotiations have failed and the likelihood of realizing improved results are low (Sebenius, 2016). Branco’s case falls in the latter group. The BATNA model is borrowed from the works of Roger Fisher and William Ury who developed it as an effective tool for negotiating business-to-business relationships, as is the case between IPC and Branco (Reynolds, 2016; Korrapati, 2016).

The BATNA model was designed based on the assumption that if two companies stick to their strategies, none of them would benefit from changing theirs. Its proponents further go ahead to demonstrate that companies should develop a best-case scenario framework, after considering the impact that this strategy will have on its partners, and use it as the criteria for negotiating with their vendors (Stitt, 2016). By sticking to it, all of them would be forced to pursue the best course of action when managing supplier relationships with the assumption that the other party is also doing the same (Hare, 2015). The result would be an equilibrium in negotiations between the two parties involved where the best-case scenario is realised.

Based on its design, the BATNA model leaves little “room for error” as companies are forced to create the best circumstances of operation to sustain relationships with their vendors. The vice versa is also true because the model also encourages vendors to pursue the best strategies for improving their performance and relationship with clients (Reynolds, 2016; Korrapati, 2016). If implemented correctly, the BATNA framework could lead to the development of diverse decisions for a company, including the suspension of negotiations and the formation of a different type of supplier relationship. IPC should use this model to review its relationship with Branco and encourage it to improve its performance. By being subjected to the implementation framework, Branco will be forced to operate within a best-case scenario setup because any level of performance below this standard will be unacceptable (Robbins, Judge and Millett, 2015). A clause should be added to the negotiation contract between the two parties, which states that the failure to adhere to the stipulations of the BATNA agreement would automatically lead to the severance of the supplier relationship. Nonetheless, this action should be pursued as a last resort if the objectives of the BATNA agreement have not been reached. Branco has had several chances of improving its performance and the desired standards are yet to be reached. Therefore, BATNA should be introduced as a last resort, as proposed above.

Care should be taken to make sure that the value of the supplier relationship between IPC and Branco is properly quantified as a basis for developing future agreements, as recommended by Hernández and Pedersen (2017). Particularly, emphasis should be made to account for the time value of money and the likelihood of Branco living up to the renegotiated agreement. It is difficult to account for other variables in the BATNA agreement because of their qualitative nature. Therefore, the aforementioned two quantitative metrics of assessment should be adopted as the guiding principles of value analysis. It is also essential to allow Branco to come up with its BATNA standards because it should not feel coerced to sign the new agreement. However, its process should follow IPC’s specifications. Therefore, IPC should take the initiative of renegotiating the agreement first and Branco should be allowed to respond to it by developing its best-case scenario. A decision should be reached when the two parties agree to a common set of standards for guiding future operations. This basis of renegotiation should be used as the foundation for undertaking future supplier evaluation processes.

Summary

The underlying theme in this report has been the importance of supplier evaluation in improving the nature of the relationship between Branco and IPC. In the first section of this document, the role and application of supplier evaluation were explained with a keen emphasis on understanding how this process is critical to IPC’s business success. In the second section of this report, Branco’s performance and business risk to IPC was analysed in detail to explain the extent that the vendor’s non-conformance problems heighten IPC’s business risk. Key areas of concern that emerged from this review included an understanding of how Branco’s poor performance would increase IPC’s vulnerability to financial, operational and conformance risks. Collectively, these areas of the assessment revealed that, if left unchecked, Branco’s non-conformance issues would have far-reaching implications on IPC’s operations.

To address this challenge, it is recommended that IPC should use the BATNA model to renegotiate its supplier relationship agreement with Branco. This tool has been proposed as a last resort because Branco has failed to demonstrate how it intends to improve its performance beyond the four quarters it has registered low scores. Based on this observation, IPC should take a proactive lead of developing a best-case scenario for meeting its procurement needs and Branco should be given a similar opportunity to design its best-case scenario based on the outcomes of the first process. The negotiation process should yield an equilibrium decision where none of the parties involved would gain from changing their strategy. This type of agreement gives IPC sweeping powers to correct Branco’s performance.

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