The Complete Guide to Vendor Selection Process

A robust vendor selection process is essential for procurement and project management. Vendor selection is one strategy needed for enterprise risk management (ERM). Poor vendor selection has negative consequences for your business.

If a vendor doesn’t provide on-time delivery or makes poor quality products, the production schedule will slip for manufacturers. eCommerce and retail stores will lose sales due to stockouts. Customer deliveries will be delayed, items could be returned, and your company’s customer reputation would be impaired.  

What is a Vendor?

A vendor is a seller of products and services, including inventory, office supplies, equipment, and janitorial services, to businesses or individual customers. A vendor may be referred to as a supplier. The selected vendor completes a sale or service, collects immediate payment, or invoices its customers with credit terms for later payment, and delivers goods to the purchaser.

What is the Vendor Selection Process?

The vendor selection process is a series of procurement steps to determine product or service requirements and match them with vendor capabilities and pricing. It includes identifying potential vendors, obtaining quotes or proposals with competitive bids, evaluating vendors by contacting references and applying a company’s vendor selection criteria checklist, and contracting. 

5 Quick Steps in the Vendor Selection Process

A high-level, summarized list of steps:

Step 1: Determine business needs

Step 2: Vet out potential vendors

Step 3: Set evaluation criteria

Step 4: Connect with and evaluate vendors

Step 5: Finalize vendor selections

Who Uses the Vendor Selection Process?

Business procurement teams use the vendor selection process. For technical products or services or collaborative decisions, the team may include members of other functional areas interested in buying and using the product or evaluating the vendor’s financial strength. 

How to Implement Vendor Selection Process

Implement the vendor selection process by updating company policy, preparing a vendor selection criteria checklist, selecting and using an efficient e-Procurement system for managing workflow, using an approved vendor list, identifying requirements in an RFI, RFQ, or RFP, and potential vendors to vet and evaluate, and choosing the most qualified vendor on a multiple-criteria basis. 

The term RFI means request for information. RFQ means request for quotation. RFP means request for proposal.

The procurement or purchasing department should hone its contract negotiation strategy and skills. 

11 Steps in the Vendor Selection Process

The full vendor selection process broken down in detail, step-by-step:

1. Consider using an e-Procurement system
2. Determine product and vendor requirements and prepare RFI, RFQ, or RFP to solicit bids
3. Search your company’s approved list of vendors and vendor evaluations
4. Identify any other potential vendors to vet
5. Refer to your company’s vendor selection criteria list and company policy
6. Shortlist vendors as the most qualified 
7. View demos and meet potential vendors for large purchases
8. Obtain multiple customer references and read any relevant case study on the vendor’s website
9. Vet financial stability of potential vendors and suppliers
10. Negotiate terms, price, discounts, and delivery dates
11. Contract with winning vendor selected

Example of Making a Vendor Selection

This example illustrates a purchasing company’s multi-step process for vendor selection. 

An electronics manufacturing company needs to select the vendor for a customized application-specific integrated circuit (ASIC) chip for a newly-engineered product. The product’s planned launch date will be in nine months. This subsidiary of an enterprise-size company has a state-of-the-art eProcurement system. 

The part must meet technical requirements and be delivered on time to complete the production process on schedule. A delivery delay or lack of quality would result in a critical risk to the company’s operations and lost revenue from a delayed new product launch.  

An engineer submits a purchase requisition electronically that’s approved online by authorized management. 

The procurement department develops and issues requirements on an RFQ or RFP uploaded to the eProcurement system. The company checks its approved vendors list for any existing suppliers of similar products. Existing vendors and other potential qualified suppliers with industry expertise are solicited to respond to the online RFP/RFQ documents and submit bids. 

The company shortlists three potential vendors and applies the vendor selection criteria checklist online. An online negotiation process ensues. 

Items to negotiate in a contract include:

• Deliverables
• Pricing
• Early payment discounts
• Transportation costs
• Performance specs
• Milestones
• Final acceptance of the completed, tested, and approved ASIC
• Initial order delivery date, and quantity
• Total order quantity and volume discount ranges to be covered under future purchase order releases under a blanket purchase order. 

For vendor due diligence, different team members will participate in the evaluation process. 

The in-house engineering, software development, test, and quality control (QC) teams evaluate these short-listed vendors’ proposals for technology specs meeting requirements and product quality. The finance and credit department evaluates the financial strength of the company. The purchasing or procurement department obtains multiple customer references and vets the potential supplier. Top purchasing management and engineering management approval are required to place an order. 

The electronics company selects the right vendor and enters all qualified vendors on the procurement system’s approved vendor list. The purchasing company and its parent value ESG (environmental, social, and governance) sustainability goals that include vendors in its supply chain. 

The purchasing company creates a purchase order which becomes an approved contract when accepted by the vendor. Due to the complexity and potential order size, a separate contract agreement may be negotiated and signed. 

The assigned engineers will communicate with the ASIC vendor during the development of the custom silicon chip to increase the probability that specs are met when the product is delivered.

Following delivery, the vendor will be evaluated on multiple criteria, including business requirements for on-time product delivery, quality product performance, and customer service. 

Vendor Selection Criteria

11 vendor selection criteria:

1. Quality product or service, meeting any technical specifications
2. Value with reasonable cost and terms
3. Transportation costs
4. Discounts for volume and early payment
5. On-time delivery
6. Financial strength
7. Excellent customer references
8. Customer service
9. Trustworthy
10. Regulatory compliance 
11. ESG sustainability

Expert Tips for Choosing Vendors

Expert tips for choosing vendors include:

• Use artificial intelligence (AI) for vendor selection 
• Evaluate and select vendors on factors beyond competitive pricing
• Vet prospective vendors for quality control, financial strength, technology capabilities, and ability to provide timely delivery 
• Check customer references for potential vendors under strong consideration
• Negotiate pricing, quantity discounts, early payment discount terms, and delivery timing 
• Consider all costs the company would incur under a contract with that vendor

McKinsey & Company recommends using tools with AI for vendor selection. Businesses can speed up vendor selection to days instead of months. AI adds depth to the number of vendors considered in the vendor selection process. Speed is an important factor. Business process efficiency improves. Your company needs fewer organizational resources for vendor selection, reducing costs.

The vendor scorecard published by the Promotional Products Association International (PPAI) shows suggested criteria for vendor management. The criteria list is used for measuring vendor performance after supplier onboarding. Consider these items in your vendor selection process.

Vendor Selection as Part of the Procurement Process

As part of the procurement process, use a company-specific vendor selection criteria list and approved vendor list. Use Thomasnet and AI software tools to identify potential vendors by product type. Check with your industry’s trade association and non-competing businesses for vendor recommendations. 

Use e-Procurement systems to automate vendor selection.

E-procurement systems efficiently handle:

• Finding vendors
• RFI, RFP, or RFQ uploading and responses
• Vendor bidding and auctions
• Vendor evaluation
• Negotiations
• Contracts
• Document repositories and communications

Procurement includes outsourcing to service providers. These service providers include janitorial companies, freelancers, and other independent contractors. Seek recommendations, read customer reviews, and view work samples if possible. Employees intending to use the services are stakeholders. They will be part of the evaluation team assessing potential service vendors. 

Importance of the Vendor Selection Process

The vendor selection process is important because vetting will help your business avoid low-quality or fraudulent vendors. Your company achieves better terms and reasonable pricing through competitive bids. The vendor selection process includes getting customer references. You’ll ensure that a vendor is financially viable and can make timely product or service deliveries to meet your business needs.

Strategy and competency in the supplier selection process contribute to a company’s vendor risk management, enterprise risk management program, financial results, cash flow, and customer satisfaction.