Vendor Selection: Process, Criteria, and How to Select the Right Vendor

Supply disruptions, imbalances between costs and quality or lack of alignment with suppliers can make any business miserable. After all, vendors are the key business partners. The reasons behind such problems often lie in the vendor selection process. Loopholes in the process or failure to implement an appropriate process correctly can lead to selecting unfit suppliers and subsequent issues

This article discusses everything you must know as a business owner about selecting the right vendors for your company. 

What is vendor selection? 

Vendor selection is a process that every business needs to go through for identification, evaluation and, finally, selection of appropriate suppliers for sourcing raw materials, intermediate goods and services.  

Example: 

Assume ABC Ltd is a company willing to enter the refrigerator manufacturing business. It surveys the market, decides what types of refrigerators they would sell, and estimates a tentative sales volume they might initially achieve. Based on this information, ABC Ltd prepares a list of raw materials, finished intermediate goods, and services support they will require to manufacture their refrigerator. One of the significant intermediate goods is the compressor. As per the estimate, they will need 10,000 pieces of compressors of a specific capacity in the first year. 

ABC Ltd will need to establish and follow an appropriate vendor selection process to find the right type of vendors for sourcing compressors. This process may involve:

1. Finalisation of the technical specifications of the compressor, tentative order size, and budget. 
2. Research suppliers capable of meeting the company’s technical needs. 
3. Contact potential suppliers, request proposals from them and evaluate these proposals. 
4. Finalise one or multiple vendors who are best fit for the requirement. 
5. Negotiate purchase order and sign the contract. 

Importance of vendor selection

An appropriate vendor selection process is essential for any business depending on suppliers for raw materials, intermediate goods and services. Right vendor selection can help:

Optimise costs 

Following an appropriate vendor selection process can help businesses negotiate competitive pricing from suppliers with better terms and conditions. This can cut costs and improve profitability.

Mitigate risks 

Unfit vendors can be a major source of supply disruptions, cost overruns, and quality quicksands in any business. Appropriate selection processes for suppliers and vendors enable businesses to pre-empt and mitigate these risks. 

Build strong vendor relations 

Suppliers and vendors are essential stakeholders of any business. Their ability to supply at competitive prices and within a strict timeline is critical for any customer company. However, long-term reliability and strong relations with vendors are crucial for businesses to survive in changing market conditions. A suitable vendor selection process helps build strong, mutually beneficial vendor relations. 

Vendor selection criteria checklist

A vendor selection criteria checklist is a procurement manager’s tool to assess potential suppliers and vendors in a structured manner. Ideally, it is a document that ensures that a procurement manager or team considers all the relevant factors while selecting vendors.  

A sample checklist of criteria for appropriate vendor selection:  

Such a checklist may vary depending on industry and business priorities. However, it is critical to implement an appropriate vendor selection process. 

Vendor selection process in India 

Successful vendor selection requires following a systematic approach comprising a series of steps. Such steps can have minor industry and company-specific deviations. Besides, India, a country with a large unorganised sector, may pose a few challenges in researching and tracking vendor credentials (centralised vendor management systems can solve such obstacles). 

However, the steps and their chronology broadly remain the same. 

1. Define requirements
2. Engagement model 
3. Research and shortlist 
4. Request proposals 
5. Evaluate proposals
6. Select and Negotiate 
7. Signup contracts 

Define requirements

A well-defined technical specification and quality standards can make the vendor selection process much easier and more effective. List the volume, expected pricing, and all other necessary details for every raw material, intermediate good, or service you want to source from external suppliers and vendors.  

Engagement model 

This involves making decisions on how to pursue the selection process. Will you outsource the vendor selection process to specialist vendor management solutions providers? You may also get specialised assistance on specific steps, like finding potential suppliers, researching credentials, legal documentation, etc. 

Research and shortlist 

In-depth research is the key to future resilience in vendor management. The vendor selection criteria checklist can be helpful in this step. Many industry-specific vendor directories with specialist services are available. If you are in a niche industry, you may also do it yourself entirely. 

The outcome of this step is a list of potential suppliers with all the details relevant to your vendor selection criteria checklist.  

Request proposals 

At this stage, you need to contact shortlisted suppliers, share your requirements, and request that they submit their proposals (RFP). You can create an RFP template to standardise vendors’ responses.  

A template RFP may include the following information: 

• Description of your requirements 
• Technical specifications 
• Quality standards 
• Delivery timelines 
• Budget and expected pricing 
• Regulatory requirements, if any 
• Other terms and conditions of engagement 

Evaluate proposals

This step begins with receiving filled RFPs from interested vendors and suppliers. Evaluate each of them based on the merits of their proposals. It is also important to review their reputation and references for qualitative evaluation. 

Select and negotiate 

Now, you have a fair understanding of the capabilities of interested vendors and who fit your requirements. Select those proposals and begin negotiations on pricing, logistics and other terms and conditions. The best vendors are the long-term business partners. So, it is advisable to negotiate for a mutually beneficial deal. Your business success depends on the success of the vendors’ business. Some vendors and suppliers may agree to do business initially at a very low cost or on unviable terms. However, such agreements do not last longer and cause mistrust in vendor-customer relations.    

Signup contracts 

This step involves signing up legal documents like non-disclosure agreements, IP rights, non-employment agreements, etc. Most companies outsource these tasks to legal experts with experience in vendor management.   

Benefits of the vendor selection process

A successful vendor selection process provides several benefits to any business, such as: 

• It saves costs of procuring raw materials, intermediate goods, and services. 
• Helps find the most suitable and reliable vendors. 
• Improves efficiencies across the supply chains.
• Helps build and maintain strong vendor relations. 
• Ensures consistency in quality standards. 

How Clear Can Help You in Vendor Selection and Management 

Clear Supply Chain Cloud is a comprehensive solution designed to streamline your invoice-to-pay  process, from vendor onboarding to invoice processing to viewing payment information. It offers a suite of advanced features that can help you further optimise your operations and achieve significant cost savings:

1. Automated Compliance Checks: Conduct thorough vendor onboarding checks (20+ checks including GSTIN and PAN, MSME status, bank account, 206AB compliance, MCA strike-off checks, and more) to ensure compliance and mitigate risk.
2. On-Demand Validation: Ensure vendor compliance with real-time validation using government-verified data. Consistently maintain an accurate and up-to-date compliance of your vendor database with on-demand validation.
3. Vendor Portal Access: Empower vendors with a self-service portal to submit invoices, track their status, and view payment information, reducing the need for manual inquiries.

With Clear, you experience true automation in your everyday vendor management and accounts payable process, with-

1. A 100% consistently compliant vendor master
2. Up to 75% faster vendor onboarding cycle times

It's time for you to streamline the process of onboarding new vendors to prevent delays in supplies due to disruptions or late payments.