Beyond price, what criteria do you typically use to award your supplier contracts?
That’s the question we’ll try to answer today (and in this new series) as we share our list of non-price attributes that can be used during the sourcing process to make contract award decisions. The goal in providing this list is to provide specific factors that sourcing teams can and/or should be using to award new contracts and to help generate ideas for those teams looking to use a more expansive list of criteria (besides price) during the sourcing process. The list is not filled with “category specific” attributes nor could a list like this be described as “all-inclusive;” that said, we think our aggregate list can provide your team with a good start. Note: our list in no particular order.
[Sidebar: Our last article gave some background on the challenge of using of using non-price attributes in supplier selection. The main takeaway from that article, we hope, was that sourcing and the use of non-price attributes in awarding a supplier contract are not mutually exclusive. Quite the contrary.]
For each attribute, we will provide a definition and why it is important. We’ll discuss considerations and examples of its use in evaluating supplier bids.
1. Supplier Market Share (and relative market position):
Definition: Market share is the percentage of sales (counted in either revenue or units) that one supplier has in a given market. Market share is an important indication of a supplier’s success within its industry and explains how competitive a supplier is relative to other companies that offer similar goods/services.
Key considerations: Understanding a supplier’s relative position in the market can help sourcing teams understand what kind of supplier it is dealing with (regional player, global, mom and pop, specialist, best-of-breed, niche provider, etc.) and provide some context as to what that supplier’s key differentiators are likely to be.
Market share can be (but is not always) an indication of viability and financial strength. Suppliers with a large market share usually hold some type of competitive advantage in the current market that has enabled them to become dominant. Now, that advantage may or may not be relative or important to your requirements and interests. A supplier with a low market share can indicate many different things and should not immediately disqualify it from consideration (unless, of course, having a large market share is important) – as we noted in this article, targeted bets on some smaller suppliers can help enterprises find that next big (or key incremental) innovation. Low market share does indicate that other, larger and more successful competitors exist. At a minimum, understanding that a supplier is not dominant in its industry can provide context when making the award recommendation and avoid sourcing teams from thinking (and saying) that “Supplier X is THE global leader with the best pricing and value bar none” when it has a 2% share.
Reviewing supplier market share is also a good check to ensure that the bidding process includes an appropriate number of qualified suppliers. For example: Why do the bidders in this project have, in aggregate, less than 20% of the market? What larger suppliers weren’t included and why? There are perfectly acceptable answers to questions like these. “We didn’t know there were any other suppliers” and variations on that answer are not.
Perhaps more important than understanding the relative market position of a supplier is understanding market share trends. Is the supplier gaining share or losing it and at what rate? Understanding market share movements is a good way to identify shifts in the supply market and where value and innovation are being generated. Large drops in market share by an incumbent (or new bidder) should raise a red flag and generate some level of research.
There are dozens of different data services that provide market share information for different industries. In many cases, the reported market shares can appear to be somewhat questionable and what has been quantified, may provide at best, a relative view of the market. For example, market sizing and share analysis for a fragmented software industry populated by small companies can be a trivial pursuit, while industries that have fewer players with publicly-reported and/or government-reported sales can be well-quantified.
Market share figures are not available for every market. When this data is not available, look for proxies that indicate market presence like search results, customer lists, and analyst reports. I believe that it is more than fair to ask the supplier to provide its market share data – If you do, “consider the source” and/or request the source directly if it is a third-party.