Choosing and Evaluating Suppliers: Selection Criteria and Sourcing
Choosing a supplier is a structured decision based on criteria such as price, quality, reliability of delivery, capacity, flexibility, payment terms, location and ethical or environmental standards, rather than simply the lowest price.
Before you start
Make sure you're comfortable with these topics first:
Method
- Rank the criteria for the business in the case before evaluating any supplier. State the ranking explicitly, because the marks for judgement come from justifying it.
- Where a table of suppliers is given, do not treat every column as equally important. Identify which one is critical for this product and lead with it.
- Calculate the total cost of a supplier, not just the price. A cheaper unit price with a longer lead time forces higher stock holding, and a shorter credit period costs working capital.
- Consider capacity against the business's plans. A supplier that cannot scale becomes a constraint on growth even if it is excellent today.
- Weigh single against multiple sourcing by asking how damaging a stoppage would be. If a stoppage would lose a major contract, the insurance of a second supplier is usually worth its cost.
- Bring ethics and environment in as a commercial factor: whether the business's customers will pay for it, and what a supply chain scandal would cost in reputation.
Worked example
Ashcombe Ceramics needs a clay supplier. Supplier A: 3.00 pounds a kilo, 2 day lead time, 30 days credit, UK based. Supplier B: 2.30 pounds a kilo, 21 day lead time, 7 days credit, overseas. Ashcombe uses 1,000 kg a month and is bidding for a contract that would double its usage. Recommend a supplier.
- Compare the direct cost first: A costs 3,000 pounds a month, B costs 2,300 pounds, so B saves 700 pounds a month or 8,400 pounds a year on current usage.
- Now cost the lead time. With a 21 day lead time Ashcombe must order roughly three weeks of clay in advance and hold a buffer against delays, so it will hold far more stock with B, tying up cash and needing storage space.
- Cost the credit terms. A gives 30 days, B gives 7. With A, Ashcombe is likely to have used and sold the clay before paying for it; with B it pays almost immediately and funds the stock itself, which is a working capital cost on top of the storage.
- Bring in the contract. If usage doubles, the saving with B doubles to about 16,800 pounds a year, which is material. But a 21 day lead time makes it hard to respond if the new customer increases an order at short notice.
- Assess the risk that matters most: a new contract is where reliability is tested, and a missed delivery early in a relationship is likely to end it. That is the criterion that would do the most damage if it failed.
- Recommend with a structure rather than a single choice: use Supplier A for the volume needed to service the new contract, where reliability and responsiveness are critical, and Supplier B for baseline stock where the long lead time can be planned around. This captures most of the saving without exposing the contract.
- State the condition: if Ashcombe cannot fund the higher stock that B requires, the saving is not available at all and A is the only workable choice.
Practice questions
Try each question, then tap to reveal the answer.
Q1List five criteria a business uses to choose a supplier.Show answer
Answer: Any five of: price, quality and consistency, reliability of delivery, capacity, flexibility, credit terms, lead time and location, ethical and environmental standards.
Q2Define single sourcing and give one advantage.Show answer
Answer: Buying all of a particular input from one supplier. The advantage is that concentrating orders gives greater buying power, so better discounts and a closer working relationship.
Q3Explain one risk of sourcing from overseas.Show answer
Answer: Any one of: long lead times force higher stock levels and slow the response to demand changes; exchange rate movements change the cost after the order is placed; it is harder to inspect quality or working conditions; transport disruption or customs delays are outside the business's control.
Q4A supplier charges 4.80 pounds a unit for orders under 500 and 4.20 pounds for orders of 500 or more. A business needs 480 units. Should it order 500? Explain.Show answer
Answer: 480 at 4.80 costs 2,304 pounds; 500 at 4.20 costs 2,100 pounds. Ordering 20 more units costs 204 pounds less in total, so yes, provided the 20 extra units will eventually be used and not wasted.
Q5Why does supplier capacity matter to a growing business?Show answer
Answer: A supplier that cannot increase output becomes a limit on how fast the business can grow, and switching supplier under pressure is riskier and usually more expensive than choosing one with headroom at the outset.
Q6Explain how credit terms can matter more than price to a small business.Show answer
Answer: Price affects profit, but credit terms affect cash. A small business can be profitable and still fail if it must pay suppliers before its customers pay it, so longer credit can be worth more than a small discount.
Q7Give one reason a business might publicise its supplier standards.Show answer
Answer: Customers increasingly consider ethics and environmental impact when choosing between similar products, so verified standards can differentiate the business, support a price premium, and reduce the risk of reputational damage from a supply chain scandal.
Exam-style questions
Written in the style of a GCSE Business exam paper, with a full mark scheme.
Larkhill Foods is choosing between two flour suppliers. Northgate Mills: 0.62 pounds a kilo, 3 day lead time, 30 days credit, has supplied the industry for 40 years. Vale Grain: 0.54 pounds a kilo, 14 day lead time, 14 days credit, a new business with one mill. Larkhill uses 6,000 kg a month. (a) Calculate the annual saving from choosing Vale Grain. (b) Recommend which supplier Larkhill should use, justifying your answer.
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Evaluate whether a business should use a single supplier or several suppliers for a key material.
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See real GCSE Business past-paper questions, with official mark schemes →
Free printable worksheet
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