This Chapter of the Manual is concerned with strategies and techniques for identifying potential suppliers and with supplier appraisal, and is intended for use at whatever stage in the procurement process the appraisal needs to be carried out.

This advice should be read in conjunction with CUP Guidance 46 on Quality Assurance.  CUP Guidance 60 on Supplier Appraisal has been withdrawn and advice on this area can be found in the OGC's Successful Delivery Toolkit, (external link verified June 2004) in particular what to do during the development of the procurement plan (click here) and what to do at the supplier selection stage (click here).  OGC has produced a booklet called "Supplier Financial Appraisal" which contains advice on how to conduct the financial appraisal of suppliers bidding for significant public sector contracts. OGC Guidance on the benefits of using smaller and medium sized firms is also available as part of the Successful Delivery Toolkit (click here).

If your requirements are for:

• strategic items normally procured through centres of expertise (see Section C.2.3 - Procurement Routes) get in touch with the designated Directorate
• goods or services covered by a Framework (see Section C.2.3 - Procurement Routes) follow the procedures for that Framework.

Good arrangements, skilfully applied, for identifying appropriate suppliers, are a vital tool for procurement staff. Moreover, the accountability of departments for the proper use of public funds and the need to exercise prudence in commercial relationships also requires that DTI deal only with companies in whose integrity we can place full confidence.

E.4.3 Sourcing Strategy

Each management unit should have in place a sourcing strategy or strategies appropriate to its procurement activities. Where regular procurement is undertaken this may include maintaining supplier lists (see above). In other cases arrangements may be made to identify and assess potential suppliers as and when a procurement requirement arises.

New sourcing needs can arise because:

• a demand arises for a product or service not previously purchased;
• there are too few known suppliers to ensure effective competition; or
• existing suppliers are not performing adequately.

Whatever the reasons for identifying new suppliers, your sourcing strategy should be designed to ensure that you:

• get accurate and up-to-date information about the market, and
• appraise the capability of potential suppliers to meet the Department’s requirements.

There are many sources of information both in paper (hardcopy), CD-ROM and online available from the Information Centre. Databases can be searched by trade name, company name, product or service and many other attributes. By using a combination of the sources listed below, the vast majority of companies in the UK and worldwide are accessible.

Here are some examples the available sources:

1. Hardcopy Sources:

• Yellow Pages
• Thompson Local Directory
• Kompass: several volumes of various information e.g. financial, products and services for several thousand companies.

2. CD-ROM Sources:

• Dun & Bradstreet Business Locator: Thousands of registered companies, partnerships and small-unregistered businesses. Ideal for trading names, addresses and telephone numbers.
• Onesource: two volumes covering over 350,000 UK firms, small and large. Financial information as well as addresses telephone numbers, CEOs etc.
• Dun & Bradstreet Who Owns Whom: around a million companies, 25,000 UK firms. List of subsidiaries and parents their relationship and location.

3. Online Sources:

• Companies House Direct: this is the official database listing all companies in England, Wales and Scotland. Details of accounts, directors and registered offices for the 1,300,000 companies registered in Britain.
• ICC Juniper: similar to the above but has added value, e.g. credit comparisons with others in the same industry and ICC own ratings.
• Experianlink and Equifax: databases recording all County Court Judgements and liquidations of companies and bankruptcy details of individuals throughout the UK. Also covers creditworthiness.

4. Other sources of information on suppliers include:

• Trade Journals and publishers' registers
• Professional Institutes
• Chambers of Commerce (Business Links)
• Regional Development Companies
• Trade Associations
• Trade Exhibitions
• Advertisements in the local, national or trade press

Besides actively sourcing, procurement staff often receive enquiries from firms seeking to do business with the DTI. All enquiries should be acknowledged. Inclusion on a list will depend on the demand for the product or service offered, the number of present suppliers and their past performance.

Select a method of researching new sources appropriate to the type and value of purchase involved. From this research aim to identify a manageable number of suppliers about whom further enquiries can be made.

These enquiries should result in a list of companies who will be invited to pre-qualify for a specific large procurement. 

A financial appraisal should be obtained of all new sources before award of contract (see Section E.4.15 - Financial Status). This step may be undertaken at the Sourcing stage or later in the procurement process depending on the sourcing method you are using. If you are undertaking an exercise to top up a supplier list it is probably preferable to carry out the financial appraisal at the outset. If seeking potential contractors for a major new project, it may be more cost-effective to undertake the financial appraisal when preparing the short-list for invitations to tender.

The general rules to follow are:

• choose appraisal arrangements appropriate to the likely value of the business;
• weed out applicants clearly not able to meet the DTI's requirements at the earliest possible stage;
• review responses to pre-qualification questionnaires or procedures carefully and seek additional information when necessary;
• seek accounting advice as necessary in interpreting financial results in accordance with the Purchasing Bulletin dated April 1994;
• for contracts above £10,000 in value obtain an independent business and financial assessment (see Section E.4.16 - Conducting a Financial Appraisal).

For business whose value is below the thresholds of the EU Directives pre-qualification applications should be sent to companies which express interest in participating in specific tender exercises. They may also be sent to companies who approach DTI looking for business, but only if there is a prospect of DTI needing a supplier of that type in the relatively near future.

For business whose value is above the thresholds of the EU Directives pre-select candidates using the restricted procedure (see Chapter E.8 - European Union Directives).

Also, for high profile contracts (i.e. that have Ministerial involvement or are to be the subject of a public announcement) or for contracts of long duration - more than a year - carry out a business appraisal of the bidder(s) before award.

Review completed pre-qualification applications, along with any accompanying corporate profiles and literature, to identify which companies may be eligible for either inclusion on an approved list or for consideration at the next stage. Ensure that all requested information has been provided.

While the decision on whether to accept an applicant may be to some extent subjective, use objective criteria as far as possible. Ensure the data you have is reliable. Wherever possible and economical to do so check the data.

Set the criteria against which to assess the ability of a company to perform satisfactorily, giving due weight to its present known position in the market place. You could accept a well-known company on the satisfactory provision of corporate literature. Applications from companies you do not know will require vetting but take into account the cost of a complex business investigation.

If you have insufficient information on which to base a judgment gather additional information in a systematic way. Focus on the need to assess whether a potential supplier is competent and likely to be able to meet your requirements in all key respects throughout the life of a contract.

The amount of data requested should be related to the annual value of the business and the size and standing of applicants. Start with basic information. Seek more complex information only as required, depending on the nature of the purchase and/or of the suppliers in the market. A limited amount of information may be sufficient when buying low-value or proprietary products, or products independently certified as meeting national or international standards, or when the available suppliers are long established in the particular market. Considerably more information may be needed when buying high value, or high-risk products or services, or when buying from suppliers that are new to either you or the market.

Site visits can be used both to look at the physical side of a business and to assess the quality of management and other personnel face-to-face.

Always record the information gathered from the appraisal itself and subsequently on a chosen supplier's performance.  This can assist you:

• in any dispute about a contract; and
• inform your discussions with suppliers on improving their competitiveness (this is an important part of good purchasing practice: and if you are going to tell a firm about its weaknesses, you must be able to support your points with pertinent facts).

The supplier's previous experience is important. A request for "supplier references" from existing or previous customers, which you can follow up to assess previous performance is extremely useful. It can be an advantage if one of the references supplied is another government department, but do not downgrade a potential supplier simply because the firm has not previously done business with government. Achieving value for money involves tapping the widest possible supplier base.

While past performance is important, it must be put in context. Your main concern is the firm's future performance in meeting your requirements.

To identify companies likely to provide, at competitive prices, the quality and service demanded by the DTI, assessment criteria are needed which will satisfy you that, for the procurement in question, each firm is likely to meet quality, delivery, and service requirements, has the physical and human resources to complete the work and is financially stable.

Select criteria appropriate to the particular procurement and an appraisal process aimed at examining each firm's business resources>  Assess the results of that examination and selects a limited number of companies for inclusion on an approved list or tender short list.

The remaining parts of this Section of the Manual provide advice on the ways to probe each of the main aspects of a firm’s business and guidance on financial appraisal.

Checks may be needed on:

• the firm's management structure
• the adequacy of the firm's management resources in key areas such as finance, purchasing, design production, quality control (a particularly important element), distribution, accounting etc. (in a small firm the management resources may appear "thin" but this does not mean that the small firm's management is not capable, as small management team will be used to working together, communications will be good everyone will roll up their sleeves to solve problems)
• whether the firm's approach to the recruitment, training and development of managers and supervisors provides the necessary expertise and experience
• whether the firm's approach to the recruitment, training and development of its workforce provides the necessary skills (the firm's approach to recruitment might be particularly important in service contracts)
• staff turnover - a possible indicator of morale and experience
• the firm’s industrial relations record.

It is important that the supplier has the capacity to handle your order alongside other orders, existing or prospective. You therefore need to check:

• the present level of capacity utilisation
• the state of the future order book (be wary if it is already full or a long way short of capacity as even with your business it may be inadequate for the firm to cover their overheads, debt, etc.)
• the impact of your business on the firm's resources - e.g., how the firm would meet a requirement for increased capacity e.g. by more reliance on sub-contractors, shift work, or increasing the workforce (local/national skill shortages can then be an issue)
• the firm's existing customers - will your business be given sufficient attention if the supplier's orders are dominated by one or two major or long-standing customers - be equally wary of a situation where a supplier might be (or become) over-reliant on your or any other customer’s business.

The technical capability of a company is important in relation to whether the products supplied will be satisfactory.

The checks here are:

• responsiveness to your enquiry: whether the supplier understands your requirements
• experience, or is the firm new to the product/service area?
• whether the firm produces to national, European or international standards; and whether its products are independently certified as conforming to the relevant standards
• quality management: in particular, whether the firm has a system which meets a recognised standard (ISO 9000 or equivalent)
• the firm’s approach production planning
• the condition of plant, machinery and other equipment and of premises
• reliance on and the reliability of sub-contractors
• the reliability of the firm's sources of supply of raw materials, parts, components etc. and strategies for using alternative sources.

It is important to satisfy yourself that a company can meet delivery requirements. Checks here are:

• the firm's transport and distribution arrangements
• adequacy of packaging
• reliability of delivery - will it be to the correct address with the right items, in the right quantities at the right time?
• procedures for and accuracy of invoicing
• the firm’s methods and time scales for responding to faults/queries
• availability of after-sales support
• availability of supplier references and of records of service levels to existing customers.

Financial appraisal can reduce, though not eliminate, the risk of placing business with a company whose financial viability is unknown. It provides information for a more considered decision when sourcing suppliers or at the tender evaluation stage prior to contract award or ordering . On contract durations of more than one year it may be desirable to periodically re-check the financial viability of the contractor (particularly for small enterprises) at regular intervals.

The checks that normally need to be made are:

• the firm's assessed turnover
• the firm’s profitability and the relationship between gross and net profits
• the value of capital assets and return on capital employed
• the scale of borrowings, and ratio of debt to assets
• whether the firm has a financial backer or guarantor of some sort
• the possibility of takeover or merger affecting ability to supply
• whether the firm is "tied" to a small number of major customers, so that if one or two withdrew their business it might cause the firm financial difficulties.

You may need to gather additional information from the firm's accounts for a number of previous years or other sources. You may decide also to seek bankers or other credit references. If in doubt seek expert advice from the accountants in the Department's Finance and Accountancy Services Unit (FASU) in FRM3d.

For contracts above £10,000 in value use the procedure below or procure a credit report from a firm such as Dun & Bradstreet.

The procedures set out below are relatively easy and cheap to employ via arrangements with Infocheck Ltd. and FASU. The check consists of comparing information from a printed report with the estimated value of the requirement or having the firm's accounts reviewed by a qualified accountant.

Use the overall value for a one-off contract or the annual value for on-going orders as a guide to selecting which of the the following procedures should be applied to a prospective supplier.  Exceptions might be made for suppliers known to the purchasers or for large national or multi-national corporations:

• One-off contracts or annual orders up to a value of £10,000
  No check is required unless the purchase is critical, novel or contentious
• One-off contracts or annual orders between £10,000 and £95,000
  Seek a full credit report. If the report proves negative either reject company and do not award a contract or refer the report to a qualified accountant for an opinion
• One-off contracts or annual orders exceeding £95,000
  A qualified accountant should report on a company's published accounts (or equivalent).

Companies responding to a contract notice in the OJEU may be vetted providing an accountant reviews the companies' accounts prior to contract award.

The decision to check a supplier is a local one. Companies that fail the test should be recorded for future reference.

The figure below provides a flow chart for the procedure:

Figure E.4-1: Checking Financial Status 

Access to credit reports is currently via the Information Centre in 1 Victoria Street. In the first instance, provide the full details of the company to be checked and staff will search on your behalf and provide the required report.

The report provides overview details of the company and its accounts along with a credit profile. Check when the latest accounts were filed and the value of contracts which the company has sufficient financial stability to undertake, and

• if the date of the latest accounts is more than 12 months prior to the date of enquiry the report should be checked by a qualified accountant
• if the value of your contract exceeds the value of the contracts that the company appears to have sufficient financial stability to undertake either do not award a contract or refer the report to a qualified accountant.

It is recognised that other purchasers may also enquire about the same company and the aggregate business may far exceed the figure in the credit check report. However, the likelihood of this happening is small and the risk acceptable.

Supply markets should not be treated as a given but regarded as something to be shaped through effective supply management. Supplier development is a planned process ensuring suppliers produce the goods, or provide the service, to the required quality standard, in the quantities and to the delivery schedules defined, by providing technical assistance, advice and commercial help through procurement planning.

An effective supplier development programme monitors and evaluates the performance of those awarded contracts or given orders. This evaluation compares suppliers, encouraging the best to improve further and negotiating with under-performers to bring them up to standard or weed them from the supplier lists. This process is known as vendor rating and it is good practice to share the results to encourage and help suppliers improve performance and competitiveness.

Vendor rating techniques award "marks" for a supplier's actual performance on a contract against a list of performance criteria- for example, timeliness of delivery, quality, responsiveness to requests for servicing, accuracy of invoices etc. - the totalled supplier's "scores" give a broad indicator of overall performance. Aspects of performance critical to the purchaser can be weighted to stress their importance.

Vendor rating is therefore a form of audit and has a number of uses as a management tool:

1. to identify suppliers who should or should not be considered for future business;
2. to assist in the evaluation of a supplier's future bid; and
3. to identify specific areas of weakness in a supplier's performance, and assist the supplier to improve.

As with supplier appraisal, vendor rating should be a team activity, seeking input from end-users. Suppliers should be informed when vendor rating is being used and of the criteria that will be applied.