The flaws of point-based sourcing methods

Back in 2001, when I was studying towards my Master of Science degree in Purchasing & Logistics Management, the topic of my dissertation was on how to create a supplier evaluation method in an objective manner. As I have always had a preference for practical application of theory, I also got to bring my thesis topic into practice at a multinational company.

The outcome was a point-based method by which the different aspects that determine performance received different weights and for which suppliers could earn points.

Back then I felt very confident that this was what was needed to come to a fair supplier evaluation, not only for measuring performance, but also to come to fair sourcing decisions in supplier selection processes. As this thesis was based on leading supply chain theory it is not surprising that many procurement organisations saw, and still see, this as the best approach when it comes to supplier evaluation and selection.

For the remainder of this article I will further direct the attention to the topic of supplier selection processes, where over time a clearly better scoring methodology has been developed, namely a money-based method.

There are already quite a number of mature organisations, mostly industry leaders, who work with monetary evaluations in their supplier selection processes and the vast majority of these organisations do this as a result of their willingness to optimize their sourcing decisions through the usage of rule-based negotiations. The rule-based negotiations apply Game Theory fundamentals, for which adopting a monetary evaluation method is a prerequisite. 

Why do organisations use point-based methods?

Interestingly enough, a point-based method has essentially always been mimicking a monetary method, as organisations, through points, try to estimate what certain cost attributes are worth to them. So then, why not straight away apply a monetary method?

We can first of all identify a few non-content related reasons for this, which for the most part do not hold up to scrutiny:

1. Lack of awareness: Unless attention gets directed to something clearly better, people do not become aware of it. Note that you cannot hide behind this reason after reading this article… ;-)

2. Habit – resistance to change (“We’ve always done it like this...”)

3. Stakeholders preferences: Different stakeholders get to increase their impact on (their preferences in) sourcing decisions by “negotiating” a bigger weight impact of the cost attribute closest to their function (e.g. Quality, Development, Logistics etc.). This is generally harder to do under a monetary method.

4. Lack of change agents: Change requires a couple of people with impact within an organisation to be able to make a compelling case for the change proposal.

Then in addition to the above, there are a few more content-related issues that might prevent implementation of a monetary method, namely:

1. Relatability: Scoring points can be perceived as more relatable. Within a given scoring framework up to e.g. maximum 10 or 100 points for a cost attribute, stakeholders might find it easy to relate to what is good and what is not. Whereas monetary values are varying per project and therefore less telling at first sight.

2. Easy alignment: It takes less cross-functional alignment, as all stakeholders give their point inputs for the projects without necessarily needing to align with other stakeholders, as the point structure is a given.

3. Speed: Scoring points can be done quicker as most point-based methods work with categorization (etc. excellent, good, average, poor) of the elements, each resulting in set points, which means this often does not require extensive underpinning of the scoring with data, which would be required for monetary scoring. 

The flaws of point-based methods

So, there might be some valid rationales for organisations to stay loyal to their point-based methods. However, in my view and experience, these do not outweigh the flaws of a point-based method, of which the biggest are:

1. Subjectivity: Despite the intentions of the method to be as objective as possible, by mimicking a monetary supplier comparison it will always be more subjective.

2. Lack of flexibility: A point-based method is very static in a sense that once stakeholders have determined the different attribute and their weight, these do not change, despite in many cases quite a few of those require a more dynamic nature to cater for different scenarios in terms of e.g. the piece of the pie a supplier might win.

3. Lack of incentives: Negotiations revolve around incentivizing the other party to make concessions on key elements of their proposition. As point-based methods generally have fixed categorizations, there is often limited upside to significantly improve a proposition, as the relative gain (in terms of points) will be limited and often does not justify the investment taken.

4. Price is not a variable: In line with point 3. it should then follow that by giving static points to suppliers for their offered prices they are poorly incentivized to improve this, as it is unclear to them what concessions they would need to make in order to win the business.

Illustrative example of a point-based method failing

To illustrate the flaws listed above, let us have a look at an example sourcing decision where at first glance the point-based scoring method seems totally fine, but upon a closer look seems exposed to the issues highlighted above. The situation is depicted in Figure 1 below.

Note that this scoring method was used in practice to make different sourcing decisions, while the example I am using here is a mock up scenario. The method of scoring points can be derived from the text boxes, which show that for each criteria the relevance of that criteria is multiplied with the supplier’s rating for that criteria. Also, points are totaled at the top in the blue boxes.

In this example there are two quite comparable suppliers that according to the buying organisation for this project only deviate on four selection criteria, highlighted in green and yellow. There are only four discriminator criteria, which give the highest points, on which suppliers differ in scoring on two of those, being Quality and Cost. 

Based on the points scored supplier A would win this project.

Now, note that:

Even if supplier B would have offered the project for free(!), he would not have won

This is because he cannot get more than 27 points on price.

Figure 1: Point-based supplier selection example

Monetary supplier comparison caters for better outcomes

Based on the above, I would argue that if an organisation is truly looking to bring procurement to the next level of maturity and excellence and strives for better sourcing decisions, they cannot get there without adopting a monetary supplier comparison for their sourcing decisions.

Main reasons for this being that it leads to fairer and more transparent Total Cost/Value of Ownership based decisions, while additionally it enables organisations to utilize rule-based sourcing processes, built on game theory fundamentals, which clearly outperform sourcing processes based on bilateral negotiations in competitive supply bases.

TWS Partners has been at the foundation of establishing a money-based Bonus/Penalty methodology and, successfully, rolling this out across different industry leaders.

This is also how my procurement eyes were opened back in 2013, when I was still working in a global commodity management role.

If you want to know more about the monetary supplier comparison method and rule-based negotiations and are keen to have your procurement eyes opened, then please reach out to me. Additionally, note that an in-depth explanation of this method is also part of the 2-day ‘Game Theory in Negotiations’ workshop TWS Partners runs in partnership with Nevi in the Netherlands.

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