Avoid these Five Decision-Making Pitfalls in Supplier Selection

Because of the pace of the business world, most satisfactory decisions are never again revisited or scrutinized

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The ability to make good decisions is not much different than the ability to make free throws or putts. All are complex processes that benefit not only from experience and talent, but also from analysis. Trainers can identify common mistakes made by athletes, and break down the motion of a swimmer’s stroke or the mechanics of a jump shot. Similarly, researchers work out common mistakes that decision-makers typically make. It’s important to be aware of these common mistakes, or decision traps, because making a decision is constantly getting tougher.

As the world becomes a smaller place due to trade agreements and evolving IT technologies, the number of suppliers a company can select from is increasing dramatically. At the same time, competition in the market is constantly getting tougher, placing extra pressure on decision-makers to find the right suppliers. To make matters worse, business strategies become more complicated. The decision-makers have to consider many different requirements and factors when they try to find the supplier that can fit their strategies and business plan the best. The best supplier is no longer based on just a few clear metrics. Supplier selection is not only more important than ever before, but it is also more complicated than it ever.

While this article discusses potential problems in supplier selection, decision traps and the difficulties of managing the overall process, the concepts apply to many selection contexts. Choosing between suppliers is very similar to choosing between projects to undertake, candidates to hire or equipment to buy—the process and the pitfalls that await are similar. This is a good thing—to improve supplier selection, we can draw upon the knowledge built around many types of selection decisions.

If some of these issues sound familiar to you, then you are on your way to growth and better performance. If you did not think about your selection process as more than just an evaluation of potential options, then hopefully this article gives you some thoughts on how you can proactively improve your process. The objective is to start you thinking about selection as a significant and complex process, then alert you to some danger signs and pitfalls. Once the potential problems are recognized, you can move on to addressing the issues.

For many, selecting the right option remains a combination of analysis, art and fortune-telling. Picking and executing the correct analytical method is only one part of the effort. Many other activities are involved in getting to the point where all the necessary information is ready and right candidate can be picked. Managing the selection process is not only limited to executing the analysis. The entire process must receive attention, starting from gathering requirements and information, continuing on to the analysis, and ending with learning from mistakes and turning the experience into knowledge. Finding the correct information and making sure it is analyzed properly is critical, but it is still only one part of the overall effort to properly run the supplier selection effort.

The elusive nature of expert decision-making manifests itself in many ways. There are many decision-making traps that buyers can fall into. It is valuable for managers to be aware of these traps, in addition to recognizing the limitations and the symptoms in the process. The following traps are taken from a book about decision-making in general by Russo and Schoemaker (1989). Some of these traps are specifically appropriate in supplier selection. The title and the description of these five decision traps (in bold italics) are taken from the authors—we focus on the application.

1. Group Failure: Assuming that with many smart people involved, good choices will follow automatically, and therefore, failing to manage the group decision-making process.

The performance of the suppliers has an effect that is far-reaching in a company. Many different groups, from the high-level management that sets the goals and the strategies all the way to manufacturing, which has to work with what the suppliers give them, and have an interest and a set of requirements for the suppliers. To ensure the suppliers that can best satisfy these requirements are selected, the decision-makers have to work with all those involved. Most buyers in companies are experienced people who are familiar with what everyone else wants, but it is a mistake to assume cooperation will take place even if there’s not a process for it.

2. Overconfidence in Your Judgment: Failing to collect key factual information because you are too sure of your assumptions and opinions.

In supplier selection, this can appear in two ways: Buyers may assume they know what everyone in the company wants regarding the suppliers, and hence, base their evaluation criteria on these assumptions, or they may assume they know how to evaluate suppliers of a particular type, relying on bits of information that served them well previously.

In the end, the overconfidence in judgment takes place because of habit and a lack of any signs to change those habits. Instead, buyers should constantly be in communication with other groups in the company, such as manufacturing, marketing and higher management, and checking to see if any of their assumptions should be changed. Also, they should be checking the results of their previous decisions to see if the basic assumptions they make when establishing their criteria still holds true. After all, buyers are in a service position, with the task of finding suppliers who will satisfy the needs of others in the company. Getting used to and being too sure of their assumptions, especially in dynamic markets, is a significant problem.

3. Shortsighted Shortcuts: Relying inappropriately on rules of thumb, such as implicitly trusting the most readily available information or anchoring too much on convenient facts.

This may happen not so much because buyers naively trust the readily available information or the rules of thumb in making decisions, but because it is so hard to do otherwise. Information about potential suppliers is difficult to come by, and with all the factors that can come into deciding a good supplier, it is only natural to rely on shortcuts. Although it is difficult to capture the thought process of the decision-makers and impose a structured system on the evaluation, it should nevertheless be done to make sure important factors are not missed and good suppliers are not needlessly eliminated.

4. Shooting from the Hip: Believing you can keep straight in your head all the information you discovered, and therefore wing it rather than following a systematic procedure.

This is similar to the previous point, except it is applicable even in cases in which the rules of thumb do work well. The subject here is not so much the final decision algorithm (or how a decision is made), but more so the way the related information and factors are organized to provide value. Even if the heuristics used make sense and are effective, getting lost or confused among all the factors hamper the overall process. Besides, the development of a systematic approach to analysis does more than improve those decisions: It also forces employees to realize the flaws and inconsistencies in their ad-hoc approach, and teaches them how to think properly. It is said the best way to learn something is to try to teach it to someone. Developing a procedure for analysis is similar—it’s the best way to figure out how that analysis should be done.

5. Not Keeping Track: Assuming that experience makes its lessons available automatically, and therefore failing to keep systematic records to track the results of your decisions and failing to analyze these results in ways that reveal their key lessons.

This is one of the most common traps in decision-making in business—being unable to systematically learn from the results. In supplier selection, this point can be generalized to learning more than just from mistakes and significant outcomes—the key lessons. Because of the pace of the business world, most satisfactory decisions are never again revisited or scrutinized. Decisions, and the rationale behind them, are usually questioned only when a crisis happens. Supplier development, however, is a significant part of both supply chain management and supplier selection efforts, and this requires constant evaluation of the decision criteria and monitoring of the results.

Ultimately, we need to recognize that managing the process of selection is as important as the analytical methods used in selection. There’s more to be gained beyond making better selections: improving cooperation between interconnected parts in the organization, developing skills for growing the corporate knowledge base, learning how to use both failures and successes to learn about the process itself … the list goes on and on. Improving decision-making skills in one area inevitably leads to improving other areas as well. After all, issues outlined here are all fundamental elements. Being able to recognize these traps can make everyone smarter.

Very few companies pay attention to their selection processes until the issue is pressing—and often, success or failure is attributed to that specific decision, although it may be that the process itself is lacking. Paying attention to the issues outlined above is a good way to start recognizing that the key to success is starting much earlier than race day.

Russo, J.E., Schoemaker P.J.H., “Decision Traps: Ten Barriers to Brilliant Decision-Making and How to Overcome Them”, 1989, Doubleday, New York