Supplier evaluation & selection

PURCHASING & SUPPLY CHAIN MANAGEMENT, 4ePURCHASING & SUPPLY CHAIN MANAGEMENT, 4e
CENGAGE LEARNINGCENGAGE LEARNING
Monczka – Handfield – Giunipero – PattersonMonczka – Handfield – Giunipero – Patterson
Presentation onPresentation on
Supplier Evaluation and SelectionSupplier Evaluation and Selection
By Pradeep OwalekarBy Pradeep Owalekar
Based on the cited BookBased on the cited Book

Coverage of Topic
 Supplier evaluation and selectionSupplier evaluation and selection
processprocess
 Key supplier evaluation criteriaKey supplier evaluation criteria
 Developing a supplier evaluation andDeveloping a supplier evaluation and
selection surveyselection survey
 Critical supplier selection issuesCritical supplier selection issues
 Reducing supplier evaluation andReducing supplier evaluation and
selection cycle timeselection cycle time
22

Evaluation and Selection Process
 No “one best way”No “one best way”
 Overall objective is to reduce sourcingOverall objective is to reduce sourcing
risk and maximize value to the buyerrisk and maximize value to the buyer
 Need to select suppliers for the long-Need to select suppliers for the long-
termterm
33

Supplier Selection and Evaluation
44

Scenarios requiring Supplier Evaluation and Selection
Decisions
 During new product developmentDuring new product development
 Due to poor existing supplierDue to poor existing supplier
performanceperformance
 At the end of an existing contractAt the end of an existing contract
 Buying new equipmentBuying new equipment
 Expanding into new markets or productExpanding into new markets or product
lineslines
 Receiving internal user requisitionsReceiving internal user requisitions
55

Scenarios requiring Supplier Evaluation and Selection
Decisions
 Performing market testsPerforming market tests
 Facing countertrade requirementsFacing countertrade requirements
 During outsourcing analysisDuring outsourcing analysis
 Consolidating volumesConsolidating volumes
 Conducting a reverse auctionConducting a reverse auction
 When current suppliers have insufficientWhen current suppliers have insufficient
capacitycapacity
 Reducing supply base sizeReducing supply base size
Pradeep B. OwalekarPradeep B. Owalekar
66

Identify Key Sourcing Requirements
 May be determined by internal andMay be determined by internal and
external customersexternal customers
 Supplier qualitySupplier quality
 CostCost
 Delivery performanceDelivery performance
 OtherOther
 Vary widely from item to itemVary widely from item to item
77

Determine Sourcing Strategy
 Single vs. multiple sourcingSingle vs. multiple sourcing
 Short-term vs. long-term contractsShort-term vs. long-term contracts
 Design support vs. operational supportDesign support vs. operational support
 Full-service vs. non-full-serviceFull-service vs. non-full-service
supplierssuppliers
 Domestic vs. foreign-based suppliersDomestic vs. foreign-based suppliers
 Collaboration vs. arm’s lengthCollaboration vs. arm’s length
relationshiprelationship
88

Identify Potential Sources
 How well existing suppliers can satisfyHow well existing suppliers can satisfy
cost, quality, and/or other performancecost, quality, and/or other performance
objectivesobjectives
 Strategic importance of purchaseStrategic importance of purchase
requirementrequirement
 Technical complexity of purchaseTechnical complexity of purchase
requirementrequirement
99

Information Search Requirements
Purchasing & Supply Chain Management, 4ePurchasing & Supply Chain Management, 4e
1010
High Capability ofHigh Capability of
SuppliersSuppliers
Low Capability ofLow Capability of
SuppliersSuppliers
High StrategicHigh Strategic
Importance toImportance to
BuyerBuyer
Minor to Moderate
Information
Search
Major Information
Search
Low StrategicLow Strategic
Importance toImportance to
BuyerBuyer
Minor Information
Search
Minor to Moderate
Information
Search

Sources of Information
 Current suppliersCurrent suppliers
 Preferred suppliersPreferred suppliers
 SalesSales
representativesrepresentatives
 InformationInformation
databasesdatabases
 ExperienceExperience
 Trade journalsTrade journals
 Trade directoriesTrade directories
 Trade showsTrade shows
 Second-party orSecond-party or
indirect informationindirect information
 Internal sourcesInternal sources
 Internet searchesInternet searches
1111

Sourcing Alternatives
 Manufacturer vs. distributorManufacturer vs. distributor
 Vendor-managed inventoryVendor-managed inventory
 Integrated supplyIntegrated supply
 Local, national, or international suppliersLocal, national, or international suppliers
 Large vs. small suppliersLarge vs. small suppliers
 CapabilityCapability
 Multiple vs. single sourcingMultiple vs. single sourcing
1212

Method of Evaluation and Selection
 Evaluation from supplier-providedEvaluation from supplier-provided
informationinformation
 Supplier visitsSupplier visits
 Use of preferred suppliersUse of preferred suppliers
 External or third-party informationExternal or third-party information
1313

Key Suppliers Evaluation Criteria
 Price, quality, and deliveryPrice, quality, and delivery
 Management capabilityManagement capability
 Employees capabilitiesEmployees capabilities
 Cost structureCost structure
 Total quality performance, systems,Total quality performance, systems,
and philosophyand philosophy
 Process and technological capabilityProcess and technological capability
1414

Key Suppliers Evaluation Criteria
 Environmental regulation complianceEnvironmental regulation compliance
 Financial stabilityFinancial stability
 Production scheduling and controlProduction scheduling and control
systemssystems
 E-commerce capabilityE-commerce capability
 Supplier’s sourcing strategies, policies,Supplier’s sourcing strategies, policies,
and techniquesand techniques
 Longer-term relationship potentialLonger-term relationship potential
1515

Management Capabilities
 Does management practice long-rangeDoes management practice long-range
planning?planning?
 Has management committed to totalHas management committed to total
quality management and continuousquality management and continuous
improvement?improvement?
 How high is management turnover?How high is management turnover?
 What are the professional andWhat are the professional and
educational backgrounds of keyeducational backgrounds of key
managers?managers?
1616

 What is the organization’s vision?What is the organization’s vision?
 Is the company customer focused?Is the company customer focused?
 What is the history of labor-What is the history of labor-
management relations?management relations?
 Is the organization making necessaryIs the organization making necessary
capital investments?capital investments?
1717

 Is the organization prepared to faceIs the organization prepared to face
future competitive challenges?future competitive challenges?
 Does management fully understand theDoes management fully understand the
importance of strategic sourcing?importance of strategic sourcing?
1818

Employee Capabilities
 Degree of commitment to quality andDegree of commitment to quality and
continuous improvementcontinuous improvement
 Overall skills and abilitiesOverall skills and abilities
 Employee-management relationsEmployee-management relations
 Worker flexibilityWorker flexibility
 Workforce turnoverWorkforce turnover
 Willingness to contribute to improvedWillingness to contribute to improved
operationsoperations
1919

Total Cost Structure
 Direct labor costsDirect labor costs
 Indirect labor costsIndirect labor costs
 Material costsMaterial costs
 Manufacturing or process operatingManufacturing or process operating
costscosts
 General overhead costsGeneral overhead costs
2020

Challenges of Total Cost Analysis
 Supplier may not understand its trueSupplier may not understand its true
costscosts
 Unsophisticated cost accounting systemUnsophisticated cost accounting system
 Cost data is considered proprietaryCost data is considered proprietary
 Buyer’s knowledge may undermineBuyer’s knowledge may undermine
supplier’s pricing strategysupplier’s pricing strategy
 Supplier is concerned about potentialSupplier is concerned about potential
misuse of its cost datamisuse of its cost data
2121

Total Quality Performance
 Management commitmentManagement commitment
 Use of SPC techniquesUse of SPC techniques
 Level of defectsLevel of defects
 Safety, training, and maintenanceSafety, training, and maintenance
 Use of ISO 9000 criteriaUse of ISO 9000 criteria
2222

Process and Technological Capability
 Level of technology, design capability,Level of technology, design capability,
methods used, and equipmentmethods used, and equipment
 Current vs. future capabilitiesCurrent vs. future capabilities
 Resources committed to R&DResources committed to R&D
2323

Environmental Compliance
 Disclosure of environmental infractionsDisclosure of environmental infractions
 Hazardous and toxic waste generationHazardous and toxic waste generation
and managementand management
 Recycling managementRecycling management
 ISO 14000 certificationISO 14000 certification
 Control of ozone-depleting substancesControl of ozone-depleting substances
2424

Financial Stability
 Often used as a screening process inOften used as a screening process in
the initial selection phasethe initial selection phase
 Risks of a financially weak supplierRisks of a financially weak supplier
 Supplier will go out of businessSupplier will go out of business
 Insufficient resources to invest inInsufficient resources to invest in
improved plant and equipmentimproved plant and equipment
 Supplier may become too dependent onSupplier may become too dependent on
buyerbuyer
 May be an indicator of other problemsMay be an indicator of other problems
2525

Production Scheduling and Control
 Does the supplier use MRP?Does the supplier use MRP?
 Does the supplier track material andDoes the supplier track material and
production cycle times?production cycle times?
 Can the supplier support the buyer’sCan the supplier support the buyer’s
JIT initiatives?JIT initiatives?
 What are the supplier’s real lead times?What are the supplier’s real lead times?
 What is the supplier’s on-time deliveryWhat is the supplier’s on-time delivery
performance?performance?
2626

E-Commerce Capability
 Web-based B2B vs. EDI systemsWeb-based B2B vs. EDI systems
 Does the supplier have CAD capability?Does the supplier have CAD capability?
 Does the supplier use bar coding?Does the supplier use bar coding?
 Does the supplier use RFID?Does the supplier use RFID?
 Can the supplier provide ASNs?Can the supplier provide ASNs?
 Can the supplier accept EFT transfers?Can the supplier accept EFT transfers?
 Does the supplier utilize e-mail?Does the supplier utilize e-mail?
2727

Supplier’s Supply Base Strategies
 Tier 1 vs. Tier 2 vs. Tier 3 suppliersTier 1 vs. Tier 2 vs. Tier 3 suppliers
 Sharing of informationSharing of information
 Level of supplier developmentLevel of supplier development
activities in the supplier’s own supplyactivities in the supplier’s own supply
basebase
2828

Potential for Long-Term Relationships
 Is the supplier willing to participate?Is the supplier willing to participate?
 Can the supplier commit necessaryCan the supplier commit necessary
resources?resources?
 When in the design phase can theWhen in the design phase can the
supplier participate?supplier participate?
 How is the supplier unique?How is the supplier unique?
 Can the supplier participate in jointCan the supplier participate in joint
problem solving and improvement?problem solving and improvement?
2929

 Will there be free and open informationWill there be free and open information
sharing?sharing?
 Will the supplier engage in futureWill the supplier engage in future
planning?planning?
 Can the supplier maintain the buyer’sCan the supplier maintain the buyer’s
need for confidentiality?need for confidentiality?
 What is the general level of comfortWhat is the general level of comfort
between the parties?between the parties?
3030

 How well does the supplier understandHow well does the supplier understand
the buyer’s industry and business?the buyer’s industry and business?
 Will the supplier share cost data?Will the supplier share cost data?
 Is the supplier willing to share innovationIs the supplier willing to share innovation
data early?data early?
 Can the supplier commit to dedicatedCan the supplier commit to dedicated
capacity?capacity?
 What is the supplier’s commitment level?What is the supplier’s commitment level?
3131

Evaluation and Selection Surveys
 Identify supplier evaluation categoriesIdentify supplier evaluation categories
 Assign a weight to each categoryAssign a weight to each category
 Identify and weight subcategoriesIdentify and weight subcategories
 Define a scoring system for categoriesDefine a scoring system for categories
and subcategoriesand subcategories
 Evaluate supplier directlyEvaluate supplier directly
 Review results and make decisionReview results and make decision
3232

Initial Supplier Evaluation
Category Weight Subweight
Score (1
- 5 scale)
Weighted
Score
Subtotal
Quality Systems 20
Process control systems 5 4 4.0
Total quality commitment 8 4 6.4
PPM defect performance 7 5 7.0 17.4
Management Capability 10
Management/labor relations 5 4 4.0
Management capability 5 4 4.0 8.0
Financial Condition 10
Debt structure 5 3 3.0
Turnover ratios 5 4 4.0 7.0
Cost Structure 15
Costs relative to industry 5 5 5.0
Understanding of costs 5 4 4.0
Cost control/reduction efforts 5 5 5.0 14.0
Delivery Performance 15
Performance to promise 5 3 3.0
Lead-time requirements 5 3 3.0
Responsiveness 5 3 3.0 9.0
Technical/Process Capability 15
Product innovation 5 4 4.0
Process innovation 5 5 5.0
research and development 5 5 5.0 14.0
Information Systems Capability 5
EDI capability 3 5 3.0
CAD/CAM 2 0 0.0 3.0
General 10
Support of minority suppliers 2 3 1.2
Environmental compliance 3 5 3.0
Supply base management 5 4 4.0 8.2
Total Score 80.6

Critical Supplier Selection Issues
 Size relationshipSize relationship
 Use of international suppliersUse of international suppliers
 Competitors as suppliersCompetitors as suppliers
 Countertrade requirementsCountertrade requirements
 Social objectivesSocial objectives
3434

Reducing Selection Cycle Time
 Map the existing processMap the existing process
 Integrate with internal customersIntegrate with internal customers
 Data warehouse with supplierData warehouse with supplier
informationinformation
 Third-party supportThird-party support
3535

Reducing Selection Cycle Time
 New organization design featuresNew organization design features
 Preferred supplier listPreferred supplier list
 Electronic toolsElectronic tools
 Predefined contract language andPredefined contract language and
shorter contractsshorter contracts
3636

A Good Supplier Does the Following:
 Builds quality into the product, aimingBuilds quality into the product, aiming
for zero defectsfor zero defects
 Makes delivery performance a priorityMakes delivery performance a priority
 Demonstrates responsiveness to aDemonstrates responsiveness to a
buyer’s needsbuyer’s needs
 Works with the buyer to reduce leadWorks with the buyer to reduce lead
timestimes
3737

A Good Supplier Does the Following:
 Provides the buyer with capability andProvides the buyer with capability and
workload informationworkload information
 Creates the futureCreates the future
 Reinvests part of its profits into R&DReinvests part of its profits into R&D
with a long-term viewwith a long-term view
 Meets stringent financial stabilityMeets stringent financial stability
criteria when evaluating newcriteria when evaluating new
customerscustomers
3838

Supplier evaluation & selection

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