Supplier Selection

& Evaluation
 • Large number of items
• Large dollar volume
involved
Need for • Need for an audit trail
Robust • Severe consequences of
poor performance
Supply
• Potential contribution
Processes to effective
organizational
operations inherent in
the function
Essential Steps in the
Procurement Process
• Recognition of need
• Description of need
• Identification and analysis of
possible sources of supply
• Supplier selection and
determination of terms
• Preparation and placement of
the purchase order
• Follow-up and/or expedite the
order
• Receipt and inspection of goods
• Invoice clearing and payment
• Maintenance of records and
relationships
Supplier Selection Decisions

• Should we use a single source, dual sources, or more than two?

• Should we buy from a manufacturer or a distributor?
• Where should the supplier be located?
• Relative to our organization, should the supplier be small, medium, or large?
• If no supplier can be found, should we use supplier development?
 • Exclusivity: The supplier may be
only available source
Arguments • patent protection, exclusive
distributorship
• Outstanding quality or service →
in Favor of value
• Order too small to split
Single • Opportunities for discounts or
lower freight costs
Sourcing • More important customer → more
attention from supplier
• Cost of duplication prohibitive
• Easier to schedule deliveries
• JIT, stockless buying or EDI
arrangements
• Focus on one, not many suppliers
 • Traditional practice
• Keep suppliers “on their toes”
• Assurance of supply
• Capable of dealing with multiple
Arguments •
suppliers efficiently
Avoid supplier dependence on one
in Favor of •
customer
Obtain a greater degree of volume
Multiple •
flexibility
Strategic considerations; e.g., military
preparedness
Sourcing • Government regulations
• Limited supplier capacity
• Opportunity to test a new supplier
• Supply market volatility
Risk, Resilience & Rebalancing in Global Value Chains
 Supplier Selection
All Potential Suppliers
Supplier Identification
Supplier
Supplier 2
1

Supplier Evaluation

Approved List

Supplier(s) of Choice
Performance Monitoring
The Supplier Selection Process
Universe of Potential Suppliers

Shorten Long List of Suppliers

100%

42% 58% Collect Information via RFI

52% 25% 23% Make Systematic Comparison

100% Visit & Audit Selected Suppliers

48% 29% 23% Establish Approved List

 Supplier Partnerships
Performance Metrics
You can’t improve what you aren’t measuring
• Quality, cost, delivery, flexibility, environment,
technology, reputation (& other) measures
• Metrics should be
– 1) understandable,
– 2) easy to measure, &
– 3) focused on customers/results
• A multi-criteria approach
• Total cost of ownership (TCO), is made up of all costs
associated w/acquisition, use, & maintenance of a
good or service
Supplier Evaluation Methodology
The Weighted-Criteria Evaluation System for Certification

1. Select the key dimensions

2. Collect performance data.
3. Assign relative weights to each dimension.
4. Assign relative performance (1-10; 1-100)
5. Multiply performance by weight & sum, for overall score.
6. Classify vendors based on their overall score:
Unacceptable, Conditional, Certified, & Preferred
7. Audit & perform ongoing certification
 Our Company’s
Best Supplier
Award

Quality
Delivery
Lead Time
Financial Stability

Price

Responsiveness
Information Sharing

Technology
R&D
 Supplier Performance Our Company’s
Best Supplier
Metrics Award

Quality
Delivery
Lead Time
Financial Stability Parts Per Million Failures
Invoices with problems
Price
Lots with defects
Responsiveness Number of customer Complaints
Number of Warranty Claims
Information Sharing

Technology
R&D
 Supplier Performance Our Company’s
Best Supplier
Metrics Award

Quality
Delivery
Lead Time
Financial Stability “The Perfect Order”
Correct Quantity
Price Correct Product
Correct Time
Responsiveness Correct Place
Information Sharing Correct Condition
Correct Documentation
Technology
OTD Percent
R&D Delivery within Ship Window
 Supplier Performance Our Company’s
Best Supplier
Metrics Award

Quality
Delivery
Lead Time
Financial Stability
Days from Order to Receipt
Price Measure variability as well as duration
Status Updates & Alerts
Responsiveness
Information Sharing

Technology
R&D
 Supplier Performance Our Company’s
Best Supplier
Metrics Award

Quality
Delivery
Lead Time
Financial Stability Profitability
Return on Equity
Price Debt to Equity Ratio
Days Sales Outstanding
Responsiveness
Information Sharing

Technology
R&D
 Supplier Performance Our Company’s
Best Supplier
Metrics Award

Quality
Delivery
Lead Time
Financial Stability Percent of Low Bid
Percent of Last Year
Price Percent of Industry Average
Commodity Index
Responsiveness
Information Sharing

Technology
R&D
 Supplier Performance Our Company’s
Best Supplier
Metrics Award

Quality
Delivery
Lead Time
Financial Stability To Solving Problems
To Customer Service Requests
Price To Correcting Failures
Corrective Action Requests Issued
Responsiveness vs. Response Time
Information Sharing

Technology
R&D
 Supplier Performance Our Company’s
Best Supplier
Metrics Award

Quality
Delivery
Lead Time
Financial Stability Portal Integration
EDI
Price Web Services
Collaborative Planning,
Responsiveness Forecasting, and Replenishment
Information Sharing Vendor Managed Inventory
Supply Chain Event Mgt.
Technology
R&D
 Supplier Performance Our Company’s
Best Supplier
Metrics Award

Quality
Delivery
Lead Time
Financial Stability Time to Market
New Differentiating Features
Price Vs.
Lowest Cost Generic Product
Responsiveness Technology
Information Sharing

Technology
R&D
 Supplier Performance Our Company’s
Best Supplier
Metrics Award

Quality
Delivery
Lead Time
Financial Stability R & D as Percent of
Revenue
Price
New Product Development &
Responsiveness Design Capabilities
Information Sharing
Product Development Team
Technology Rating
R&D

Article: Seven Steps to Measure Supplier Performance

 Supplier Status Based Upon
Supplier Performance Scores
Status Supplier Actions
Performance
Score
Preferred 3.0 – 4.0 Supplier is candidate for a longer term
agreement, increased volume, and increased
new product development opportunities.
Certified 2.0 – 2.9 Supplier meets intended purpose or
performance. Supplier is eligible for supplier
development activities aimed at improving
performance into the preferred status.
Conditional 1.0 – 1.9 Supplier needs development work to improve
performance, but may be dropped if
performance continues to lag.
Unacceptable 0 – .9 Supplier is dropped from further business
PLAN, BUY AND PAY WITH SAP ARIBA