SUPPLIER SELECTION METHODS

“The objectives of the purchasing function are that it should obtain the right materials (meeting quality
requirements), in the right quantity, for delivery at the right time and right place from the right source
(a supplier who is reliable and will meet its commitments in a timely fashion), with the right service
(both before sale and after sale), and at the right price.” (Gaither, 1996 as cited in Moynihan et al.
2006).

Jabil Circuit Inc. one of the largest companies in the Tampa Bay area survived from the disruption of
supply chain due to 2011 Tōhoku earthquake and Tsunami in Japan for its effective strategy and the
cooperation of its suppliers. In 2012, Japanese car makers faced supply shockwave due to severe flood
at the low-lying areas of Ayutthaya and Pathumthani provinces of Thailand where vast majority of
suppliers are located. Success of Jabil Circuit Inc. proves that behind every great success of any
company there was an even bigger supplier and logistician. Any disruption in upstream supply may
cause tremendous disaster in entire supply chain and compel organization to take risk. Risks in supply
chain are broadly classified as internal risk that appears in normal operation and external risk that
come from outside the supply. Selection of right supplier/s could minimize external risks. Supplier
selection could be either single sourcing where only one supplier is selected to fulfil the entire demand
or multiple sourcing where a group of suppliers are selected to fulfil the need of entire demand. Risk
in supply chain could be minimized by internal integration and external integration of supply chain
entities. External integration strongly encourages single sourcing by establishing long-term
relationship between supplier and organization. Today companies are more interested about proactive
buying instead of reactive buying. Reactive buying gives highest priority to cost and restrict sharing of
knowledge and information. Proactive buying considers procurement as main management function.
In proactive buying, suppliers are not only selected on lowest cost basis rather on various strategic
issues to fulfil long term goal of any company. Proactive procurement prefers multiple sourcing to have
better negotiation options and encourages sharing of knowledge and information i.e. co-creation of
wealth.
Single sourcing Multiple sourcing
Concept of this strategy comes from just Multiple sourcing is preferable if reliability
in-time (JIT) philosophy. Uncertainty in of one supplier is very poor. It reduces
supply is very high as buyer deals with safety stock without increasing stock out
single supplier. problem (Kelle and silver, 1990).It reduces
uncertainty in supply but increases the
fixed cost associated with operating
multiple suppliers (Agrawal and
Nahmias,1997)
No competition exists as only one supplier Reduction of price is achieved through
is involved. It gives quantity discount from competition between suppliers. It gives
order consolidation, reduce order lead greater assurance of timely delivery and
time and logistical lead time (Hahn et greater upside volume flexibility
al.,1986;Bozarth et al.,1998) (Ramasesh et al., 1991).
It is applicable where goodwill trust exists In presence of low ordering cost and
between buyer and supplier. highly variable lead-times dual sourcing is
better than single sourcing (Ramasesh et
al., 1991).
Low threat to loss of information. Since business data is shared among
various suppliers, proper security
measures should be taken.
Linear Point Method (Categorical method): This method involves categorizing each supplier’s
performance in specific area defined by a list of relevant performance variables. The buyer develops a
list of performance factors for each supplier and keeps track of each area by assigning a ‘grade’ in
simple terms, such as ‘good, neutral, unsatisfactory’. In the meetings with the supplier the buyer
informs him of his performance. The advantage associated with this type of evaluation is that it can be
implemented immediately and is least expensive. The disadvantage is dependence on the judgment
of the user. With this method there is on concrete supporting data.

Cost-Ratio method: This method evaluates supplier performance using standard cost analysis. The
total cost of each purchase of material is calculated as its selling price plus the buyer’s internal
organizational cost associated with the quality, delivery and service elements of purchase. Calculation
involves four step processes; 1. Determine the internal organizational cost associated with the quality,
delivery and service. 2. Convert each element to cost ratio, which expresses the cost as percentage of
the value of the purchase. 3. Sum up the three cost ratios (quality, delivery and service) to obtain
overall cost ratio. 4. The overall cost ratio is applied to suppliers quoted price to obtain the net adjusted
cost figure. The net adjusted cost figure is used to compare the performance of various suppliers.

Weighted Point Average Method: This method is the most commonly used evaluation method.
Specific quantitative performance factors are used to evaluate supplier performance. The most
commonly used factors are quality, service (delivery) and price, although any one factor may be given
more weight than others. The assignment of these weights is a matter of judgment of top management
preferences. These weights are subsequently used as multipliers for the individual ratings on each of
the three performance factors. After the weights have been assigned the individual performance
ratings are determined. This is done by summing the scores for each factor. Then each performance
ratings are multiplied by its respective weights as percentage. Finally, the results of three factors are
added to give a numerical rating for each supplier.
Single sourcing Multi sourcing

Sl. Methods Remark Sl. Methods

No. No.
1. Linear Depends heavily on human 1. Mixed integer
Weighted judgements programming.
Point
2. Categorical Depends heavily on 2. Goal programming.
method human judgments.
3. Cost ratio Very complicated and need 3. Single/ multi objective
more financial information. programming.

4. AHP More accurate than any other 4. Multi attribute utility

method (Ghodsypour and theory and AHP; AHP-LP;
O’Brien,1998) AHP-GA; AHP and multi-
objective possibilistic
linear programming
(AHPMOPLP) etc.

Experts agree that no best way exists to evaluate and select suppliers, and thus organizations use a
variety of approaches. The overall objective of the supplier evaluation process is to reduce risk and
maximize overall value to the purchaser. An organization must select suppliers with which it can do
business for an extended period of time. Supplier evaluations often follow a rigorous, structured
approach through the use of a survey. An effective supplier survey should have certain characteristics
such as comprehensiveness, objectiveness, reliability, flexibility and finally, has to be mathematically
straightforward. To ensure that a supplier survey has these characteristics is recommended a step-by-
step process when creating this tool. Following steps to follow when developing such a system.

i) Defining the objectives and selection of criteria for evaluation

ii) Interviewing the vendors

iii) Selection of method.

Some universally agreed steps for supplier selection are

Rank (Kannan and Tan, 2002) (Ho and Nguyen, 2007)

USA Taiwan Vietnam

1 Ability to meet delivery due Commitment to quality Commitment to quality

dates
2 Commitment to quality
3 Technical expertise
4 Prices of materials, parts
and services
5 Honest and frequent
communications
Important Criteria to keep in mind for Supplier selection
Ability to meet delivery due
dates
Prices of materials, parts and
services
Reputation of supplier
Supplier‟s process capability
Prices of materials, parts and
services
Ability to meet delivery due
dates
Technical expertise
Industry knowledge
 Step
Identification of the need
for a specific product
Identify key sourcing
requirements and
criteria
Determine Sourcing
Strategy
Identify Potential Supply
Sources
Limit Suppliers in Selection
Pool
Determine Method for
Final Selection
Select Suppliers and Reach
Agreement
Key information
Different situations may trigger the need for supplier selection. For example,
new product development, modifications to a set of existing suppliers due to a
bad performance, the end of a contract, expansion to different markets,
current suppliers' capacity is not sufficient to satisfy increases in demand.
Defining the proper criteria becomes critical since the nature of supplier
selection involves multi-criteria decision making. The set of criteria to be
chosen largely depends on the company's objectives and the type of industry
in which the company competes.
Sourcing requires that companies clearly define the strategy approach to be
taken during the supplier selection process. Examples of sourcing strategies
are: single versus multiple suppliers, domestic versus international and short
term versus long term.
The importance of the item under consideration influences the resources spent
on identifying potential suppliers.
Given the limited resources of a company, a purchaser needs to prescreen the
potential suppliers to reduce their number before proceeding with a more
detailed analysis and evaluation.
There are some multi-criteria techniques which are widely used to evaluate the
suppliers (these will be discussed in this paper).
The final step of the supplier evaluation and selection process is to clearly
select those suppliers that best meet the company's sourcing strategy. This
decision is often accompanied with determining the order quantity allocation
to selected suppliers.