Unit VII: Supplier Selection

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 Outline
• Understanding supplier selection
• Supplier Selection Process
 Learning Objectives
• Upon completing this unit, trainees will be
expected to:
• Appreciate the role of supplier selection in
procurement
• Understand the process of supplier selection
 Introduction
• In the past, it was sufficient to obtain three bids and
award the contract to the supplier offering the
lowest price. Enlightened purchasers now commit
major resources to evaluating a supplier’s
performance and capability across many different
areas.
• The supplier selection process has become so
important that teams of cross-functional personnel
are often responsible for visiting and evaluating
suppliers. A sound selection decision can reduce or
prevent a host of problems.
 Cont…
• Supplier evaluation and selection decisions
are taking on increased importance today. If a
firm has reduced its supply base to a much
smaller level, and if remaining suppliers
usually receive longer-term agreements, the
willingness or ability to switch suppliers is
diminished. This makes selecting the right
suppliers an important business decision.
 7.2 The importance of successful
supplier selection
• Choosing the right supplier to partner with
provides ongoing benefits and enables our
business to meet their goals and grow. On the
other hand, selecting the wrong supplier may
have far-reaching consequences.
7.3 The supplier selection process
 Cont…
Recognize the Need for Supplier Selection
• The first step involves recognizing that there is a
requirement to evaluate and select a supplier for an
item or service.
• Might begin in anticipation of a future purchase
requirement. Purchasing may have early insight into
new-product development plans through
participation on a product development team.
 Cont…
– Identify Key Sourcing Requirements
• Often determined by internal and external
customers within the value chain, can differ
widely from item to item.
• Although different requirements may exist for
each evaluation, certain categories—supplier
quality, cost, and delivery performance—are
usually included in the evaluation.
 Cont…
– Determine Sourcing Strategy
• No single sourcing strategy will satisfy the
requirements of all purchases.
• The strategy adopted for a particular item or
service will influence the approach taken
during the supplier evaluation and selection
process.
 Cont…
– Identify Potential Supply Sources
• Purchasers rely on various sources of information
when identifying potential sources of supply. The
degree to which a buyer must search for
information or the effort put forth toward the
search is a function of several variables, including
how well existing suppliers can satisfy cost,
quality, or other performance variables. The
strategic importance or technical complexity of
the purchase requirement also influences the
intensity of the search
 Cont…
• Guidelines regarding the effort and intensity of
search required during supplier evaluation:
– High capability of current suppliers + High strategic
importance of requirement = Minor to moderate
information search
– High capability of current suppliers + Low strategic
importance of requirement = Minor information search
– Low capability of current suppliers + High strategic
importance of requirement = Major information search
– Low capability of current suppliers + Low strategic
importance of requirement = Minor to moderate
information search
 Cont…
– Limit Suppliers in Selection Pool
• The result of this information gathering is that,
depending upon the item under consideration, a
purchaser may have many potential sources from
which to choose. Unfortunately, the performance
capabilities of suppliers vary widely. Limited
resources also preclude an in-depth evaluation of all
potential supply sources. Purchasers often perform a
first cut or preliminary evaluation of potential
suppliers to narrow the list before conducting an in-
depth formal evaluation. Several criteria may support
the narrowing of the supplier list.
 Cont…
• Determine the Method of Supplier Evaluation and
Selection
• Once an initial cut has eliminated suppliers that are not
capable, the buyer or commodity team must decide how to
evaluate the remaining suppliers, which may appear to be
equally qualified. This requires a finer level of evaluation
detail than that used in the initial process. There are a
number of ways to evaluate and select suppliers from the
remaining companies in the pool.
• These include evaluating supplier provided information,
conducting supplier visits, and using preferred supplier lists.
Key Evaluation Criteria to Be Noted
During a Supplier Visit
– Management capability Total quality management
– Technical capability Operations and scheduling capability
– Financial strength Personnel relations
– E-systems capabilities ISO certifications
– Technological sophistication and efficiency of the equipment
– Caliber of the supervision and inspection personnel
– Evidence of good management and housekeeping practices
– Types of inventory systems Employee contract expiration dates
– Nature of the receiving, storeroom, and shipping areas
– Quality control philosophy Environmental practices
– Representation of white and blue collar staffs
– Names and contact information of key decision makers
 Cont…
• Select Supplier and Reach Agreement
• The final step is to select the supplier(s) and reach a
contract agreement. The activities associated with
this step can vary widely depending on the purchase
item under consideration. For routine items, this may
simply require notifying and awarding a basic
purchase contract to a supplier.
• For a major purchase, the process can become more
complex. The buyer and seller may have to conduct
detailed negotiations to agree upon the specific
details of a purchase agreement
7.4 Vendor Relationship Management

• VRM is an all-inclusive approach to managing the affairs

and interactions with the organizations that supply
buying company with goods and services
• Includes communications, business practices,
negotiations, methodologies and software that are used
to establish and maintain a relationship with a supplier
• Benefits: lower costs, higher quality, better forecasting,
win-win relationship
• Characteristics of a good vendor: a good vendor
– Honours premises, has a stable background, offers fair
prices
– Reacts quickly to unforeseen needs of the buying company
– Takes the initiative in suggesting better methods or service
– Warns the purchasing company in good time
– Will take the initiative when it comes to technological
development
Strategies to Strengthen vendor Relations

1. share information and priorities

2. balance commitment and competition
3. allow key vendors to help the company strategize
4. build partnerships for the long term
5. seek to understand vendor’s business too
6. Negotiate to a win-win agreement
7. come together on value
8. apply VRM best practices
– Vendor selection
– Scrutinize the prospects
– Remain flexible
– Monitor performance
– Communicate constantly
 Supplier Performance Evaluation
• Two types: pre-selection (before the purchase) & post selection (after
purchase)
• Supplier Evaluation methods: two commonly used methods
• Weighted Point Method
– Factors considered are: quality, price & timely delivery
– Each factor is given weight based on its relative importance
• Example: Suppose that you are the Purchasing Manager for DEF Co. As the
purchaser of the company, you are required to evaluate the performance
of three suppliers A, B, and C and select the best supplier by using the
weighted point method. The factors that are considered to evaluate are
Quality, Service (Delivery), and Price. The weight assigned to each factor is
50, 25, and 25 respectively. The three suppliers have been rated in their
previous performance as follows:
 The seven Cs of effective supplier
evaluation
• Many of the aspects of supplier appraisal are neatly summarzsed
as the ‘seven Cs of supplier evaluation’:
• 1 Competency of the supplier to undertake the tasks required
• 2 Capacity of the supplier to meet the purchaser’s total needs
• 3 Commitment of the supplier to the customer in terms of
quality, cost driving and service
• 4 Control systems in relation to inventory, costs, budgets, people
and information
• 5 Cash resources and financial stability ensuring that the
selected supplier is financially
• sound and is able to continue in business into the foreseeable
future
• 6 Cost commensurate with quality and service
• 7 Consistency the ability of the supplier to deliver consistently
and, where possible, improve levels of quality and service.
End of Unit VII

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