Supplier Assessment

Presented by
Nikhil Shete
Aniruddha Joshi
Nikhil Lavange

Guided By
Prof. Dr. Ing. Martin Pohlmann
 NIKHIL SHETE
ANIRUDDHA JOSHI
NIKHIL LAVANGE
Masters in Business Administration & Engineering (MBA&E)
with specialization in
Interdisciplinary Management (IM)

Summer Semester 2014

Global Supply Chain Management
Contents
• What is Supplier Assessment ?

• Why Supplier Assessment is important ?

• Criteria for Supplier Assessment.

• Methods for Supplier Assessment.

• Interactive solution for actual problem.

• Comparison between the methods.

What is Supplier Assessment ?
• Supplier assessment is a term used in business and refers to
the process of evaluating and approving potential suppliers by
quantitative assessment.

• The purpose of supplier evaluation is to ensure a portfolio of

best in class suppliers is available for use. 

• Supplier evaluation is also a process applied to current

suppliers in order to measure and monitor their performance for
the purposes of reducing costs, mitigating risk and driving
continuous improvement.
Why Supplier Assessment is important ?

• In today’s competitive environment, progressive firms must be

able to produce quality products at reasonable prices. Product
quality is a direct result of the production workforce and the
suppliers.

• Buying firms select suppliers based on their capabilities, and

not purely on the competitive process. The current trend in
sourcing is to reduce the supplier base.

• In order to select suppliers who continually outperform the

competition, suppliers must be carefully analyzed and evaluated.
Criteria for supplier assessment
• There are two main categories of supplier evaluations:

- process-based evaluations.
- performance-based evaluations.

• Process-based evaluation is an assessment of the

supplier’s production or service process.

• Performance-based evaluations are based on objective

measures of performance.
Supplier Performance Based Evaluation Systems
• The three general types of supplier evaluation systems in use
today are:
– the categorical method,
– the cost-ratio method, and
– the linear averaging method.

• In general, the guiding factors in determining which system is

best are ease of implementation and overall reliability of the
system.
• It must be pointed out the interpretation of the results from
any of these three systems is a matter of the buyer’s judgment.
Categorical Method
• The categorical method involves categorizing each supplier’s
performance in specific areas 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,” and “unsatisfactory.”

• At frequent meetings between the buying organization and the

supplier, the buyer will then inform the supplier of its
performance.
Cost-Ratio Method
• The cost-ratio method evaluates supplier performance by using
standard cost analysis.

• The total cost of each purchase is calculated as its selling price plus
the buyer’s internal operating costs associated with the quality,
delivery, and service elements of the purchase.

• Calculations involve a four-step approach

• A hybrid of the cost-ratio method is the “total cost-of-ownership

rating,” developed by the director of corporate purchasing of Sun
Microsystems.
Cost-Ratio Method
• It includes five performance factors: quality (maximum of 30
points), delivery (25), technology (20), price (15), and service (10).
A perfect supplier would receive a score of 1.00.
• This is calculated by deducting the amount of points received (100
if perfect) from 100, dividing by 100, and adding 1.
• The idea is to give a simple numeric rating to the so-called hidden
cost of ownership—the additional product-lifetime cost to Sun.
• A score of 1.20, for instance, means that for every dollar Sun
spends with that supplier, it spends another 20 cents on everything
from line downtime to added service costs.
Linear Averaging
• The linear averaging method is probably the most
commonly used evaluation method.

• Specific quantitative performance factors are used to

evaluate supplier performance.

• The most commonly used factors in goods purchases

are quality, service (delivery), and price, although any
one of the factors named may be given more weight
than the others.
Linear Averaging Method

1. The first step is to assign appropriate weights to each

performance factor, such that the total weights of each factor
add up to 100.

• For example, quality might be assigned a weight of 50, service

a weight of 35, and price a weight of 15.

• The assignment of these weights is a matter of judgment and

top management preferences.

• The weights are subsequently used as multipliers for individual

ratings on each of the three performance factors.
Example
Comparison between the methods
 Thank You …
Have a nice day…