Learning Objectives

1. To identify the qualifications a good supplier.

2. To learn about the key elements of the make-versus-buy
3.To identify appropriate supplier selection techniques. 4.To
learn about supplier relationship management.
5.To identify potential disadvantages of single sourcing. 6.To
analyze how to reduce the number of suppliers.
7.To learn about strategic supplier relationship management.
8.To understand how supplier evaluation is accomplished

8-1
 Supplier Selection Defined
• Supplier: “External entity that supplies relatively
common, off the shelf, or standard goods or
services” (Business Dictionary)
• Supplier Selection: “The stage in the buying
process when the intending buyer chooses the
preferred supplier or suppliers from those
qualified as suitable.” (Westburn Dictionary)

Supplier Selection 10 April 2010 2

 Brainstorming Exercise
• Why is supplier selection so important to your
organization?
• What can result in your company from having the
incorrect supplier?
• What is important to you when finding a supplier?

• Write a comprehensive note on Suppliers’ Rewards &

Recognition
Supplier Selection 3
 Evaluation and Selection Process
1. Recognize the need for supplier selection
2. Identify key sourcing requirements
3. Determine sourcing strategy
4. Identify potential supply sources

Supplier Selection 10 April 2010 4

 Evaluation and Selection Process
5. Limit suppliers
6. Determine method of supplier evaluation
and selection
7. Negotiate and select supplier

Supplier Selection 10 April 2010 5

Recognize Need for Supplier Selection
• Why are you looking for a supplier?
– End of contract
– Problems with current supplier
– Have new product

Supplier Selection 10 April 2010 6

Identify Key Sourcing Requirements
• What do you require from your suppliers?
• Are your requirements in alignment with
company goals and mission?
• Consider Carter’s 10 C’s of Supplier
Selection

Supplier Selection 10 April 2010 7

Carter’s 10 C’s of Supplier Selection
• Competency • Commitment to quality
• Capacity • Cash/finances
• Consistency • Clean
• Control of Process • Culture and relationships
• Cost/Price • Communication

Supplier Selection 10 April 2010 8

 Determine Sourcing Strategy
• How many suppliers are you going to need?
– Single Source
– Multiple Source

Supplier Selection 10 April 2010 9

 Identify Potential Supply Sources
• Where can you find your suppliers?
• Simple brainstorming activity will generate
a long list of possibilities

Supplier Selection 10 April 2010 10

 Limit Suppliers in Pool
• Narrow down your choices
33% 40%

75% 43%

100% 36% 22%

25% 57%

31% 18%

B D
10 AApril Cr
Supplie E12
 Determine Method of
Supplier Evaluation and
•Choose what you would like to evaluate
Selection
• Decide where you will gather your
information from
• Make selection from your evaluations

Supplier Selection 10 April 2010 12

 Negotiate and Select Supplier
• Perform negotiations with supplier
• Choose supplier and agree to terms

Supplier Selection 10 April 2010 13

 Practical Exercise
• You and three others have narrowed the search
down to four companies
• Using Carter’s 10 C’s you have chosen four factors
you will use to evaluate and have also assigned each
factor a weighted percentage
• Perform a weighted factor analysis to decide which
company to is the best option

Supplier Selection 10 April 2010 14

 Make Versus Buy
• The use of outsourcing has quickly become a competitive
weapon for an increasing number of businesses.
• It is no easy task for management to decide to make component
parts and services or buy
• The decision to outsource has led to a need for strategic
partnerships.

8-5
 Key Make-or-buy Mistakes
• In most cases, businesses are not proficient at identifying their
core capabilities . Buyers usually rationalize in-house decisions
based on capacity capabilities.

• Buying organizations wait too late to assess the value of

consultants or strategic partners.

• Buyers do not recognize that the product or service is

approaching maturity.

• There are always new competitors with new technology

attacking the market.

8-16
Key Make-or-Buy Success Factors
• Perform a realistic assessment of the capabilities and
expertise of each member of the in-house team. If the
core competencies exist, what happens if a key
member leaves the team. Can the member be
easily replaced?

• Evaluate alternative strategic partnership

arrangements and select the appropriate partner.

• Share information with all functional areas

and request their input.

8-17
 The Make or Buy Decision
• When a firm has answered the make-or-buy question
with a decision to buy , the question then becomes
to whom to “delegate” this responsibility.

• Thus, the firm must select a supplier or suppliers for

the part (s) in question.

• The buying firm must be highly skilled at

(1) specifying product attributes,
(2) forecasting expected requirements,
(3) ensuring the right quality at a reasonable price.

8-18
 Strategic Selection
• Each business unit and department should have a
clear understanding of the strategy of the whole firm
and have a departmental strategy that complements
and aids the overall strategy execution of the firm.

• Purchasing, logistics, inventory management, and

production control are all linked tightly together
under the materials management umbrella.

8-19
 Strategy and Outsourcing

• Since outsourcing is a delegation of

responsibilities, it should be viewed as an
extension of the OEM’s strategy.

8-20
 Supplier Selection
Criteria
• Company • Service
– Financial stability – Delivery on time
– Management – Condition on arrival
– Location – Technical support
• Product – Training
– Quality
– Price
 Supplier Evaluations
• As firms increasingly emphasize cooperative
relationships with critical suppliers, executives of buyer
firms are using supplier evaluations to ensure that their
per-formance objectives are met.

• Supplier evaluations, one type of supplier develop-

ment program (SDP), are an attempt to meet current
and future business needs by improving supplier
performance and capabilities.

8-22
Suppliers Must be Carefully Evaluated
• 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.

8-
23
 Three Categories of Suppliers
1. Strategic suppliers are those that are most
important to the buying firm. They supply the
buying firm with essential materials and
capabilities that are not easily replaced.

2. Preferred suppliers are those that are important to

the buying firm, but alternative suppliers could be
found with some effort.

3. Transactional suppliers are those that can be easily

replaced in a short time.
8-24
Criteria for Supplier Evaluation
• There are two main categories of supplier evaluations:
process-based evaluations and performance-based
evaluations.

• The process-based evaluation is an assessment of the

supplier’s production or service process. Performance-
based evaluations are based on objective measures of
performance.

• Typically, the buyer will conduct an audit at the

supplier’s site to assess the level of capability in the
supplier’s systems.
8-25
Performance-based Evaluations

• Performance-based evaluations assess the

company after its product or service has been
delivered.

8-26
 Criteria for Supplier Evaluation
• In addition, large buying organizations increasingly
are demanding that their suppliers become certified
through third-party organizations, such as ISO
certification or Malcolm Baldrige National Quality
Awards.

8-27
 Jonathan Hughes’ Seven
Principles of Supplier Metrics
1- Measure what is important
2- Develop predictive metrics
3- Be comfortable with subjectivity
4- Situate metrics to facilitate dialogue
5- Define metrics jointly
6- Share data
7- Define metrics to assess value

Potential Performance metrics:

-Quality -Delivery -Cost

Communication -Innovation -Customer Satisfaction
 Three Common 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. 8-29
 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.

8-30
 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.

8-31
 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.

8-32
 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.
8-33
 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.
8-34
Example

8-35
Strategic SRM
•
For each strategic supplier, a key contact within the
buying firm must be established to ensure that the
relationship is being properly managed.

• This person is the individual within the buying that

others in the buying organization should contact for
information about specific strategic suppliers.

8-36
 Strategic SRM

• Relationships with strategic suppliers need to be

closely managed. One way to keep up on supplier
relationships is for a buying organization is to compile
supplier profiles for each strategic supplier.

• These profiles should include items such as key

management contacts, a company overview, SWOT
analysis, Porter’s five key financial figures, information
on current contracts, “owners” of the relationship
within the firm, and an organizational chart.

8-37
The Strategic Supplier Performance Review
Process

• A performance review is a set of expectations and

measurements for controlling long-term relationships
with existing strategic suppliers.

• It includes consistent measurements for establishing

positive relationships with new suppliers and
evaluating current performance of existing strategic
suppliers according to the expectations of the buying
firm.

8-38
 The Strategic Supplier
Performance Review Process
• The review process must have a standard template that
is used as a guideline for informing a customized review
process with criteria specific to each strategic supplier.

• The performance review template should include a

personal meeting with the functional manager.

8-39
 Review Categories
• The buying firm should have various review
categories that are used in order to fully assess
their strategic suppliers.

• Quality is a very important review category.

• Customer service should be expected to be

proactive and flexible, and delivery performance
needs to be optimized.
8-40
 Review Categories
• The most important attributes should be:
* high quality and
* on-time delivery.

• Technology and innovation are also important

in order to stay ahead of or at pace with
competition and help keep the buying firm at
the top of their field.

8-41
 Strategic Suppliers

• It is necessary for the buying firm to have strategic

suppliers who are open about their total costs.

• Cost reduction and continuous process improvement

are necessary in order to keep costs down and create
trust with strategic suppliers.

8-42
 Single versus Multiple Sources
• Much debate has taken place concerning the
number of suppliers a firm should use.
One side of the debate is the multiple-sources side.
This involves the use of two or more suppliers.

The other side of the debate is the single-source

policy, in which only one supplier is used to supply a
particular part.

8-43
Advantages of Multiple Sourcing
• The main arguments for multiple sourcing are competition
and assured supply.
– It is commonly believed that competition between suppliers for a
similar part will drive costs lower as suppliers compete against each
other for more of the OEM’s business.

• This sense of competition is in the very root of American

thought as competition is the basis for capitalism and is the
backbone of Western economic theory.

• Multiple sources also can guarantee an undisrupted supply

of parts.
– If something should go wrong with one supplier, such as a strike or a
major breakdown or natural disaster, the other supplier (s) can pick up
the slack to deliver all the needed parts without a disruption.
8-44
 Advantages of Single Sourcing
• The major arguments in favor of single sourcing are
that with the certainty of large volumes that the
supplier can enjoy lower costs per unit and increased
cooperation and communication to produce win-win
relationships between buyer and seller.

• Naming a certain supplier as the single source and

providing it with a long-term contract (three to five
years) greatly reduces the uncertainty that the
supplier will lose business to another competitor.

8-45
 Advantages of Single Sourcing
• With this contract guarantee, the supplier is more willing
to invest in new equipment, or change its
business/operating methods to accommodate the buyer.

• Single sources should be able to provide lower costs per

unit compared to multiple sources by reducing the
duplication of operations in areas such as setup.

• Spreading fixed costs across a larger volume should also

result in an accelerated learning curve.

8-46
 Cross-Sourcing
• Cross-sourcing works this way. If supplier A can produce
parts 1, 2, 3, 4, and 5 and so can supplier B, the
advantages of both single and multiple sourcing can be
achieved if supplier A produces all of parts 1, 3, and 5
and supplier B produces all of 2 and 4. If anything would
happen to supplier A, supplier B can pick up the slack
as it has the capability to produce 1, 3, and 5 as well.

• In sum, neither supplier suffers because overall volume

remains the same. The reverse also can be done if a
buyer wants to increase competition among the
suppliers.

8-47
 Supplier Reduction
• Regardless of one’s final analysis of the single/multiple
debate, it is recommended to reduce the supply base.

• If the perceived benefits outweigh the risks, and after careful

analysis of both short-term and long-term needs, a single
source may be appropriate.

• However, for operations that would be financially damaged

when a supply stoppage occurs, then the use or development
of a second source is wise.

• Assume that it is desirable to reduce the number of suppliers.

The question now is which one (s)? The grade and hurdle
methods are used to guide the supplier reduction analysis.

8-48
 Grade
• “Grade” methods are those that are based on a score or grade
given to the supplier by the buyer for some attribute.

• The most common attributes are quality, price, and delivery.

• The supplier’s performances in the past are kept on record and

the suppliers receive a “report card” as to how well they are
doing compared to other suppliers.

• Many additional attributes an be added to the most common

three such as frequency of delivery, but the method remains
the same—for each attribute and purchase transaction, the
supplier is given a grade.

8-49
 Hurdle
• The second group of methods used to reduce the
number of suppliers a firm uses is what I have termed
“hurdle” methods.

• In this type of situation, suppliers are required to

“jump” over higher and higher hurdles to win the
buyer’s business.

• Usually this is done through some sort of supplier

certification program.

8-50
 Certification
• Supplier certification programs are very useful tools to
evaluate the quality capabilities of a supplier.

• Since quality is one of the biggest concerns to many

OEMs, this is a good way to control supplied part
quality.

• Basically, certification involves the setting of criteria

regarding quality levels as demonstrated through the
use of SPC and such things as process capability studies
of a supplier’s equipment, record-keeping abilities, and
so forth.
8-51
 Designing Certification Programs
• When designing a certification program, careful
attention should be paid to the selection of criteria.

• Good certification should include issues regarding

equipment capability, quality assurance, financial
health of the supplier, production scheduling
methods, value analysis abilities, and cost accounting
methods.

8-52
 Industry Examples
• Consider the apparel, chemical, electronics, and
construction industries.

• A supplier with the lowest per-unit price may not have the
best quality or delivery rating of various suppliers.

• The particular selection strategy may be acceptable in the

apparel industry, where the highest emphasis is placed on
price or price markup, but would be unacceptable in the
chemical industry, where the highest priority is purity of the
chemicals (i.e., quality).

• Each industry must analyze the various associated criteria

trade-offs when selecting a supplier. 8-53
 Apparel Industry
• Organizational buying can be broken down into two
categories: retail buying and industrial buying.

• There are distinct differences between retail and

industrial buying.

• The most important distinction is that the retail buyer is

unique in serving as both a purchasing agent and
marketing manager.

• Successful retail buying depends on the ability to select

suppliers who meet the perceived needs and wants of
the firm and its customers. 8-54
 Chemical Industry
• Industrial buying in the chemical industry mostly deals with
buying bulk chemicals for chemical production and synthesis.

• Overall, in ranking which criterion is considered most

important in supplier selection, quality was number one.
Reliability and dependability of the delivery ranked second,
while price considerations ranked third.

• Purchasing managers send requests for quotes (RFQs) to

prequalified suppliers.

• Maintaining quality is by far the most important competitive

advantage of companies in the chemical industry.

8-55
 Electronics Industry
• Industrial buying within the electronics industry is extremely
competitive.

• Some companies place higher emphasis on pricing and

delivery. The companies also varied in their methods of
purchasing.

• For example, Dynalab prefers to deal with a single source,

while Tandy uses many suppliers to meet their needs.

• Supplier selection at Tandy Corporation is based solely on

price. When Tandy sends out an RFQ, suppliers that lack a
good reputation are ignored.

• Thus, the quality of the supplier chosen to bid is assumed to

be high. 8-56
 Construction Industry
• In the construction industry, material quality, delivery
dependability, and price appear to be the most critical criteria.
• However, the degree of importance that various construction
firms place on the four criteria varies.
• The supplier selection process begins by choosing potential
suppliers for each material type needed for a specific project.
• The selection process is usually based solely on past
performance.
• Once a pool of potential sources is formed, RFQs are sent out,
negotiations are conducted, and specific suppliers are selected.

8-57
KPIs for Supplier Evaluation
1- Quality
• Compliance rate
• Supplier defect rate
• PO and invoice accuracy
2- Delivery
• Rate of emergency purchases
• Supplier lead time
• PO cycle time
• Vendor availability
3- Cost
• Cost per invoice and PO
• Spend under management (SUM)
• Procurement ROI and benefits
• Price Competitiveness