Current Event Assignments 2
Chapter 12
Supplier Selection
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Key Questions Addressed in Chapter 12
How can the supply professional match the organization’s needs to what the market can supply?
Which supplier(s) should be selected?
How can suppliers be identified?
What information is required to evaluate potential sources?
Should we select single or multiple sources?
Should we deal directly with manufacturers or go through distributors?
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Identification of Potential Sources
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Potential Sources of Information
Trade directories and online resources
Catalogs (online and hard copy)
Trade journals
Sales representatives
Supplier and commodity databases
Visits to suppliers
Samples
Colleagues, networking, professional contacts
Your own records
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Standard Information Requests
Requests for information (RFI)
Signals the supplier as a potential source of supply
Does not commit either party to future business
Request for quotation (RFQ) or request for bid (RFB) or invitation to bid
A serious inquiry on a specific requirement or variety of requirements
Asks the supplier to declare price and terms
Requests for proposal (RFP)
Allow more latitude to the supplier than RFQ
Used with requirement is difficult to describe or the purchaser expects innovation or creativity
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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?
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Arguments in Favor of Single Sourcing
Prior commitments
Exclusivity: Supplier may be the only available source
Outstanding quality or service value
Order too small to split
Opportunities for discounts or lower freight costs
More important customer more attention from supplier
Cost of duplication prohibitive (e.g., tools and dies)
Easier to schedule deliveries
JIT, stockless buying or systems contracting
Resources required for supplier relationship management
Prerequisite to partnering
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Arguments in Favor of Multiple Sourcing
Traditional practice
Keep suppliers “on their toes”
Assurance of supply
Capable of dealing with multiple suppliers efficiently
Avoid supplier dependence on one customer
Obtain a greater degree of volume flexibility
Back-up arrangements
Strategic considerations; e.g., military preparedness
Government regulations
Limited supplier capacity
Opportunity to test a new supplier
Supply market volatility
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Supplier Development Initiative
Supplier
Purchaser
Supplier
Purchaser
The Sales Context
Sales Initiative
Supply Response
The Supplier Development Context
Sales Response
Supply Initiative
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Key Supplier Evaluation Question
Is this supplier able to supply the purchaser’s requirements satisfactorily?
strategically and operationally
in the short and long term
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Three Levels of Supplier Evaluation
Level 1 – Strategic
Level 2 – Traditional: quality, quantity, delivery, price and service
Technical, engineering, manufacturing and logistics strengths
Service design, operations and delivery
Management and financial evaluation
Level 3 – Current Additional
financial, sustainability (environmental and social), innovation, regulatory, and political
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Level 1: Strategic Evaluation
Sourcing strategy directly linked to organizational strategy, goals, and objectives drives effective sourcing decisions
Strategic sourcing: captures the linkage between sourcing strategy and organizational strategy
considers suppliers and the supply base integral to an organization’s competitive advantage
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Define Strategic Purchases
What makes a purchase or a supplier strategically important to the organization?
Mission critical - may help or hinder attainment of the organization’s mission
First step in the strategic sourcing process
Drives decisions in sourcing and selection process
Drives allocation of resources to any specific buy
Without categorizing, may overinvest resources in tactical or operational purchases and under-invest in strategic ones
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Risk Assessment
Management makes decisions about the risks it is willing to take in light of the expected returns
Takes actions to avoid, mitigate, transfer, insure against, limit, or explicitly assume risk
Supply decisions must be made in the context of the organization’s risk profile
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Level 2 – Traditional
Technical, Engineering and Operations
Quality systems and performance
Engineering and technical strengths
Capacity and flexibility to meet demand (lead time)
Process capabilities
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Level 2 – Traditional (cont’d)
Service design, operations and delivery
Quality systems and ability to meet standards based on statement of work (SOW)
Capacity and flexibility of service delivery system
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Level 2 – Traditional (cont’d)
Management and Financial
Mission, corporate culture, values and goals
Organization structure and decision-making
Management controls, information systems, policies and procedures
Qualifications and background of managers
Financial analysis; e.g., profit, inventory turns, receivables, current ratio
Procurement systems
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Level 3 – Current Additional
Financial Considerations
Financial Health of the Supplier
Sustainability
Triple Bottom Line: Balances financial, environmental, and social performance of the organization
Annual sustainability or corporate citizenship reports provided in addition to financial reports
Environmental Sustainability
Minimize the environmental footprint to protect the natural environment
Reduce, reuse, recycle
Social Sustainability
Issues that affect human safety and welfare, community development, and protection from harm
Supplier labor and human rights practices
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Level 3 – Current Additional (cont’d)
Innovation
Evidence of continuous improvement
Evidence of continuing managerial and technical competence
Regulatory Compliance
Lack of citations or speed of correction in case of citations
Political Factors
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Formal Supplier Evaluations
Quality
Quantity
Delivery
Price
Service
Good Performance
Fair Performance
Unsatisfactory Performance
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Weighted Point Evaluation Systems
Identify suppliers
Important suppliers and/or critical goods and services
Identify factors or criteria for evaluation
Determine the importance of each factor
Establish a system to rate each supplier on each factor
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Evaluation of Potential Sources: Two Key Questions
Is this supplier capable of supplying our requirements satisfactorily in both the short- and long-term?
Is this supplier motivated to supply these requirements in the way we expect in the short- and long-term?
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1.
Can We
Make In - House ?
2. Can a Current
Supplier
Meet ?
3.
Find Potential
New Supplier
Yes
No
No
Make Buy
Two or More
Suppliers
Can Meet
One
Supplier
Can Meet
Yes
One
Supplier
Can Meet
No
Supplier
Can Meet
Two or More
Suppliers
Can Meet
Can We Use
Supplier
Development to
Create Supplier?
No Yes
Can We
Redesign/Re - specify
so that
Existing or New Supplier
Can Meet?
Yes
Can We Make
In - House?
Yes
No
Rethink