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chapter_7_supplier_evaluation_and_selection.pptxSupplier Evaluation and Selection
Chapter 7
OSCM 3660:002 Strategic Sourcing
Spring 2016
Sandeep Jagani
PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e
© 2012 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
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Chapter Overview
Supplier evaluation and selection process
Key supplier evaluation criteria
Developing a supplier evaluation and selection survey
Reducing supplier evaluation and selection cycle time
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Evaluation and Selection Process
No “one best way”
Overall objective is to reduce sourcing risk and maximize value to buyer
Need to select suppliers for long-term
Can involve intensive effort and major commitment of resources
Many issues and decisions
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Selection and Evaluation Process
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© 2012 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Recognize need for supplier selection
Identify key sourcing requirements
Determine sourcing strategy
Identify potential supply sources
Limit suppliers in selection pool
Determine method of supplier evaluation and selection
Select supplier and reach agreement
Evaluation and Selection Decisions
During new product development
Due to poor existing supplier performance
At end of existing contract
Buying new equipment
Expanding into new markets or product lines
Receiving internal user requisitions
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Evaluation and Selection Decisions
Performing market tests
Facing countertrade requirements
During outsourcing analyses
Consolidating volumes
Conducting a RFQ or reverse auction
When current suppliers have insufficient capacity
Reducing size of supply base
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Identify Key Sourcing Requirements
May be determined by internal and external customers
Supplier quality
Cost
Delivery performance
Vary widely from item to item
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Determine Sourcing Strategy
Single vs. multiple sourcing
Short-term vs. long-term contracts
Need for design support
Full-service vs. non-full-service suppliers
Domestic vs. foreign suppliers
Collaboration vs. arm’s length relationship
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Identify Potential Sources
How well existing suppliers can satisfy cost, quality, and/or other performance variables
Strategic importance of purchase requirement
Technical complexity of purchase requirement
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Information Search Requirements
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| High Capability of Suppliers | Low Capability of Suppliers | |
| High Strategic Importance to Buyer | Minor to moderate | Major |
| Low Strategic Importance to Buyer | Minor | Minor to moderate |
© 2012 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Sources of Information
Current suppliers
Preferred suppliers
Sales representatives
Information databases
Experience
Trade journals
Trade directories
Trade shows
Second-party or indirect information
Internal sources
Internet searches
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Sourcing Alternatives
Manufacturer vs. distributor
Size of purchase
Manufacturer’s policies on direct sales
Storage space available
Extent of services required
Vendor-managed inventory (VMI)
Integrated supply
Local, national, or international suppliers
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Sourcing Alternatives
Large vs. small suppliers
Capability
Variety of products offered
Locations
Multiple vs. single sourcing
Overall trend to rationalize supply base
Leverage vs. assurance of supply
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Evaluate Critical Issues
Size relationship
Use of offshore suppliers
Countertrade requirements
Competitors as suppliers
Sustainability and adversity objectives
Risk/Reward issues
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Limit Suppliers in Selection Pool
Financial risk analysis
Examples
Federal 10K or Dun & Bradstreet reports
Evaluation of supplier performance
For existing suppliers
Evaluation of supplier-provided information
Preliminary surveys (entry qualifiers)
RFIs, RFPs, or RFQs
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Determine Method of Supplier Evaluation and Selection
Evaluation from supplier-provided information
Supplier visits
Use of preferred suppliers
External or third-party information
Example
International suppliers
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Key Supplier Evaluation Criteria
Primary criteria
Cost or price, quality, and delivery
Management capability
Employee capabilities
Cost structure
Total quality performance, systems, and philosophy
Process and technological capability
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Key Supplier Evaluation Criteria
Sustainability and environmental compliance
Financial stability
Production scheduling and control systems
E-commerce capability
Supplier’s sourcing strategies, policies, and techniques
Longer-term relationship potential
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Management Capability
Does management practice long-range planning?
Has management committed to TQM and continuous improvement?
How high is management turnover?
What are professional and educational backgrounds of key managers?
What is organization’s vision?
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Management Capability
Is management customer focused?
What is history of labor-management relations?
Is organization making necessary capital investments?
Is organization prepared to face future competitive challenges?
Does management fully understand importance of strategic sourcing?
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Employee Capabilities
Degree of commitment to quality and continuous improvement
Overall skills and abilities
Employee-management relations
Frequency of work stoppages
Worker flexibility
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Employee Capabilities
Employee morale
Workforce turnover
Willingness of employees to contribute to improved operations
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Cost Structure
Total cost perspective
Direct labor costs
Indirect labor costs
Material costs
Manufacturing or process operating costs
General overhead costs
Caveat
Supplier may not fully understand its own costs
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Challenges of Cost Analysis
Supplier’s unsophisticated cost accounting system
Cost data is considered proprietary
Buyer’s knowledge of costs may undermine supplier’s pricing strategy
Competitors may have access to buyer’s cost data
Supplier is concerned about potential misuse of its cost data
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Total Quality Performance, Systems, and Philosophy
Management commitment
Use of SPC techniques
Level of defects
Safety, training, and facilities
Equipment maintenance
Use of MBNQA and ISO 9000:2008 criteria
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Process and Technological Capability
Level of technology, design, methods, and equipment used to manufacture products or deliver services
Current vs. future capabilities
Review capital expenditure plans
Resources committed to R&D
Supplier design capabilities
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Sustainability and Environmental Compliance
Ongoing sustainability practices and top management support
Current and projected CO2 emissions
Attainment of ISO 14000:2004 certification
Evidence of measuring or requiring sustainable practices in supply base
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Sustainability and Environmental Compliance
Hazardous and toxic waste reduction programs in place
Purchasing recycled materials
Encouraging recycling and reuse internally
Disclosure of environmental infractions
Programs to control or eliminate ozone-depleting substances
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Financial Stability
Often used as screening process in initial selection phase
Risks of financially weak supplier
Supplier will go out of business
Insufficient resources to invest in improved plant and equipment
Supplier may become too financially dependent on buyer
May be indicator of other problems
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Interpreting Financial Ratios
| Liquidity Ratios | Interpretation |
| Current ratio = Current assets / Current liabilities | Should be > 1.0, but look at industry averages |
| Quick ratio = (Cash + Receivables) / Current liabilities | At least 0.8 if supplier sells on credit; Low means cash flow problems |
| Activity Ratios | Interpretation (compare to industry average) |
| Inventory turnover = COGS / Inventory | Low means slow inventory or possible cash flow problems |
| Fixed asset turnover = Sales / Fixed assets | Too low means supplier may be inefficient using its fixed assets |
| Total asset turnover = Sales / Total assets | Too low means supplier may be inefficient using its total assets |
| Days sales outstanding = (Receivables x 365) / Sales | Too high hurts cash flow; Too low shows restrictive credit policy |
© 2012 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Interpreting Financial Ratios
| Profitability Ratios | Interpretation (compare to industry average) |
| Net profit margin = Profit after taxes / Sales | Represents after-tax return |
| Return on assets = Profit after taxes / Total assets | Represents the return earned on what a company owns |
| Return on equity = Profit after taxes / Equity | Represents return on shareholders’ investment |
| Debt Ratios | Interpretation (compare to industry average) |
| Debt-to-equity = Total liabilities / Equity | > 3 means highly leveraged |
| Current debt-to-equity = Current liabilities / Equity | Too high means supplier may be unable to pays its bills |
| Interest coverage = (Pretax income + Interest) / Interest | Should be > 3; low may mean difficulty in paying creditors |
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Production Scheduling and Control Systems
Does supplier use MRP?
Does supplier track material and production cycle times?
Can supplier support buyer’s use of JIT initiatives?
What are supplier’s real lead times?
What is supplier’s on-time delivery performance?
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E-Commerce Capability
Web-based B2B vs. EDI systems
Does supplier have CAD capability?
Does supplier use bar coding or RFID?
Can supplier provide ASNs or accept EFT transfers?
Does supplier utilize e-mail?
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Supplier’s Sourcing Strategies, Policies, and Techniques
Track performance of Tier 1 vs. Tier 2 vs. Tier 3 suppliers
Sharing of information
Extent of supplier development activities in its own supply base
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Longer-Term Relationship Potential
Is supplier willing to participate?
Can supplier commit necessary resources?
How early in design phase can supplier participate?
How is supplier unique?
Can supplier participate in joint problem solving and improvement?
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Longer-Term Relationship Potential
Will there be free and open information sharing?
Will supplier engage in and share future planning?
Can supplier maintain buyer’s need for confidentiality?
What is general level of comfort between the parties?
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Longer-Term Relationship Potential
How well does supplier understand buyer’s industry and business?
Will supplier share cost data?
Is supplier willing to share innovations with buyer first?
Can supplier commit to dedicate exclusive capacity?
What is supplier’s commitment level?
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Developing a Supplier Evaluation and Selection Survey
Survey should …
Be comprehensive and include important performance categories
Be as objective as possible
Include items and measurement scales that are reliable
Be flexible
Be mathematically straightforward and simple to understand
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Steps in Developing a Supplier Evaluation and Selection Survey
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Identify supplier evaluation categories
Assign a weight to each evaluation category
Identify and weigh subcategories
Define scoring system for categories and subcategories
Evaluate supplier directly
Review evaluation results and make selection decision
Review and improve supplier performance continuously
Initial Supplier Evaluation
| Category | Weight | Subweight | Score (1 - 5 scale) | Weighted Score | Subtotal | |
| Quality Systems | 20 | 17.4 | ||||
| Process control systems | 5 | 4 | 4.0 | |||
| Total quality commitment | 8 | 4 | 6.4 | |||
| PPM defect performance | 7 | 5 | 7.0 | |||
| Management Capability | 10 | 8.0 | ||||
| Management/labor relations | 5 | 4 | 4.0 | |||
| Management capability | 5 | 4 | 4.0 | |||
| Financial Condition | 10 | 7.0 | ||||
| Debt structure | 5 | 3 | 3.0 | |||
| Turnover ratios | 5 | 4 | 4.0 | |||
| Cost Structure | 15 | 14.0 | ||||
| Costs relative to industry | 5 | 5 | 5.0 | |||
| Understanding of costs | 5 | 4 | 4.0 | |||
| Cost control/reduction efforts | 5 | 5 | 5.0 | |||
| Delivery Performance | 15 | 9.0 | ||||
| Performance to promise | 5 | 3 | 3.0 | |||
| Lead-time requirements | 5 | 3 | 3.0 | |||
| Responsiveness | 5 | 3 | 3.0 | |||
| Technical/Process Capability | 15 | 14.0 | ||||
| Product innovation | 5 | 4 | 4.0 | |||
| Process innovation | 5 | 5 | 5.0 | |||
| Research and development | 5 | 5 | 5.0 | |||
| Information Systems Capability | 5 | 3.0 | ||||
| EDI capability | 3 | 5 | 3.0 | |||
| CAD/CAM | 2 | 0 | 0.0 | |||
| General | 10 | 8.2 | ||||
| Support of minority suppliers | 2 | 3 | 1.2 | |||
| Environmental compliance | 3 | 5 | 3.0 | |||
| Supply base management | 5 | 4 | 4.0 | |||
| Total Score | 80.6 |
© 2012 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Sample Recommendation Form
| Company Name | Foster Industries | Survey by: Manufacturing Commodity Team |
| Address | P.O. Box 1256 | Accompanied by: Quality Assurance |
| City, State, & Zip | Stroudsburg, PA 18370 | Initial Survey Resurvey |
| Phone | 570-619-5411 | Survey Date: 9/14/2010 |
| Supplier Code | Foster | Contact: Mr. Robert Jones |
| Supplier Score | 80.8 | Minimum Required Score: 65 |
| Recommendations | ||
| Supplier has potential to become a critical partner. However, limited design/development capability prevents continued growth. Foster will embark on implementing and upgrading design/development function for our business. | ||
| Action Plan Is Due By: | 2/1/2011 | |
| Supplier Acknowledgement | John Weaver Date: 9/15/2010 |
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Reducing Supplier Evaluation and Selection Cycle Time
Map current evaluation and selection process
Integrate with internal customers
Utilize data warehouse with supplier information
Engage third-party support
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Reducing Supplier Evaluation and Selection Cycle Time
New organizational design features
Commodity teams
Lead buyer model
Preferred supplier list
Electronic tools
Predefined contract language and shorter contracts
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A Good Supplier Does the Following:
Builds quality into the product, aiming for zero defects
Makes delivery performance a priority
Demonstrates responsiveness to buyer’s needs
Works with buyer to reduce lead times
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A Good Supplier Does the Following:
Provides buyer with capability and workload information
Creates, rather than fearing, future
Reinvests part of its profits into R&D with a long-term view
Meets stringent financial stability criteria when evaluating new customers for credit
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