Module 3 - SUPPLIER SELECTION AND EVALUATION

SUPPLIER SELECTION
AND EVALUATION
Module 3
OBJECTIVES
• To identify the qualification of a good supplier
• To identify appropriate supplier selection techniques
• To learn about supplier relationship management
• To analyze how to reduce the number of suppliers
• To learn about strategic supplier relationship management
• To understand how supplier evaluation is accomplished
Suppliers Must Be Carefully Evaluated
• In today’s competitive environment progressive firms must be able to
produce quality products at reasonable prices
• Buying firms select suppliers based on their capabilities, not purely of
competitive process
• In order to select suppliers who continually outperform competition,
suppliers must be carefully analyzed and evaluated
A New Role of Purchasing
• Traditional purchasing professionals who act as little more than order placers
are giving way to strategically involved analytical managers who control vital
inputs to production process
• More and more power is being placed in the hands of professional
purchasing manager because industry is beginning to realize the importance
of defect-free parts and value added capabilities of supplier
Strategic Selection
• Each business unit and department should have a clear understanding of the
strategy of the whole firm and have 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 material management umbrella
Supplier Relationship Management
• Buyer and supplier relationship have become increasingly important for a number
of reasons
• 1. Trend towards specialization
• 2. In some market segments, 80% or more of total product revenue often passes
directly to supplier
• 3. Significant transfer of value downstream
• 4. Maintain strong relationship with the best contract manufacturers and suppliers
• 5. Keeping buying firm edge by reducing costs, improving product and
service quality and enacting continuous improvement
• 6. with the decreasing number of supplier, it is important to maintain strong
buyer-supplier relationships
Four Pure Supply Management Relationships
Counter Competitive Cooperative Collaborative

productive
Counterproductive Relationships
• Are those in which each organization ( buying and supplying) is so focused
on getting what is best for it that each puts the other at a disadvantage
Transactional Relationships
Or competitive relationship , both buying and supplying firms strive to get the
very best arrangement possible in their negotiations and fail to see the benefits
of both organization obtaining their goals and objectives
Cooperative Relationships
• Recognize the potential value of both organization getting what they want and
maximize the potential of having a long-term relationship
Collaborative Relationships
• Usually found with the buying firm’s strategic/tier-one suppliers
• Realize the benefits of working together to optimize outcomes for both
• Develop a strategy to deliver high quality product or service on time and under
budget
SRM Programs
• Once the system is developed, it then forces the various functions in the
buying firm to evaluate which supplier truly add value
• The company will categorize the suppliers into:
• 1. strategic
• 2. preferred
• 3. transactional
Three Categories of Supplier
• 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
• Preferred suppliers
• Are those that are important to the buying firm, but alternative suppliers could be
found with some other effort
• Transactional suppliers
• Are those that can be easily replace in a short time
Main Categories of Supplier Evaluation
• Process-based
• Assessment of the supplier’s production or service process
• Performance-based
• Assess the company after the product or service has been delivered
• In addition, large buying organization are demanding that their suppliers become ISO
Certified
Three Common Performance Based Evaluation
System
A. Categorical method
• Involves categorizing each
suppliers performance in specific
areas defined by a list of
performance variables
• Steps
• The buyer develops a list of
performance factors for each
supplier and keep track of each
area by assigning a grade
B. Cost-ratio method
• Evaluates the supplier performance by using
standard cost analysis
• The total cost of each purchased is calculated
as selling price plus the buyers internal
operating cost associated with quality, delivery
and service elements of the purchase
• Includes five performance factors
• Quality ( maximum of 30 pts)
• Delivery (25 pts)
• Technology (20 pts)
• Price (15 pts)
• Service (10 pts)
• A perfect supplier will receive a score of 100
• The best supplier is selected as the one with
the lowest net adjusted cost
• C. Linear Averaging
• Most commonly used evaluation
method
• Specific quantitative performance
factors are used to evaluate supplier
performance
• Steps
• 1. assigned appropriate weights to each
of factor add up to 100
• Ex. Quality 50, service 35, price 15
• 2. use the weight as subsequent multiplier
for individual ratings on each of the
performance factors
• 3. results are added in order to give
numerical rating for each supplier
Strategic Supplier Performance Review Process
• Performance review is a set of expectations and measurements for

controlling long-term relationships with existing strategic suppliers
• Includes consistent measurements for establishing positive relationship with
new suppliers and evaluating current performance of strategic supplier
according to the expectation of the buying firm
• Standard template with review categories
Strategic Suppliers
• Single Source
• One supplier is use to supply a particular part
• Advantages
• Supplier is willing to invest in new equipment or change operating methods to accommodate the buyer
• Provide lower cost per unit by reducing duplication of operations
• Spreading fixed cost across a larger volume
• Multiple Source
• Use of 2 or more suppliers
• Advantages
• Guarantee and undisrupted supply parts
Supplier Reduction
• If perceived benefit outweigh the risk
• Supplier Reduction Analysis
• Grade methods
• are those that are base on a score or grade given to the supplier for some attribute
• Suppliers performance in the past are kept on a record
• Hurdle
• Suppliers are required to jump over higher and higher hurdles to win the buyer’s business
• Done through certification program
Certification
• Supplier Certification program
are very useful tools to evaluate
the quality capabilities of a
supplier

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What are the objectives of supplier selection and evaluation?

What are the advantages of carefully evaluating suppliers?

SUPPLIER SELECTION

Counter Competitive Cooperative Collaborative

• Performance review is a set of expectations and measurements for

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