supplier evaluation & selection
TRANSCRIPT
PURCHASING & SUPPLY CHAIN MANAGEMENT, 4ePURCHASING & SUPPLY CHAIN MANAGEMENT, 4e
CENGAGE LEARNINGCENGAGE LEARNINGMonczka – Handfield – Giunipero – PattersonMonczka – Handfield – Giunipero – Patterson
Presentation on Presentation on Supplier Evaluation and SelectionSupplier Evaluation and Selection
By Pradeep OwalekarBy Pradeep OwalekarBased on the cited BookBased on the cited Book
Coverage of Topic
Supplier evaluation and selection Supplier evaluation and selection processprocess
Key supplier evaluation criteriaKey supplier evaluation criteria Developing a supplier evaluation and Developing a supplier evaluation and
selection surveyselection survey Critical supplier selection issuesCritical supplier selection issues Reducing supplier evaluation and Reducing supplier evaluation and
selection cycle timeselection cycle time
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Evaluation and Selection Process
No “one best way”No “one best way” Overall objective is to reduce sourcing Overall objective is to reduce sourcing
risk and maximize value to the buyerrisk and maximize value to the buyer Need to select suppliers for the long-Need to select suppliers for the long-
termterm
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Supplier Selection and Evaluation
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Scenarios requiring Supplier Evaluation and Selection Decisions
During new product developmentDuring new product development Due to poor existing supplier Due to poor existing supplier
performanceperformance At the end of an existing contractAt the end of an existing contract Buying new equipmentBuying new equipment Expanding into new markets or product Expanding into new markets or product
lineslines Receiving internal user requisitionsReceiving internal user requisitions
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Scenarios requiring Supplier Evaluation and Selection Decisions
Performing market testsPerforming market tests Facing countertrade requirementsFacing countertrade requirements During outsourcing analysisDuring outsourcing analysis Consolidating volumesConsolidating volumes Conducting a reverse auctionConducting a reverse auction When current suppliers have insufficient When current suppliers have insufficient
capacitycapacity Reducing supply base sizeReducing supply base size
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Identify Key Sourcing Requirements
May be determined by internal and May be determined by internal and external customersexternal customers Supplier qualitySupplier quality CostCost Delivery performanceDelivery performance OtherOther
Vary widely from item to itemVary widely from item to item
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Determine Sourcing Strategy
Single vs. multiple sourcingSingle vs. multiple sourcing Short-term vs. long-term contractsShort-term vs. long-term contracts Design support vs. operational supportDesign support vs. operational support Full-service vs. non-full-service Full-service vs. non-full-service
supplierssuppliers Domestic vs. foreign-based suppliersDomestic vs. foreign-based suppliers Collaboration vs. arm’s length Collaboration vs. arm’s length
relationshiprelationshipPradeep B. OwalekarPradeep B. Owalekar
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Identify Potential Sources
How well existing suppliers can satisfy How well existing suppliers can satisfy cost, quality, and/or other performance cost, quality, and/or other performance objectivesobjectives
Strategic importance of purchase Strategic importance of purchase requirementrequirement
Technical complexity of purchase Technical complexity of purchase requirementrequirement
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Information Search Requirements
Purchasing & Supply Chain Management, 4ePurchasing & Supply Chain Management, 4e1010
High Capability of High Capability of SuppliersSuppliers
Low Capability of Low Capability of SuppliersSuppliers
High Strategic High Strategic Importance to Importance to
BuyerBuyer
Minor to Moderate Information
Search
Major Information Search
Low Strategic Low Strategic Importance to Importance to
BuyerBuyer
Minor Information Search
Minor to Moderate Information
Search
Sources of Information
Current suppliersCurrent suppliers Preferred suppliersPreferred suppliers Sales Sales
representativesrepresentatives Information Information
databasesdatabases ExperienceExperience
Trade journalsTrade journals Trade directoriesTrade directories Trade showsTrade shows Second-party or Second-party or
indirect informationindirect information Internal sourcesInternal sources Internet searchesInternet searches
Pradeep B. OwalekarPradeep B. Owalekar1111
Sourcing Alternatives
Manufacturer vs. distributorManufacturer vs. distributor Vendor-managed inventoryVendor-managed inventory Integrated supplyIntegrated supply
Local, national, or international suppliersLocal, national, or international suppliers Large vs. small suppliersLarge vs. small suppliers
CapabilityCapability
Multiple vs. single sourcingMultiple vs. single sourcing
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Method of Evaluation and Selection
Evaluation from supplier-provided Evaluation from supplier-provided informationinformation
Supplier visitsSupplier visits Use of preferred suppliersUse of preferred suppliers External or third-party informationExternal or third-party information
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Key Suppliers Evaluation Criteria
Price, quality, and deliveryPrice, quality, and delivery Management capabilityManagement capability Employees capabilitiesEmployees capabilities Cost structureCost structure Total quality performance, systems, Total quality performance, systems,
and philosophyand philosophy Process and technological capabilityProcess and technological capability
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Key Suppliers Evaluation Criteria
Environmental regulation complianceEnvironmental regulation compliance Financial stabilityFinancial stability Production scheduling and control Production scheduling and control
systemssystems E-commerce capabilityE-commerce capability Supplier’s sourcing strategies, policies, Supplier’s sourcing strategies, policies,
and techniquesand techniques Longer-term relationship potentialLonger-term relationship potential
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Management Capabilities
Does management practice long-range Does management practice long-range planning?planning?
Has management committed to total Has management committed to total quality management and continuous quality management and continuous improvement?improvement?
How high is management turnover?How high is management turnover? What are the professional and What are the professional and
educational backgrounds of key educational backgrounds of key managers?managers?
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Management Capabilities
What is the organization’s vision?What is the organization’s vision? Is the company customer focused?Is the company customer focused? What is the history of labor-What is the history of labor-
management relations?management relations? Is the organization making necessary Is the organization making necessary
capital investments?capital investments?
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Management Capabilities
Is the organization prepared to face Is the organization prepared to face future competitive challenges?future competitive challenges?
Does management fully understand the Does management fully understand the importance of strategic sourcing?importance of strategic sourcing?
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Employee Capabilities
Degree of commitment to quality and Degree of commitment to quality and continuous improvementcontinuous improvement
Overall skills and abilitiesOverall skills and abilities Employee-management relationsEmployee-management relations Worker flexibilityWorker flexibility Workforce turnoverWorkforce turnover Willingness to contribute to improved Willingness to contribute to improved
operationsoperationsPradeep B. OwalekarPradeep B. Owalekar
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Total Cost Structure
Direct labor costsDirect labor costs Indirect labor costsIndirect labor costs Material costsMaterial costs Manufacturing or process operating Manufacturing or process operating
costscosts General overhead costsGeneral overhead costs
Pradeep B. OwalekarPradeep B. Owalekar2020
Challenges of Total Cost Analysis
Supplier may not understand its true Supplier may not understand its true costscosts
Unsophisticated cost accounting systemUnsophisticated cost accounting system Cost data is considered proprietaryCost data is considered proprietary Buyer’s knowledge may undermine Buyer’s knowledge may undermine
supplier’s pricing strategysupplier’s pricing strategy Supplier is concerned about potential Supplier is concerned about potential
misuse of its cost datamisuse of its cost dataPradeep B. OwalekarPradeep B. Owalekar
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Total Quality Performance
Management commitmentManagement commitment Use of SPC techniquesUse of SPC techniques Level of defectsLevel of defects Safety, training, and maintenanceSafety, training, and maintenance Use of ISO 9000 criteriaUse of ISO 9000 criteria
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Process and Technological Capability
Level of technology, design capability, Level of technology, design capability, methods used, and equipmentmethods used, and equipment Current vs. future capabilitiesCurrent vs. future capabilities
Resources committed to R&DResources committed to R&D
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Environmental Compliance
Disclosure of environmental infractionsDisclosure of environmental infractions Hazardous and toxic waste generation Hazardous and toxic waste generation
and managementand management Recycling managementRecycling management ISO 14000 certificationISO 14000 certification Control of ozone-depleting substancesControl of ozone-depleting substances
Pradeep B. OwalekarPradeep B. Owalekar2424
Financial Stability
Often used as a screening process in Often used as a screening process in the initial selection phasethe initial selection phase
Risks of a financially weak supplierRisks of a financially weak supplier Supplier will go out of businessSupplier will go out of business Insufficient resources to invest in Insufficient resources to invest in
improved plant and equipmentimproved plant and equipment Supplier may become too dependent on Supplier may become too dependent on
buyerbuyer May be an indicator of other problemsMay be an indicator of other problems
Pradeep B. OwalekarPradeep B. Owalekar2525
Production Scheduling and Control
Does the supplier use MRP?Does the supplier use MRP? Does the supplier track material and Does the supplier track material and
production cycle times?production cycle times? Can the supplier support the buyer’s Can the supplier support the buyer’s
JIT initiatives?JIT initiatives? What are the supplier’s real lead times?What are the supplier’s real lead times? What is the supplier’s on-time delivery What is the supplier’s on-time delivery
performance?performance?Pradeep B. OwalekarPradeep B. Owalekar
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E-Commerce Capability
Web-based B2B vs. EDI systemsWeb-based B2B vs. EDI systems Does the supplier have CAD capability?Does the supplier have CAD capability? Does the supplier use bar coding?Does the supplier use bar coding? Does the supplier use RFID?Does the supplier use RFID? Can the supplier provide ASNs?Can the supplier provide ASNs? Can the supplier accept EFT transfers?Can the supplier accept EFT transfers? Does the supplier utilize e-mail?Does the supplier utilize e-mail?
Pradeep B. OwalekarPradeep B. Owalekar2727
Supplier’s Supply Base Strategies
Tier 1 vs. Tier 2 vs. Tier 3 suppliersTier 1 vs. Tier 2 vs. Tier 3 suppliers Sharing of informationSharing of information Level of supplier development Level of supplier development
activities in the supplier’s own supply activities in the supplier’s own supply basebase
Pradeep B. OwalekarPradeep B. Owalekar2828
Potential for Long-Term Relationships
Is the supplier willing to participate?Is the supplier willing to participate? Can the supplier commit necessary Can the supplier commit necessary
resources?resources? When in the design phase can the When in the design phase can the
supplier participate?supplier participate? How is the supplier unique?How is the supplier unique? Can the supplier participate in joint Can the supplier participate in joint
problem solving and improvement?problem solving and improvement?Pradeep B. OwalekarPradeep B. Owalekar
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Potential for Long-Term Relationships
Will there be free and open information Will there be free and open information sharing?sharing?
Will the supplier engage in future Will the supplier engage in future planning?planning?
Can the supplier maintain the buyer’s Can the supplier maintain the buyer’s need for confidentiality?need for confidentiality?
What is the general level of comfort What is the general level of comfort between the parties?between the parties?
Pradeep B. OwalekarPradeep B. Owalekar3030
Potential for Long-Term Relationships
How well does the supplier understand How well does the supplier understand the buyer’s industry and business?the buyer’s industry and business?
Will the supplier share cost data?Will the supplier share cost data? Is the supplier willing to share innovation Is the supplier willing to share innovation
data early?data early? Can the supplier commit to dedicated Can the supplier commit to dedicated
capacity?capacity? What is the supplier’s commitment level?What is the supplier’s commitment level?
Pradeep B. OwalekarPradeep B. Owalekar3131
Evaluation and Selection Surveys
Identify supplier evaluation categoriesIdentify supplier evaluation categories Assign a weight to each categoryAssign a weight to each category Identify and weight subcategoriesIdentify and weight subcategories Define a scoring system for categories Define a scoring system for categories
and subcategoriesand subcategories Evaluate supplier directlyEvaluate supplier directly Review results and make decisionReview results and make decision
Pradeep B. OwalekarPradeep B. Owalekar3232
Initial Supplier EvaluationCategory Weight Subweight
Score (1 - 5 scale)
Weighted Score
Subtotal
Quality Systems 20 Process control systems 5 4 4.0 Total quality commitment 8 4 6.4 PPM defect performance 7 5 7.0 17.4
Management Capability 10 Management/labor relations 5 4 4.0 Management capability 5 4 4.0 8.0
Financial Condition 10 Debt structure 5 3 3.0 Turnover ratios 5 4 4.0 7.0
Cost Structure 15 Costs relative to industry 5 5 5.0 Understanding of costs 5 4 4.0 Cost control/reduction efforts 5 5 5.0 14.0
Delivery Performance 15 Performance to promise 5 3 3.0 Lead-time requirements 5 3 3.0 Responsiveness 5 3 3.0 9.0
Technical/Process Capability 15 Product innovation 5 4 4.0 Process innovation 5 5 5.0 research and development 5 5 5.0 14.0
Information Systems Capability 5 EDI capability 3 5 3.0 CAD/CAM 2 0 0.0 3.0
General 10 Support of minority suppliers 2 3 1.2 Environmental compliance 3 5 3.0 Supply base management 5 4 4.0 8.2
Total Score 80.6
Critical Supplier Selection Issues
Size relationshipSize relationship Use of international suppliersUse of international suppliers Competitors as suppliersCompetitors as suppliers Countertrade requirementsCountertrade requirements Social objectivesSocial objectives
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Reducing Selection Cycle Time
Map the existing processMap the existing process Integrate with internal customersIntegrate with internal customers Data warehouse with supplier Data warehouse with supplier
informationinformation Third-party supportThird-party support
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Reducing Selection Cycle Time
New organization design featuresNew organization design features Preferred supplier listPreferred supplier list Electronic toolsElectronic tools Predefined contract language and Predefined contract language and
shorter contractsshorter contracts
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A Good Supplier Does the Following:
Builds quality into the product, aiming Builds quality into the product, aiming for zero defectsfor zero defects
Makes delivery performance a priorityMakes delivery performance a priority Demonstrates responsiveness to a Demonstrates responsiveness to a
buyer’s needsbuyer’s needs Works with the buyer to reduce lead Works with the buyer to reduce lead
timestimes
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A Good Supplier Does the Following:
Provides the buyer with capability and Provides the buyer with capability and workload informationworkload information
Creates the futureCreates the future Reinvests part of its profits into R&D Reinvests part of its profits into R&D
with a long-term viewwith a long-term view Meets stringent financial stability Meets stringent financial stability
criteria when evaluating new criteria when evaluating new customerscustomers
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