-Supplier Selection Criteria Overview Kumars

Supplier Selection Criteria- An Overview

A Major Project Report By IRSS-2012

Contents

1.1 INTRODUCTION .................................................................................................................................. 2

1.2 SELECTION OF CRITERIA IN RESEARCH ............................................................................................... 2

1.3 QUANTIFICATION OF CRITERIA FOR SUPPLIER SELECTION .................................................................. 3

1.4 SYSTEMS AT MAJOR MANUFACTURERS ............................................................................................. 6

1.4.1 BHEL- Bharat Heavy Electricals Limited ............................................................................... 6

1.4.2 ABB ........................................................................................................................................ 11

1.4.3 VOLVO .................................................................................................................................. 12

1.4.4 ALCOA HOWMET ................................................................................................................ 14

1.4.5 General Dynamics Land Systems .......................................................................................... 17

1.4.6 Ordnance Factories Board (OFB)......................................................................................... 18

1.4.7 RAIL COACH FACTORY - INDIAN RAILWAYS .................................................................. 21

1.4.8 COAL INDIA LIMITED ........................................................................................................ 23

1.4.9 STEEL AUTHORITY OF INDIA LTD (SAIL) ........................................................................ 26

1.4.10 LOCKHEED MARTIN AERONAUTICS ........................................................................... 29

1.4.11 UNITED TECHNOLOGIES CORPORATION ................................................................. 30

1.4.12 SCHAEFFLER TECHNOLOGIES AG & CO. KG ........................................................... 31

1.4.13 BUREAU OF INDIAN STANDARDS, IS 12040:2001 ...................................................... 36

1.5 REFERENCES .................................................................................................................................... 40

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1.1 Introduction

The dynamics of market has forced all manufacturers to resort to large scale outsourcing.

Traditional manufacturers have been forced to outsource major activities. Selecting a

supplier is a very complex and risky process since the factors responsible for selection are

difficult to be quantified. It is not possible to quantify all factors and predicting suppliers

behaviour is quite difficult. For a public procurement agency it is all the more difficult as

it has to maintain the image of a fair, transparent and just decision maker. The

manufacturers and companies have evolved several methods for supplier evaluation. Few

of the systems followed in major companies were analyzed for finding patterns of

similarity and also their closeness to models in research. Generally quality is considered

the most important criteria for selection of supplier. But quality is not the factor which is

decisive, in most cases it is the purchase price. Thus an integrated approach is must for

qualifying the suppliers. The paper has analyzed a few of the major manufacturers

systems to get a fair idea of prevalent practices in industry. The research done on this

topic of supplier selection has been compiled to find the gaps and similarities. The aim of

the work is to reconcile the practice with research.

1.2 Selection of criteria in research

Bureau of Indian Standards has published a standard IS: 12040-2001 which provides the

broad guidelines for development of Vendor Rating System. The standard stipulates

Quality, Price, Delivery, Service and System as five key factors to work out rating

system.

Factors for supplier evaluation which have evolved over the years have been compiled as

listed in Table I.

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Table I Factors/criteria for supplier selection

FACTOR/CRITERION

Quality systems in operation at the suppliers place/quality philosophy

Financial capability of the supplier

Technological capability/R&D capability

Reputation for integrity/believability and honesty/Vendors image

Existence of IT standards/communication system

Performance awards/performance history

Bidding procedural compliance

Profitability of suppliers

Breadth of product line/ability of a supplier to supply a number of items

Suppliers proximity/geographic location

Management and organization

Contribution to productivity

Conflict resolution

FACTOR/CRITERION

Production facilities and capacity

Communication openness

Labour problems at the suppliers place

Business volume/amount of past business

Price

Quality/Reliability of the product

Ability to meet delivery promise/ Delivery lead time/ Consistent Delivery

Management sensitivity to buyers requirements/ Attitude

After Sales Support/ Technical support available

Positive attitudes towards complaints

1.3 Quantification of criteria for supplier selection

The important point in the selection of criteria is that they it must be possible to quantify

them and the data also be available. Each such criterion, therefore has been analyzed

(Table II) for its feasibility to be included in the list of selection criteria.

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Table II Feasibility of selection criteria

CRITERION FEASIBILITY

Quality systems in operation at the suppliers place/quality philosophy

For existing suppliers, only certificate can be asked, cannot be quantified. This will automatically reflect in the quality of supply. But for assessing capability of potential supplier, this is an important basis.

Financial capability of the supplier

For new bidders this can be factor, but no discrimination can be done on this basis and it is difficult to assign ranking to a prospective or current supplier. This can also have the effect of restricting competition and allow only established players to bid/supply. But even with this drawback, it is a very important factor while determining potential suppliers.

Technological capability/R&D capability

For regular well established items, this may not be a important criterion. Moreover, there is no scale possible for this subjective opinion. This can have a similar effect as financial capability criterion. When new suppliers are invited, this again is very important. Independent expert opinion may be required for assigning ranking/marks for this criterion.

Reputation for integrity/believability and honesty/Vendors image

This is a very important. However, to assign ranking is a very difficult problem. And in the present condition, the onus of ranking the integrity lies with the purchasing organization. This therefore, cannot form the part of selection criteria.

Existence of IT standards/communication system

This is an important for increasing the efficiency of the supplier; however, the purchasing organization should be more concerned about delivery and quality than the internal arrangements of the supplier. The professionalism of the supplier is best reflected in the ensuing supplies. This criterion also cannot be quantified to a satisfactory level with reduced subjectivity. For potential suppliers some credit has to be given for their systems.

Performance awards/performance history

This is an important criterion, but is covered in quality of product and delivery history. It can be a basis for a potential supplier. Credit can be given for market reputation and delivery performance for other supplies.

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Bidding procedural compliance

Without this in public procurement no supplier can qualify so it is a redundant criterion in case of public procurement.

Profitability of suppliers

It may not be possible to assess this factor completely; moreover the focus of organization is on quality and timely delivery. If these are achieved this criteria becomes redundant. If the supplier cannot breakeven then it may no longer supply and which is surely a matter for concern. But in public procurement quantifying is must which only can lead to objectivity, but for this factor it will not be possible.

Breadth of product line/ability of a supplier to supply a number of items

This item is not quantifiable. Since the aim is to reduce subjectivity it will not qualify to be in the criteria list. Moreover, when the judgement has to be on several items this will play an important role but as long as the supplier is being evaluated for a single item, it does not matter.

Suppliers proximity/geographic location

This is an important factor in reducing cost of transportation and ease in case of crisis. But in a globalization era, this may not be right way to assess suppliers.

Management and organization

Cannot be quantified

Contribution to productivity

This will automatically reflect in price of product and cannot be quantified.

Conflict resolution This also cannot be quantified and any opinion will be subject of dispute.

Production facilities and capacity

This is an important criterion for first time registration of suppliers, once the track record of supply is there, it may not be useful

Communication openness

Cannot be quantified

Labour problems at the suppliers place

Similarly, this criterion also cannot be quantified.

Business volume/amount of past business

This criterion is important for assessment of new suppliers.

Price This is a very important criterion and can be quantified

Quality/Reliability of the product

This is a very important factor and methods to quantify this are available.

Ability to meet delivery promise/ Delivery lead time/ Consistent Delivery

This can be quantified and one of the most important criterion for a supplier to qualify.

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Management sensitivity to buyers requirements/ Attitude

Difficult to quantify but is covered in warranty obligations etc.

After Sales Support/ Technical support available

This is an important factor and can be quantified on basis of history of problem resolution for old suppliers and industry feedback for new suppliers.

Positive attitudes towards complaints

This can be factored in a common criterion service which includes a few of the above mentioned criteria.

Based on past research, and evaluation of criteria applicable and manageable in present

context, the four salient criteria which may be identified as most relevant in supplier

evaluation and selection are,

a. Quality

b. Delivery

c . Price

d. Service

The principle to be adopted is You cant manage what you dont measure.

1.4 Systems at Major Manufacturers

Few important and famous companies whose supplier evaluation and rating system could

be found have been detailed to find out the which are the most relevant and practical

criteria for supplier evaluation and selection.

1.4.1 BHEL- Bharat Heavy Electricals Limited

Bharat Heavy Electricals Limited (BHEL) is a Public Sector Enterprise manufacturing

integrated power plant equipments It is based in New Delhi, India. BHEL was established

in 1964, ushering in the indigenous Heavy Electrical Equipment industry in India. It is

engaged in the design, engineering, manufacture, construction, testing, commissioning

and servicing of a wide range of products and services for the core sectors of the

economy, viz. Power, Transmission, Industry, Transportation, Renewable Energy, Oil &

Gas and Defence. It has 15 manufacturing divisions, two repair units, four regional

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offices, eight service centres, eight overseas offices and 15 regional centres and currently

operates at more than 150 project sites across India and abroad. Most of its manufacturing

units and other entities have been accredited to Quality Management Systems (ISO

9001:2008), Environmental Management Systems (ISO 14001:2004) and Occupational

Health & Safety Management Systems (OHSAS 18001:2007).

It is the 7th largest power equipment manufacturer in the world. It has a workforce of

about 50,000.

BHEL has a scientific method of Supplier Performance monitoring and rating system.

Supplier Performance Rating (SPR):

Supplier performance is assessed with respect to the following main factors and it is

calculated for each consignment/ purchase order:

Rating Weightage

Quality 60

Delivery 30

Service 10

Total 100

Quality Rating (QR) is given 60% weightage.

Quality rating is based on acceptable quantity of material offered for inspection or

delivered by supplier

=(1 + 0.75 2 + 0 3) 60

where,

Q =Quantity inspected

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Q1 =Quantity accepted

Q2 =Quantity accepted with concession / deviation/ rectification

Q3 =Quantity rejected

The pre-inspection report (at suppliers works) includes the quantity accepted after

rework in Q2 category.

Delivery Rating (DR) is given 30% weightage

Supplier is rated on delivery parameters as follows.

Adherence to P.O delivery date 30

One mark is deducted for each days delay.

Service Rating (SR) is given 10% weightage

Service Rating is given on the basis of the following criteria.

SR

Cooperation and readiness to help in emergency, submission of Support documents such as GA Drawings, TC,GC etc. as applicable, submission of final technical documents, O&M Manuals and as built drawings complete and in time.

5

Promptness in reply/attending quality problems at site/shop 5

Thus, the Supplier Performance Rating (SPR) = QR+DR+SR

The period for calculation of SPR is previous year plus elapsed period of current year or

period for last three executed purchase orders whichever is more.

There is a system of FEEDBACK FROM SHOP FLOOR at BHEL. If non-

conformance/defects in components are noted while processing at shop floor overall

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performance rating will be multiplied by demerit factor (DF). The demerit factor is

calculated in the following manner:

DF

Components used after rectification 0.9

Components replaced by supplier 0.8

Supplier does not rectify/ replace/respond 0.0

Supplier Rating

Now based on total score the supplier performance is rated.

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Total Score Rating Action

98-100 A1 Supplier can be considered as Preferred Supplier for self certification and long term contract.

90 to less than 98 A Supplier can be considered for self certification 100% Quality Rating consistently.

Supplier can be considered for reduced witness points during inspection. Supplier can be considered for long-term contracts.

75 to less than 90 B Supplier to be informed about deficiency for immediate corrective and preventive action.

Supplier can be considered for long-term contracts.

60 to less than 75 C Supplier to be informed about deficiency for immediate corrective and preventive action. Response to be obtained from supplier. Necessary technical help may be provided to the supplier.

Inspection stages may be reviewed for tightened inspection.

Enquiry to be sent only after approval at higher level.

Less than 60 D Supplier to be put under hold and informed.

In order to provide motivation to A1 and A category rating supplier, BHEL has suggested

the following steps,

a) May be considered for self-certification

b) May be preferred for long term contracts

c) In tenders, where quantity is to be split amongst suppliers, 10% quantity may

be reserved for A1 category supplier in addition to normal distribution of

remaining 90% quantity as per normal practice.

d) Appreciation/commendation in structured get-together/suppliers meets.

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The feed back to the supplier is given annually in a prescribed format. The system at

BHEL is very structured, and has transparency inbuilt. It is done so as it is a Public

Sector Unit subjected to various statutory audits, investigations etc.

1.4.2 ABB

ABB is a multinational corporation headquartered in Zurich, Switzerland, operating in

robotics and mainly in the power and automation technology areas. It ranked 143rd in

Forbes Ranking (2010). ABB is one of the largest engineering companies as well as one

of the largest conglomerates in the world. ABB has operations in around 100 countries,

with approximately 145,000 employees in June 2012, and reported global revenue of $40

billion for 2011. The supplier evaluation at ABB has both formal and informal methods.

Purchase items are classified according to Kraljics model. They have a fairly simple

supplier qualification and assessment system.

Supplier Qualification Status

Suppliers can determine their potential qualification status by looking at the Summary

Sheet of the Supplier Qualification Questionnaire. According to the qualification level

achieved they can see below the actions that need to be taken.

Rejected: Their score is under 20%: Their Company is too far from ABB requirements.

If and when they have implemented corrective actions which permit them to reach a score

of more than 20%, they can get in touch with ABB again.

Under Development: Their score is between 20% and 50%: they can be part of the ABB

Supplier List, provided their Quality, Costs and Delivery (QCD) performance is best in

class and they have a plan to reach 50% within one year.

Qualified: Their score is above 50%: they can be part of the ABB Supplier List, provided

their Quality, Costs and Delivery (QCD) performance is best in class. The decision to

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include a supplier on the ABB supplier list will be based on the combination of the score

and the action plan to address weak areas.

Supplier Scorecard

Suppliers overall performance is measured on quality, on-time delivery and cooperation.

The relative importance depends on division to division. In general most important is on-

time delivery in which supplier receives 40-60% of the points, quality as second most

important with 20-40% points and cooperation is last. The suppliers objective is:

Measurement Suppliers Objective

On-Time Delivery 100% on-time

As-Received Quality Zero defects

1.4.3 VOLVO

The Volvo Group is one of the worlds leading manufacturers of trucks, buses,

construction equipment and marine and industrial engines. The Group also provides

complete solutions for financing and service. The Volvo Group, which employs about

115,000 people, has production facilities in 19 countries and sells its products in more

than 190 markets. In 2012 the Volvo Groups sales amounted to about USD 45 billion.

The Volvo Group is a publicly-held company headquartered in Gteborg, Sweden.

In their Supplier Quality Assurance Manual Edition 06-2010, Volvo has stated their goal

as PREMIUM SUPPLIERS FOR PREMIUM BRAND, our effort is directed towards

selecting the best suppliers based on capability and performance. Once selected, our

goal is to work with these suppliers to develop a strong, long-term, structured

relationship with them.

The objectives are well defined for the suppliers. The targets are mentioned in the table

below:

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Measurement GENERAL TARGET

PPM- Rejected Part Per Million

(Safety critical characteristics excluded)

Explanation: The PPM value is defined as the number of rejected parts divided by the total quantity delivered multiplied by 1000000.

10 PPM

QPM- Quality Performance Measurement

Calculated at Supplier manufacturing Parma level

Explanation: Compound quality grading from 0 point (Outstanding) to 100 (worst case)

30

Fault Frequency

Explanation: The number of Warranty Claims per vehicle within the first 12 months of use (after zero Km/miles)

0 % for safety features

Unless otherwise specified in the technical specifications, fault frequency targets shall be:

Below 0.0005% for fasteners ,brackets and similar parts

Below 0.005% for othercomponents

Service campaign

Explanation: The number of vehicle recalled after zero KM/miles due to a reliability/warranty problem

0

Safety recall

Explanation; The number of trucks recalled after zero km/miles due to a safety problem

0

This is a MUST (non-negotiable)

Delivery precision

Explanation: A percentage: The quantity of parts delivered on time divided by the total delivered.

98% as minimum requirement.

100% For delivery in sequence.

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For managing performance, the following performance parameters are monitored,

Quality Performance Measurement Level, Field Failure, Delivery Precision, Rejected

Parts Per Million Level, Breakdown Failure, Unplanned Stop, Production Feedback,

Warranty Claims and Safety Problem.

The scorecard for suppliers is used for monitoring the quality trends and acts as alert for

low performing supplier. A low performing supplier (LPS) is identified and quality

improvement activities are initiated. There is a unique system of exit criteria of a four

stage performance improvement elevation process.

1.4.4 ALCOA HOWMET

Headquartered in Cleveland, Ohio, Alcoa Howmet is a world leader in the investment

casting of superalloys, aluminum and titanium primarily for jet aircraft engines and

airframes as well as Industrial Gas Turbine (IGT) engine components. Alcoa Howmet

also provides hot isostatic pressing, precision machining and protective coating services.

An important supplier of superalloy metals, titanium ingots, ceramic products and

advanced tooling, Alcoa Howmet conducts extensive research to aid development of its

material, product and process technologies.

Alcoa Howmet and affiliates operate 27 manufacturing facilities in the United States,

Canada, France, the United Kingdom and Japan.

Howmet uses a computer database to evaluate suppliers performance in the areas of:

Quality

Delivery

Service

Total Cost

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A combination of data from each category determines total overall performance. The

Supplier Price Index (SPI) factors rework and other quality and delivery issues to

calculate the real cost of a purchase to Howmet. The information is used for negotiating

contracts and awarding new business.

The company has the following Performance Categories for suppliers

Preferred

Suppliers that sustain composite performance levels of 94% to 100% will receive

preference for new and follow-on business.

Certified

Suppliers that sustain composite performance levels of 90% to 93.9% will be awarded

business based on the suppliers ability to provide products, materials or services in

accordance with the Supplier Certification Control plan.

Acceptable


business before those in lesser performance categories.

Marginal


business that has not already gone to preferred and acceptable suppliers.

Measurement Criteria

Quality = 55% of Performance Measurement

Formula

(Receipt Rejected / Total Monthly Receipts) (Reason Code weight + Point of Location

weight / Total Monthly Receipts) = Point Loss

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The result is subtracted from the available suppliers quality percentage points.

Quality ratings for high volume components are different, for a specific month the

following formula is used, based on parts per million (PPM):

PPM Criteria Quality Performance Measurement Score

000-800 100 Points

800-1600 95 Points

1600-1800 90 Points

1800-2400 85 Points

2400 or greater 0 Points

Delivery = 35% of Performance Measurement

Suppliers are penalized for deviations in delivery dates and quantities. Within 6-day

delivery window, 100 points are credited and late beyond 5 days as 0.

Service = 10% of Performance Measurement

The service rating reflects a few factors: like how well the suppliers carry out the

purchase order; their support systems and ethical conduct.

Rating Service Performance Level Credit (% Points)

Good Competent, meets expectations 90.0 100.0

Acceptable Tolerable but below expectations 80.0 89.9

Unacceptable Results are not adequate 70.0 79.9

Rating Ethics Performance Level Credit (% Points)

Acceptable Has an Ethics program 100.0

Unacceptable Does not have an Ethics program 0.0

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1.4.5 General Dynamics Land Systems

General Dynamics is a market leader in business aviation; combat vehicles, weapons

systems and munitions; shipbuilding and marine systems; and mission-critical

information systems and technology. It has integrated more than 60 businesses, including

six in 2011. The gross revenue was approximately $32 billion in 2011 and the workforce

is about 95,000 employees. The company is organized into four business groups:

Aerospace, Combat Systems, Information Systems and Technology and Marine Systems.

General Dynamic Land Systems is one of its divisions. It rates suppliers in relation to

various performance factors. The company strives to identify problem areas and work

with the supply base to improve their performance ratings with the various General

Dynamics Land Systems locations. The Monthly Supplier Performance Report includes

the following performance ratings.

Metric Definition Goal Weight Factor

Performance Ranges

Red Yellow Green

Delivery 100% of score based on:

On-Time Delivery of Shipments to the Promise Date /Need by Date

100% 40% 95%

Quality 100% of score based on;

Quality Acceptance Percentage of parts Received

100% 30% 98% 98%-99.9%

100%

Financial stability

100% of score based on:

Current Dun and Bradstreet (D&B)

Supplier Evaluation of Risk (SER) Score

SER of 1, 2 or 3 = 100%

SER of 4, 5,or 6 = 75%

SER of 7 or 8 = 25%

SER of 9 = 0%

100% 10%

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Compliance 50% of score based on:

Supplier adherence to iSupplier Activity Requirements

50% of Score based on:

Supplier adherence to Barcode Requirements

100% 20% 0% 50% 100%

Overall Combination of Delivery, Quality , Financial Stability, and Compliance

100% 100% 93.5%

The key attributes of performance are

1. Delivery

2. Cost

3. Quality

They have a structured supplier development process.

1.4.6 Ordnance Factories Board (OFB)

Ordnance Factories Board (OFB), consisting of the Indian Ordnance Factories is an

industrial setup functioning under the Department of Defence Production, Ministry of

Defence, Government of India. It is engaged in production, testing, logistics, research,

development and marketing of a comprehensive product range in the areas of land, air

and sea systems. The Headquarter is at Kolkata, it consists of forty-one Factories, nine

Training Institutes, three Regional Marketing Centres and four Regional Controllerates of

Safety. OFB is the world's largest government operated production organization. It has a

total workforce of about 164,000. Its total sales were at $2.6 billion.

OFB has issued a detailed procedure for vendor registration and monitoring called

VENDOR REGISTRATION SOP Ver 2.2. The suppliers are short-listed by a Capacity

Verification Team. The performance of successful established suppliers is monitored

regularly against every completed order based on Vendor Rating System. Following

parameters are used for Vendor Rating System:

1. Quality Rating

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2. Delivery Rating

3. Price Rating

4. Service Rating.

There are formulae suggested for the different parameters.

QUALITY RATING

= {(1 + (0.7 2) + (0.3 3) + (0 4)}/

where

Q1 = Quantity Accepted Conforming to Specification,

Q2 = Quantity accepted with deviation

Q3 = Quantity accepted after rectification

Q4 = Quantity rejected and

Q = Total quantity offered for inspection (Q1 + Q2 + Q3 + Q4 )

DELIVERY RATING

= ( / ) + { /} { /} 0.5

where

Qa = Quantity Supplied on Time,

Qc = Quantity Ordered,

Qb = Quantity supplied late beyond delivery period

Tc = Delivery period as per supply order in days,

Ta = Total Time taken to complete the supplies, including late deliveries in

number of days.

PRICE RATING

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= /

where,

PL = Lowest price quoted by any Supplier against that tender

PQ = Price quoted by the Supplier.

SERVICE RATING

The Index/Score for performance with respect to service is determined jointly by the

production/user and the materials management department. They use the service rating

break-up as per IS 12040:2001,

PARAMETER MAXIMUM SCORE

Co-cooperativeness and readiness to help in emergencies 30

Readiness to replace rejected material 20

Providing support documents in time 10

Promptness in reply 10

Co-operation in delivering and implementing measures or

avoiding recurrence of defects/complaints

30

TOTAL 100

COMPOSITE INDEX FOR PERFORMANCE OR OVERALL RATING.

= + + +

where,

A, B, C, D are the weightage for parameters of quality, delivery, price and service

respectively. The values of which are given in succeeding paragraph.

In case an established source fails to secure any order in the last three years, it shall

continue to be an established supplier subject to its renewal of registration.

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Following weightage factor have been suggested for different parameters,

Weightage for Quality - 60%

Weightage for Delivery - 25%

Weightage for Price - 10%

Weightage for Service - 05%

The overall rating of selected established suppliers is worked out using the above

formulae against the orders placed on the firm. The firms getting average overall rating

of less than 70% against orders completed in last three years shall not be considered for

issue of LTE thereafter for a period of one year. After the reinstatement, their rating will

be monitored afresh as above. Second such occasion of rating falling below 70% will

permanently disqualify a firm from the status of established suppliers.

OFB has a system for INSPECTION CATEGORIZATION of firms, Self-Certification

category inspection status is be awarded to Firms securing more than 95% vendor rating

apart from other requirements mentioned in SOP for input material Inspection. This

categorization is valid for a period of one year. After the expiry of validity period it is

reviewed again.

For Inspection at Firm premises category inspection status, Firm should secure more

than 85% marks in vendor rating apart from other requirements mentioned in SOP for

input material Inspection. Inspection on receipt category inspection shall be applied to

the firms securing 70% to 85% marks in vendor rating apart from other requirements

mentioned in SOP for input material Inspection.

1.4.7 RAIL COACH FACTORY - INDIAN RAILWAYS

Established in 1986, Rail Coach Factory (RCF) is a coach manufacturing unit of Indian

Railways. It has manufactured around 16000 passenger coaches of 51 different types

including Self Propelled passenger vehicles which constitute over 35% of the total

population of coaches on Indian Railways. It is located in near Jalandhar, Punjab, India.

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The overall SUPPLIER RATING (Sr) has been defined as

= 0.6 + 0.4

Where Sr = Suppliers rating for a Purchase Order.

Dr = Delivery rating and Qr = Quality rating.

Delivery rating (Dr) is computed for each Purchase Order as under:

= + (1

)

where, Q = Qty ordered.

T = Promised delivery time

Qt = Qty supplied in time

Qd = Qty delayed

Td = time delay for quantity delayed.

K = Constant with value as 2.

Quality rating (Qr) is computed for each PO as under:

= /

where, Qs= Total quantity supplied/ offered for inspection = (Qa+Qrr+Qcr)

Qa = Quantity accepted

Qrr = Quantity rejected during RITES(Third Party) inspection

Qcr = Quantity rejected during consignee inspection

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Some other conditions have also been specified by RCF,

1. If quantity accepted is < 50% of the PO quantity and original Delivery Period has

expired, then Quality Rating (Qr) is taken as zero for that PO.

2. When a lot is accepted with improvement advice to the vendor, Qr for that lot is

considered as 75% only.

3. When a rejected lot is used in distress, the use is condoned by the competent

authority, but such a lot is assigned zero quality rating (Qr).

4. En-route detachment of a coach from a train due to failure of a component/

assembly is a serious failure. If it happens within the warranty period, a severe

penalty is imposed by way of reduction in quality rating of the vendor for that

group of items. The overall supplier rating (Sr) is reduced by 15% for every

instance reported during the period of review.

5. In case of delays in executing warranty claims, the Quality rating is reduced with

the following scheme.

Days taken to attend the failure

11-20 21-30 31-40 41-50 51-60 >60

Reduction in Qr 5 10 20 40 60 100

6. For two consecutive rejections of the same item at consignees end, a vendor is

delisted for that item/group of items. However in case there are three or less

approved vendors left (Part-I and Part-II combined), for that item/ group of items,

he can be considered for retention as a Part-II vendor only.

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1.4.13 BUREAU OF INDIAN STANDARDS, IS 12040:2001

The Bureau of Indian Standards, New Delhi has issued a comprehensive standard IS

12040:2001 on Guidelines for development of Supplier Rating System. The purpose

was to give guidelines to organizations in India on methodology for supplier rating.

The overall supplier rating system comprises of

1. Supplier rating

2. Supplier grading

3. Supplier preferences

4. Rewards system

As per the standards, the suppliers can be rated based on any or all of the following

factors:

a) Quality

b) Delivery

c) Price

d) Service

e) System

For Quality Rating, a standard formula has been devised; it also defines Quality rating for

variable parameter of the product. It has also given table of the calculated values of

tolerance for various clauses.

For Price Rating (), the formula is,

=

100

Where,

PL = lowest of the price quoted by suppliers

PU = highest price quoted

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P = price quoted by the supplier being rated

The standard also defines rating using life cycle costs.

The delivery rating () for a consignment depends upon the quantity supplied within

delivery time and some other factors, the standard has defined.

=1

1 + 1 (1

1 )

Where,

Q = quantity agreed to be supplied within the stipulated delivery time

Q1 = actual quantity supplied

T = agreed delivery time for full consignment

T1 = actual delivery time for full consignment

The Service rating has been recommended based on following parameters,

Cooperativeness and readiness in help in emergencies S1

Readiness to replace rejected material S2

Providing support documents in time S3

Cooperation in delivering and implementing measures or

avoiding recurrence of defects/complaints S4

The System Rating is based on several criteria which are judgement based, and the

standard mentions the ISO 9004 to be referred for guidance.

The composite supplier rating is obtained by giving weightages for the individual ratings.

Rating Weightage

Quality, QR W1

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Delivery, DR W2

Price, PR W3

Service, SR W4

System, SY W5

Total 100

=1 + 2+ 3+ 4+ 5

100

The standard has mentioned that weights of the factors are to be decided by the

management based on experience and opinion. It may be based on criticality of the

product with respect to quality and delivery. It has recommended that W5 may be kept 30.

It has also given a table indicating weights of individual factors based on criticality.

The standard has illustrated a classification scheme.

Rating Class Remarks

Above 90 A Efforts must be made for long term relationship.

75-90 B If price of A is higher then, limited order on B must be given

50-75 C This class must be provided help to upgrade.

Upto 50 D Not to be considered.

The standard also emphasizes the role of reward systems. It has also published annexure

as proforma for supplier capability report and appraisal report.

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The study of various systems at national and international companies brings out the fact

that criteria for supplier evaluation are more or less common. Some companies have

exhaustive and very scientific methods to assess the performance. They have formal

feedback systems also. The four factors namely, quality, delivery, price and service are

the criteria for assessing supplier performance by all organizations.

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1.5 References

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