Supplier Evaluation and Selection

PURCHASING & SUPPLY CHAIN MANAGEMENT, 4ePURCHASING & SUPPLY CHAIN MANAGEMENT, 4e

CENGAGE LEARNINGCENGAGE LEARNINGMonczka – Handfield – Giunipero – PattersonMonczka – Handfield – Giunipero – Patterson

Supplier EvaluationSupplier Evaluationand Selectionand Selection

Chapter 7Chapter 7

Chapter Overview

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 timePurchasing & Supply Chain Management, 4ePurchasing & Supply Chain Management, 4e

22

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

Purchasing & Supply Chain Management, 4ePurchasing & Supply Chain Management, 4e33

Supplier Selection and Evaluation


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


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


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


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

relationshiprelationshipPurchasing & Supply Chain Management, 4ePurchasing & Supply Chain Management, 4e

88

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


Information Search Requirements


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


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


Limit Suppliers in Selection Pool

Financial risk analysisFinancial risk analysis Ex. Dun and Bradstreet reportsEx. Dun and Bradstreet reports

Evaluation of supplier performanceEvaluation of supplier performance For existing suppliersFor existing suppliers

Evaluation of supplier-provided Evaluation of supplier-provided informationinformation Preliminary surveys (entry qualifiers)Preliminary surveys (entry qualifiers) RFIs, RFPs, or RFQsRFIs, RFPs, or RFQs


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


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


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


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?



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?



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?


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

operationsoperationsPurchasing & Supply Chain Management, 4ePurchasing & Supply Chain Management, 4e

2020

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


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 dataPurchasing & Supply Chain Management, 4ePurchasing & Supply Chain Management, 4e

2222

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 MBNQA and ISO 9000 criteriaUse of MBNQA and ISO 9000 criteria


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


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


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


Interpreting Financial RatiosLiquidity Ratios Interpretation

Current ratio =Current assets / Current liabilities

Should be > 1.0, but look atindustry averages

Quick ratio =(Cash + Receivables) / Current liabilities

At least 0.8 if supplier sells on creditLow = cash flow problems

Activity RatiosInterpretation

(compare with industry average)

Inventory turnover =COGS / Inventory

low = slow inventory or possible cash flow problems

Fixed asset turnover =Sales / Fixed assets

Too low = supplier may be inefficient using its fixed assets

Total asset turnover =Sales / Total assets

Too low = 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

Interpreting Financial Ratios

Profitability RatiosInterpretation

(compare 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 RatiosInterpretation

(compare 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

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?Purchasing & Supply Chain Management, 4ePurchasing & Supply Chain Management, 4e

2929

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?


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 activities Level of supplier development activities

in the supplier’s own supply basein the supplier’s own supply base


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?Purchasing & Supply Chain Management, 4ePurchasing & Supply Chain Management, 4e

3232


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?



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?


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


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


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


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


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


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 customerscriteria when evaluating new customers


Supplier Evaluation and Selection

Documents

Transcript of Supplier Evaluation and Selection