Supply Chain Management Lecture 7 – Supplier Planning & Selection Alexa Kirkaldy.

Supply Chain Management Lecture 7 –

Supplier Planning & Selection

Alexa Kirkaldy

Lecture 7 - Learning ObjectivesOn completion you will be able to:

• Recognise the importance of supply planning for any firm and the main steps in this process

• Appreciate that a firm needs a portfolio of approaches to supply depending on the supply risk and financial impact of the purchase

• Be aware that in the West supply planning in the last 20 years has also involved reducing the number of suppliers dealt with and that selection of the right suppliers is a critical process

Time

Strategic Planning Steps

Supply Planning

Contract &RelationshipStrategy

Supplier Selection

Steele and Court (1996) define the purpose of supply

planning as:“To ensure the existence of a supply-market to which the

buying organization has ready access and which

enables it to succeed as a business both now and in the

future.”

Elements of Supply Planning

Supply planning

Supplypositioning

Supplierpreferences

Riskmanagement

Optimisingthe Supply

Base

Procurementmarketing

Reversemarketing

Supplier Developmentprogramme

Current market position

Ideal market position

Based on Steele and Court (1996 p. 32)

Kraljic’s Supply Positioning

Supply’s impact on financial

results

Low

Low

High

High

Supply risk

Leverage items• Alternative sources of supply available

• Substitution possible

Bottleneck items• Monopolistic market• Large entry barriers

Routine items• Large product variety• High logistics complexity• Labour intensive

Strategic items• Critical for product’s cost price

• Dependence on supplier

Competitive bidding

System contracting + E-commerce solutions

Performance based partnership

Secure supply + search for alternatives


Supply planning

Supplypositioning

Supplierpreferences

Riskmanagement


Base


Reversemarketing





Steele and Court (1996 p. 69)

Supplier Preferences Market Segmentation by the Supplier

Nurture clientExpand businessSeek new opportunities

Cosset clientDefend rigorouslyHigh service &response

Give low attentionLow interestLose without pain

Drive premium priceSeek short-term advantageRisk losing customer

Development Core

Nuisance Exploitable

Attractiveness of

account

Relative value ofbusiness or account

Nurture clientExpand businessSeek new opportunities

Cosset clientDefend rigorouslyHigh service &response

Give low attentionLow interestLose without pain

Drive premium priceSeek short-term advantageRisk losing customer

Development Core

Nuisance Exploitable

Attractiveness of

account

Relative value ofbusiness or account

Supplier Preferences - Exercise

Consider a local restaurant in Coventry ( supplier) reviewing its customers

1)Domestic Students arriving late at night, little money, drunken2)Affluent international students3)Local people living in Coventry4)Christmas / New Year Parties


Supply planning

Supplypositioning

Supplierpreferences

Riskmanagement


Base


Reversemarketing





Procurement MarketingFactors that may attract suppliers according to Steele and

Court include:• Prospect of on-going profitable business.

• Certainty of prompt payment according to contractual terms.

• Prestige from being a supplier to a ‘blue chip’ organisation.

• Use of simple procurement systems with straightforward uncomplicated contracts.

• Genuine opportunity to grow because of the association.

• Buying organisation is straightforward and open minded.

• Potential to learn from the customer (supplier development) or other suppliers (supplier associations and networks)


Supply planning

Supplypositioning

Supplierpreferences

Riskmanagement


Base


Reversemarketing





Optimising the Supply Base Size

According to Monczka and Trent

“Supply-base optimisation is the process of determining the number and most appropriate suppliers a buying firm should maintain. The process requires the elimination of suppliers from the supply base who are not capable of achieving world class standards, either currently or in the near future.”

Supply Base OptimisationWomack et al’s Cross Regional

Comparison of Automotive Suppliers

Region Where Assembly Plant is Located Country of ownership of Plant

Japan Japan

America Japan

America America

Europe All

Number of suppliers per assembly plant Inventory level (days, for 8 parts) Proportion of parts delivered JIT (%) Proportion of parts single sourced (%)

170 0.2 45.0 12.1

238 1.6 35.4 98.0

509 2.9 14.8 69.3

442 2.0 7.9 32.9

Lamming found Japanese companies had 3 approaches;• Single sourcing • Dual sourcing because one supplier can not provide the

required volume/variety/delivery requirements• Dual sourcing of non strategic parts using a traditional

‘leveraged approach’

Time

Strategic Planning Steps

Supply Planning

Contract &RelationshipStrategy

Supplier Selection

Steele and Court (1996) define the purpose of supply

planning as:“To ensure the existence of a supply-market to which the

buying organization has ready access and which

enables it to succeed as a business both now and in the

future.”

Supplier Selection 1• Set up Selection criteria

• Total quality management policy• BS 5750/ ISO 9000 certification or equivalent• Implementing latest techniques e.g. JIT, EDI• In-house design capability• Ability to supply locally or world-wide as appropriate• Consistent delivery performance, service standards and product quality• Attitude on total acquisition cost• Willingness to change, flexible attitude of management and workforce

• Initial Contact

• Your company - history, size of operations, countries of operation etc.• Yourself - contact information and role in the organisation.• Your project - give a realistic estimate of annual volume.

• Request for information – the aim here is to get enough information to easily eliminate unsuitable suppliers.

Information to request includes catalogues, data sheets, annual sales volume and sales contact information.

Supplier Selection 2• Formal evaluation – RFP process

– Price quotation– Financial data– Reference checking– Supplier visit– Audits, assessments or surveys

• Pilot / Test manufacturing batch.

Supplier Selection & Evaluation Categorical Methods

Performance Characteristics

Supplier

Quality Delivery Service Total

A Good (+) Unsatisfactory (-) Neutral (0) 0

B Neutral (0) Good (+) Good (+) ++

C Neutral (0) Unsatisfactory (-) Neutral (0) -

Supplier Selection & Evaluation Cost Ratio Method

SupplierQuality

CostRatio (%)

DeliveryCost

Ratio (%)

ServiceCost

Ratio (%)

TotalPenalty

Ratio (%)

QuotedPrice/

Unit (£)

NetAdjusted Cost

(£)

A 2 2 1 5 16.00 16.80

B 5 4 2 11 15.40 17.01

C 7 3 5 15 15.00 17.25

Supplier Selection & Evaluation Linear -Averaging Method

Supplier A Supplier B Supplier CSelectionCriteria

Weight

Score Total Score Total Score Total

Quality 52 8 416 5 260 6 312

Delivery 26 3 78 8 208 3 78

Service 22 5 110 8 176 5 110

Total 604 644 500

Comparison of the 3 Methods

Categorical Cost-Ratio Linear Averaging

Ease ofImplementation Easiest Most Difficult Moderate

Clarity of result Least clear Moderate Clearest

Situationsrequested Small firms Very large firms Medium firms

Cost Lowest Highest Middle

Cost/Benefit ratio Lowest Middle Highest

Supplier Selection - 7 Steps

Continuous benchmarking

and improvement

Integrate suppliers into

operations

Negotiateand select

competitive supplier(s)

7RFP / ITT or

Direct Action Plan

65Generate supplier portfolio

Develop procurement

strategies

432Profile

outsourcing requirement

1

• Define supplier monitoring process

• Set up supplier continuous improvement teams

• Perform periodicalre-evaluation

• Saving reports

• Define a new sourcing plan

Key

Objectives

• Prepare and launch RFP

• Monitor RFP process

• Analyse RFP returns

Or

• Direct negotiations plan and strategy or supplier development plan

• Screen candidate suppliers

• Define potential suppliers evaluation criteria

• Generate RFI

• Select suppliers for RFP

• Set-up commodity team

• Define outsourcing scope

• Identify sourcing constraints

• Define priorities and organise team work

• Identify milestones

• Prepare and manage data collection

• Savings

• Collect information on supplier market

• Analyse supplier market

• Identify sourcing strategy levers

• Formalize sourcing strategy

• Analyse suppliers proposals

• Define negotiation strategy

• Negotiate with suppliers

• Build and validaterecommendation (ROI, Payback etc)

• Finalize and sign corporate contracts

• Define implementation plan

• Communication on sourcing results

• Set up tracking systems

• Finalise contracts at local level

• Model can be used for selecting supplier of a product or an outsourced logistics service provider

RFI – Request for informationRFP – Request for proposalITT – Invitation to tenderROI – Return on investment

Source: FT Group Sourcing 2009

Lecture 7, Key Points & Tips

• In designing the supply chain there are three main tasks; supply planning, supplier selection and relationship management.

• In supply planning there are seven aspects to consider, supply positioning, supplier preferences, risk management, procurement marketing, reverse marketing, supply base optimisation and supplier development.

• Supply positioning is one of the most important tools to help firms prioritise SCM and procurement efforts and Kraljic’s matrix appears in many SCM and procurement texts.

• Considering the supplier’s own preferences for customers is less well recognised and reflects the fact that SCM has been lead by powerful, large firms who have strong bargaining power over the suppliers.


• Procurement marketing is another less familiar theme that requires to firm to consider how good a customer they are for the supplier.

• Reverse marketing considers the situation where there are not enough suitable sources of supply and considers what the firm can do to encourage new suppliers.

• Optimising the supply base in the west has meant reducing the number of suppliers dealt with and has accompanied moves to build more partnerships in markets with slow growth.

• When dealing with fewer suppliers it is vital that the best ones are selected and therefore the process of supplier selection must be handled very careful, taking into account the risks.


• To select suppliers there is a variety of evaluation methods proposed in academic texts and journals and include the categorical, cost ratio and linear averaging methods.

• You need to read the accompanying notes carefully as we have only had time to cover the principles in the lecture. You need to be able to explain the 7 elements of supply planning, be able to draw and apply Kraljic’s matrix and the supplier preference matrix. You also need to be aware of the main steps to take when selecting a supplier and be able to explain how to use at least one evaluation method.

For next time. Read the Case Study – Designing a Hybrid Global Sourcing Strategy• What analysis would you do to answer Donna’s questions?• Any alternatives to the task force approach?• What steps on culture shock?

Read the chapter ‘Strategic Supplier Selection’ - Cousins

Possible oral presentation questions– How do firms go about rationalizing their supply base?– Is centralised purchasing the best solution?– How do firms find out about new suppliers and approve them in

this supply chain?– What mechanisms for suppler selection are used and could they

be improved in this supply chain?

Supply Chain Management Lecture 7 – Supplier Planning & Selection Alexa Kirkaldy.

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