Supplier Selection and Evaluation

Supplier Selection and Evaluation

One of the most important processes performed in organizations today is the evaluation, selection and continuous measurement of suppliers.

Selecting a vendor is now as important a process as developing new products.

Organizations ability to produce a quality product at a reasonable cost and in a timely manner is heavily influenced by its supplierscapabilities.

Supplier selection is one of the key issues of SCM because the cost of raw materials and component parts constitutes the main cost of a product Management.

Supplier Selection and Evaluation

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Recognize the need for supplier selection

Identify key sourcing requirements

Determine sourcing strategy

Identify potential supply sources

Limit suppliers in selection pool

Determine method of supplier evaluation and selection

Select supplier and reach agreement

Supplier Selection

Supplier understands management philosophy of quality

Commitment to quality and quality standards

Stable management system

High technical standards

Innovative and flexible

Capacity to produce the quantity needed

Price, delivery data and quality

Supplier has a tract record of customer satisfaction

Supplier must be accessible in terms of communication and transportation (location)

Factor

Ranting of supplier

(1 = Worst Ranting

5 = Highest Ranting)

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Importance of Factor to

Your Firm (10 = No

Importance; 5 =

Highest Importance)

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Weighted

Composite Ranting

(0 = Minimum;

25 = maximum)

Supplier A

Product reliability

Price

Ordering convenience

After-sale service

Total supplier A

Supplier B

Product reliability

Price

Ordering convenience

After-sale service

Total supplier B

Supplier C

Product reliability

Price

Ordering convenience

After-sale service

Total supplier C

Example of an evaluation procedure

Initial Supplier Evaluation

CategoryWeightSubweightScore (1 - 5 scale)Weighted ScoreSubtotalQuality Systems20Process control systems544.0Total quality commitment846.4PPM defect performance757.017.4Management Capability10Management/labor relations544.0Management capability544.08.0Financial Condition10Debt structure533.0Turnover ratios544.07.0Cost Structure15Costs relative to industry555.0Understanding of costs544.0Cost control/reduction efforts555.014.0Delivery Performance15Performance to promise533.0Lead-time requirements533.0Responsiveness533.09.0Technical/Process Capability15Product innovation544.0Process innovation555.0research and development555.014.0Information Systems Capability5EDI capability353.0CAD/CAM200.03.0General10Support of minority suppliers231.2Environmental compliance353.0Supply base management544.08.2Total Score80.6

Supplier Evaluation Criterias

The six classes for the suppliersevaluation

measurement:

FINANCIAL HEALTH

EXPERTISE

OPERATIONAL PERFORMANCE METRICS

BUSINESS PROCESSES & PRACTICES

ENABLING BEHAVIORS OR CULTURAL FACTORS

RISK FACTORS

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Table above uses a five point scale (1=worst rating, 5= highest rating)

Prior to evaluating suppliers, management must determine the relative importance of the factors to its particular situation, and assign each a weight. For example, if the product reliability were of paramount importance to the firm, it would be given the highest importance ranting. If price were not as important as product reliability, management would assign price a lower importance ranting. A factor of no importance to the firm would be assigning a zero.

Financial Health

In order to evaluate if a potential supplier is in good

financial position, a buyer can use indicators such as:

Sales

Profitability

Liquidity

ROI

Debt ratio

Transparency of finances

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Expertise

The purchasing department of the firm should choose

its suppliers according to its capabilities:

Network capabilities

Quality and production capabilities (dedicated level?)

Technical level compared to sector average

Spread of technical creation

Investment in R&D

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Operational Performance

There are a large number of criteria in this category, such

as:

On-time delivery

Lead time

Responsiveness

Inventory management and control: reorder management, forecasting capabilities

Order acceptance, processing & fulfillement

Customer service

Preventive maintenance

Hours of operators training in Total Quality Control (TQC) or JIT

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Business Processes and Practices

How does supplier provide a product or service at the

best value, on time and exactly as required from the

buyers?

Best practice and quality based information.

This evaluation business can help get at the root causes of supplier problems.

For example: is the quality standard of the products met by the production process (preventing defection) or by inspecting the quality of the products after production?

13

Behaviors and Cultural factors

The evaluation criteria of such a category focus on the

long term sustainability of potential suppliers:

What is the improvement culture of the supplier? Are his information capabilities always up-to-date?

What is his intention of coordination?

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Analytic Hierarchy Process

Analytic Hierarchy Process (AHP) is a multicriteria decision-making system.

AHP was developed by Thomas L. Saaty.

It is used to solve complex decision-making problems.

AHP has been applied in variety of decisions and planning projects in nearly 20 countries.

AHP is implemented in the software of Expert Choice .

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Typical application areas

Resource allocation

Hiring, evaluating and promoting employees

TQM

Strategic planning

Relocation decisions

Vendor selection

Evaluating mergers and acquisitions

How widespread is its use?

..a few of the thousands of organizations using AHP and EC

IBMNASAGoodyearIRSFord Motor Co.FBICitibankDepartment of DefenseXeroxWorld BankBoeingTexacoAT&TEastman KodakGeneral MotorsInter-American Bank

A few of the many Universities using/teaching AHP/EC

Harvard UniversityColorado State UniversityYale UniversityUniversity of CambridgeMITDuke UniversityAmerican UniversityPurdue UniversityNaval War CollegeKatz School of BusinessGeorge Washington UniversityWharton School of BusinessMichigan State UniversityJohns Hopkins UniversityStanford UniversityUniversity of Maryland

Expert Choice (EC)

EC helps you organize the various elements of a problem into a hierarchy.

EC guides you in judging, via pair-wise comparisons, the relative importance of the objectives and the preference for the alternatives that you have defined.

EC derives priorities by combining intangible information from your experience and intuition, and tangible information such as data.

Analytic Hierarchy Process

Select the Best Toothbrush Manufacturer

Cost

Reliability

Delivery Time

Cornell

Brush Pik

Picobuy

Cornell

Brush Pik

Picobuy

Cornell

Brush Pik

Picobuy

Overall Goal

Criteria

Decision

Alternatives

Step 1: Structure a hierarchy. Define the problem, determine the criteria and identify the alternatives.

Analytic Hierarchy Process

Step 2: Make pairwise comparisons. Rate the relative importance between each pair of decision alternatives and criteria.

Analytic Hierarchy Process

Step 2 (contd): AHP uses 1-9 scale for the prioritization process.

Numerical ratingsVerbal judgments1Equally important (preferred)3Moderately more important5Strongly more important7Very strongly more important9Extremely more important

Analytic Hierarchy Process

Step 2 (contd): Intermediate numerical ratings of 2, 4, 6, and 8 can be assigned. If someone could not decide whether one criterion (alternative) is moderately more important than the other one or strongly more important than the other one, 4 (moderately to strongly more important) can be assigned.

Analytic Hierarchy Process

Step 3: Synthesize the results to determine the best alternative. Obtain the final results.

The output of AHP is the set of priorities of the alternatives.

An Example with AHP

Choosing the most satisfied school

Goal: To select the most satisfied school.

Criteria: learning, friends, school life, vocational training, college prep. and music classes.

Alternatives: School A, school B, and school C.

Goal

Satisfaction with School

Learning Friends School Vocational College Music

Life Training Prep. Classes

School

A

School

C

School

B

Hierarchy:

School Selection

L F SL VT CP MC

Learning 1 4 3 1 3 4 .32

Friends 1/4 1 7 3 1/5 1 .14

School Life 1/3 1/7 1 1/5 1/5 1/6 .03

Vocational Trng. 1 1/3 5 1 1 1/3 .13

College Prep. 1/3 5 5 1 1 3 .24

Music Classes 1/4 1 6 3 1/3 1 .14

Weights

Pairwise comparisons:

Comparison of Schools with Respect

to the Six Characteristics

Learning

A B C

Priorities

A 1 1/3 1/2 .16

B 3 1 3 .59

C 2 1/3 1 .25

Friends

A B C

Priorities

A 1 1 1 .33

B 1 1 1 .33

C 1 1 1 .33

School Life

A B C

Priorities

A 1 5 1 .45

B 1/5 1 1/5 .09

C 1 5 1 .46

Vocational Trng.

A B C

Priorities

A 1 9 7 .77

B 1/9 1 1/5 .05

C 1/7 5 1 .17

College Prep.

A B C

Priorities

A 1 1/2 1 .25

B 2 1 2 .50

C 1 1/2 1 .25

Music Classes

A B C

Priorities

A 1 6 4 .69

B 1/6 1 1/3 .09

C 1/4 3 1 .22

Composition and Synthesis

Impacts of School on Criteria

Composite

Impact of

Schools

A

B

C

.32 .14 .03 .13 .24 .14

L F SL VT CP MC

.16 .33 .45 .77 .25 .69 .37

.59 .33 .09 .05 .50 .09 .38

.25 .33 .46 .17 .25 .22 .25

School A: .16*.32+.33*.14+.45*.03+.77*.13+.25*.24+.69*.14= .37

Overall final outcome

School B is the best school with an overall priority of 0.38, followed by school A.