VENDORS Evaluation and Selection

By Nikhil Rane

12MT007IND017

AgendaImportance of Supplier SelectionSupplier Selection ProcessBenefits of Supplier Selection ProcessSupplier Evaluation CriteriasSupplier Evaluation Methods

CASE STUDY CONCLUSION

Importance of Supplier Selection

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.

Importance of Supplier Selection

Supplier selection process is a multi-criteria problem, which includes both qualitative and quantitative factors.

Relatively small cost reductions gained in the acquisition of materials can have a greater impact on profits.

A sound supplier selection decision today can reduce a host of problems tomorrow

Supplier Selection ProcessSteps in Supplier Selection Process

Evaluating Needs and Defining Objectives

Gathering a Limited Pool of VendorsInterviewing with VendorsSelecting and Applying the Method

Evaluating Needs and Defining Objectives

What need you are looking to satisfy?Increase product quality

Which evaluation categories you will use? What are your business, technical and usability requirements? What are the must requirements?

Max price, min performance, etcHow will you score the requirements?

Gathering a Limited Pool of Vendors

Evaluating all potential vendors takes much time

Basic screening and elimination due to lack of must requirements

Interviewing with VendorsOne by one interview with vendorsGap analysis between your

requirements, objectives and vendor properties

Scoring each criteria

Benifits of vendor rating system

Helping minimize subjectivity in judgment and make it possible to consider all relevant criteria in assessing suppliers.

Providing feedback from all areas in one package.

Facilitating better communication with vendors.Providing overall control of the vendor base.Requiring specific action to correct identified

performance weaknesses.Developing a performance-based culture.

Supplier Evaluation CriteriasThe evaluation criterias are fundamental to choose the

best supplier. They are specific to each firm, because they vary according to the needs.

The criteria exposed are the most common ones.

Six categories of criteria selected

Supplier Evaluation CriteriasThe six classes for the suppliers’evaluation

Measurement:FINANCIAL HEALTHEXPERTISEOPERATIONAL PERFORMANCE METRICSBUSINESS PROCESSES & PRACTICESENABLING BEHAVIORS OR CULTURAL

FACTORSRISK FACTORS

Financial HealthIn order to evaluate if a potential supplier is in good

financial position, a buyer can use indicators such as:SalesProfitabilityLiquidityTransparency of finances

ExpertiseThe 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 averageSpread of technical creationInvestment in R&D

Operational PerformanceThere are a large number of criteria in this category, such as:

On-time deliveryLead timeResponsivenessInventory management and control: reorder

management, forecasting capabilities…Order acceptance, processing & fulfillementCustomer servicePreventive maintenanceHours of operators training in Total Quality Control

(TQC) or JIT

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.

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?

Risk FactorsA supplier’s risks are risks for the buyer. Indeed, if a

supplier takes too much risk, it can have a great impact on

his customer.

Risk factors can be uncovered in the previous criteria

exposed, but also in criteria such as: trade relations,

currency exchange, insurance, legislations.

Criteria SelectionIn reality, these mesures of supplier performance are

difficult to obtain (financial publications, questionnaires, surveys, site visits).

Whichever criteria chosen, the assessment system must be optimal for good decision making.

Selecting and Applying the MethodSelect one among various methodsTHE CATEGORICAL METHODTHE WEIGHTED POINT METHODTHE COST-RATIO METHOD

Calculate overall vendor score using selected method

Select the vendor with best score

The Categorical MethodBasically, it is a procedure whereby the buyer

relies on a historical record of supplier performance.

Initially, a list of evaluation criteria is identified.

The buyer then assigns a grade to each supplier, for each criterion, based on past experience.

A simple marking system of plus, minus, and neutral grades may be used.

Evaluation lists are often provided to other departments involved, such as quality control, engineering, production, and receiving

The Categorical MethodVendors with composite high or low ratings are noted,

and future supply decisions are influenced by them.

Although this system is non-quantitative, it is a means of keeping systematic records of performance.

It is also inexpensive and requires a minimum of performance data.

However, the process relies heavily on the memory and judgment of the individuals providing the ratings, and the ratings may become routinely performed without much critical thought

The Weighted Point MethodWeighted-point method quantifies the evaluation criteria.

A number of evaluation factors can be included, and their relative weights can be expressed in numerical terms so that a composite performance index can be determined and supplier comparisons made.

For example, following evaluation criteria have been chosen: quality of shipments, accuracy of delivery, and price.

Assuming that quality and delivery are the most significant, a point rating system such as the following might be used: quality, 40 points; delivery, 40 points, and price, 20 points.

The Cost-Ratio Method

The cost-ratio method relates all identifiable purchasing costs to the value of the shipments received from the respective suppliers.

The higher the ratio of costs to shipments, the lower the rating for that supplier.

What cost categories are used depends on the products involved.

Quality, delivery, service, and price are the overall categories, and respective costs are accumulated for each.

The Cost-Ratio MethodFor example, costs associated with quality normally

include the costs of unusual visits to a vendor's plants, unusual inspection costs of incoming shipments,

and all costs associated with defective products,

including rejected parts and the resulting manufacturing losses.

The Cost-Ratio MethodVendor__________________________ January, 20__

Visit to vendor plant 200Sample approval 300Incoming inspection 75Manufacturing losses 0Reworking costs 0Value of rejected parts 425Other 9

Total costs 1,000Total value of purchases 100,000Quality cost ratio:

(total cost / purchases) 1%

Case study

This study was conducted on pressure die-casting ancillaries supplying common parts to a light engineering industry situated near pune. The study aimed to find out best vendors from present four,

ASK , RAJ ,BIRARI and , PATEL. to chose best 1

As product being seasonal, ancillaries do not get sufficient business during off-season. Criteria for evaluation were cost, quality, schedule adherence, system adaptability and general cooperation

weight Supplier 1 Supplier 2 Supplier3 Supplier4

Quality 0.46 0.48 0.55 0.47 0.33

Price 0.30 0.24 0.27 0.35 0.33

Service 0.14 0.12 0.09 0.12 0.22

delivery 0.11 0.16 0.09 0.06 0.11

Supplier 1= (0.46*0.48) + (0.30*0.24) + (0.14*0.12) + (0.11*0.16) = 0.32

Supplier 1 0.32

Supplier 2 0.35

Supplier 3 0.34

Supplier 4 0.29

Result – According to the previous results, the higher weight belongs to supplier 2,and is judge to be the best overall

CONCLUSIONChoosing the best vendor from a group of qualified

service providers can be a daunting task. Determining specific requirements in advance and communicating factors for success with potential providers creates an equitable and decisive way to subjectively make a decision

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