Supplier Selection & EvaluationBPT3133 – Procurement in Industrial Management

Chapter Outline

• Supplier Evaluation and Selection• Supplier Quality Management• Supplier Management and Development• Global Sourcing

Learning Objective

• Identify the 7 step supplier selection process as an enabler to world-class supplier selection

• Link the principles of total quality management to supply management practices

• Recognize that supplier management and development includes a variety of activities intended to improve supplier performance

• Understand the reasons why firms pursue international purchasing

Supplier Evaluation & Selection

Select supplier and reach agreement

Determine method of supplier evaluation and selection

Limit suppliers in selection pool

Identify potential supply sources

Determine sourcing strategy

Identify key sourcing requirements

Recognize the need for supplier selection

When do supplier evaluation and selection decisions arise?

• During new product development• Due to poor internal or external supplier

performance• At the end of a contract• When buying new equipment• When expanding into new markets or product

lines• When performing market tests• When current suppliers have insufficient capacity• When reducing the size of the supply base• During outsourcing analyses• When consolidating volumes across a business

Supplier Evaluation & Selection

Determine sourcing strategy• No single sourcing strategy approach will satisfy

the requirements of all purchases• Purchasing strategy adopted will influence the

approach taken during evaluation and selection process

• Key decisions include: Single vs. multiple supply sources Short term vs. long term purchase contracts Selecting suppliers that provide design support vs.

those that lack design capability Full-service vs. non full-service suppliers Domestic vs. foreign suppliers Expectation of a close working relationship vs. arm’s-

length purchasing

Supplier Evaluation & Selection

Identify potential supply sources:• Current suppliers• Sales representatives• Information database• Experience• Trade journals / directories / shows• Second-party / indirect information• Internal sources• Internet searches

Sourcing alternatives:• Manufacturer vs. Distributor• Local / National / International Suppliers• Large or Small Suppliers• Multiple or Single Sourcing

Supplier Evaluation & Selection

Key Supplier Evaluation Criteria:• Management capability• Employee capabilities• Cost structure• Total quality performance, systems and philosophy• Process and technological capability• Environmental regulation compliance• Financial stability• Production scheduling and control systems• E-commerce capability• Supplier’s sourcing strategies, policies and techniques• Longer-term relationship potential

Supplier Evaluation & Selection

Ability to meet or exceed current and

future customer expectations or

requirements within critical performance areas on a consistent

basis

Supplier Quality Management

Supplier Quality

Importance of Supplier Quality a. Supplier Impact on Quality

• supplier responsible for 50% of firm’s product-related quality problem

• company focuses only its own internal quality issues will usually fail to recognize and take action on quality-related problems

b. Continuous-Improvement Requirements• continuous quality improvements in all aspects; one way to

do this is through effective management of supplier quality

c. Outsourcing of Purchase Requirements• no longer an advantage in some industries to make most of

the components of a product• therefore, progressive buyers are relying on suppliers that

demonstrate significant capabilities

Supplier Quality Management

Factors affecting supply management’s role in managing supplier quality:i. The ability of a supplier to affect a buyer’s total

quality

ii. The resources available to support supplier quality management and improvement

iii. The ability of a buying firm to practice world class quality

iv. A supplier’s willingness to work jointly to improve quality

v. A supplier’s current quality levels

Supplier Quality Management

8 Key Principles of TQM

1. Define quality in terms of customers and their requirements

2. Pursue quality source

3. Stress objective rather than subjective analysis

4. Emphasize prevention rather than detection of defects

5. Focus on process rather than output

6. Strive for zero defects

7. Establish continuous improvement as a way of life

8. Make quality everyone’s responsibility

Supplier Quality Management

• Important part of supplier management involves the continuous measurement, evaluation and analysis of supplier performance.

• What to measure?– Delivery performance– Quality performance– Cost reduction

• Types of Supplier Measurement Techniques– Categorical System– Weighted-Point System– Cost-Based System

Supplier Management & Development

Supplier Management & Development

Categorical System

Supplier Management & Development

Weighted-Point System

Supplier Management & Development

Cost-Based System

* Supplier Performance Index (SPI) = (Total Purchases + Nonperformance Costs) / Total Purchases

Supplier Management & Development

• Definitions of globalization – ‘interdependence’, ‘connectivity’ and ‘integration of economies’ in social, technical and political spheres

• International Purchasing relates to a commercial purchase transaction between a buyer and a supplier located in different countries.

• Global (worldwide) sourcing involves proactively integrating and coordinating common items and materials, processes, designs, technologies and suppliers across worldwide purchasing, engineering and operating locations.

Global Sourcing

Why Source Worldwide?• Cost / Price Benefits• Access to Product and Process Technology• Quality• Access to the Only Source Available• Introduce Competition to Domestic Suppliers• React to Buying Patterns of Competitors• Establish a Presence in a Foreign Market

Global Sourcing

Barriers to Worldwide Sourcing:• Lack of knowledge and skills concerning global

sourcing• Resistance to change• Longer lead times• Different business customs, language and culture• Currency fluctuations

Global Sourcing

Benefits:• Lower purchase price or cost• Greater supplier responsiveness• Greater sourcing process consistency• Improved supplier relationships• Improved sharing of information with suppliers

Global Sourcing

• Suppliers evaluation and selection will establish the foundation to develop & improve supplier performance.

• Improving supplier quality involves much more than providing clear specifications and maintaining open communication.

• An effective supplier management program helps maximize the contribution received from suppliers, lowering costs, increasing quality and developing future capabilities.

• Firms operating in competitive industries must purchase from the best available sources worldwide.

Summary