1. Chapter Three
Supplier Selection and VRM
Presentation Outlines
• Benefits of maintaining good supplier r/ship
• Process of supplier selection
• Local buying
• Rationale for local purchasing
• Benefits of buying from local
• Suppliers’ performance evaluation
• Supplier’s evaluation methods
By Belachew Y.(Ast. Prof.)
Date 22/10/2014
2. Introduction
• Selecting capable suppliers is one of the
purchasing managers most important
responsibility.
If capable supplier is selected, the firm get
– competitive price
–reliable quality
– on-time delivery
–good technical service and other goals of
purchasing are more likely achieved.
3. Con’t
• A good supplier / vendor must be assisted,
rewarded, and motivated.
• And by making periodical evaluations
inefficient suppliers should be eliminated and
anew efficient should be developed.
• Running a high quality business operation is
quite impossible without having satisfactory
suppliers
4. Con’t
• Periodical evaluation of suppliers should be
made to screen-out inefficient suppliers and
replaced by effective ones.
• And this dream can be true through effective
and efficient function of purchasing for its
responsible to establish and maintain a
satisfactory group of suppliers
5. Benefits of Maintaining Good Supplier R/p?
• The keywords to develop a relationship with
your suppliers are knowledge, communication
and expectations
• better ways of serving customer and attempts
to find new ways of developing products and
services
• The good supplier warns ahead of time of
materials shortages, strikes and anything else
that may affect the buyers operation
6. Con’t
In general, good supplier r/p offers:
– right price
– On time delivery
– Quality product
– Right quantity
– Good technical service
7. Points that help to develop good supplier relation ship are:
Know your supplier
• face to face, personally and professionally
• understand each other’s needs both from the
supplier’s side as well as the buyer’s side.
• Financial strength, r/p of employees, working
environment, past performance and good will
of the firm etc
8. Con’t
Placing orders
One of the biggest problems that both buyers and
suppliers face is with respect to placing orders.
An order which is placed in time gives the
supplier sufficient time to meet the deadline.
Analyzing your forecast sales in advance and
knowing your supply needs can be very helpful
when it comes to predicting and meeting supply
deadlines.
Sharing this forecast with your supplier will keep
him informed well in advance and prepared.
9. Con’t
Advance payment and clearing of dues
• One of the key factors in maintaining a good
relationship with your supplier is the prompt
payment of bills and dues.
• This will motivate the supplier to work harder
to keep up to your business demands as well
keep him happy
• If you get on time delivery, on time payment is
mandatory
10. Con’t
Open and clear communications
• It is the most vital link to a good relationship
with your supplier
• Communicate any changes in the firm- dev’t
and expansion, demand etc
11. Process of Supplier Selection
Knowledge of sources is a primary
qualification for any effective buyer.
The procedure of source selection involves:
• the preparation of an exhaustive list of
prospective suppliers and
• the successive elimination from this list on
various grounds until the number has been
reduced to the one or few to be favored with
the business
12. con’t
• The process is therefore one on searching and
sorting
• searching for all likely suppliers and then
• sorting for the ones with whom to do business.
13. Con’t
Preparing a Prospective Supplier List
• The first step in the process of selecting a
supplier is to prepare a complete list of
prospective suppliers.
Source of supplier information- Give as an
assignment
• Supplier information purchasing file log books
• Supplier catalog
• Trade exhibition
• Visits to supplier plant
15. Local Vs International Buying
• Local buying is a preference to buy locally produced
goods and services over those produced more
distantly.
Benefits of Buying from Local
• Stimulates local economy and helps other business
• Shopping locally helps boost local economy and
support communities
• Stimulates local economy and helps other business
• Encourages local investments and creates
employment
• Positive impact on the environment
• Develops a strong community bond
16. International Procurement
• Any company wishing to do business with international
suppliers must take into account various aspects specific to
the customs and habits of foreign countries, which are
opening up more and more to market globalization.
• The company must familiarize itself with communication
methods, languages and dialects, time zones, economic
analyses of the market, international agreements, and the
agreements of the World Trade Organization (WTO).
• Generally buying goods or services in another country is
more complicated than buying from a local seller.
• Foreign goods have an effect on the economy of the
importing country.
• Governments, therefore, tend to watch the import trade of
their countries very closely.
17. Con’t
• As the result, there are so many complicated
procedures and documents in import.
• International procurement or international
purchasing is sometimes known as import
• International procurement- relates to a
commercial transaction between any buyer and
a supplier in different countries.
18. Reasons for international procurement
Three major reasons:
• Cost - foreign countries may have higher worker productivity,
more efficient production technologies.
• Quality - consumers are willing to pay higher prices for good
quality goods than for lower quality domestic products.
• Availability - due to the lack of technology, or production
capacity in the domestic country, companies go overseas to
find suppliers.
• Many companies will also purchase from international
suppliers to meet a delivery schedule because their domestic
suppliers are already at full capacity
19. Con’t
Other reasons
• Access to product/process technology
• Access to only source available
• Introduce competition to domestic suppliers
• React to buying patterns of competitors
• Establish a presence in a foreign market
20. Suppliers’ performance Evaluation
• After the list of possible suppliers has been
compiled, the next step is to evaluate
performance of each supplier so that the list
may be narrowed down to the predetermined
number with whom the buyer chooses to place
her/his business.
• It is not always easy to evaluate potential
suppliers because it often requires an extensive
amount of time and resources.
21. Con’t
To evaluate/ select suppliers the following
variables should be considered:
Reliability include
the quality capability of the vendor.
Stability and reputability are also other factors to
consider in rating the reliability of the vendor.
Financial stability and strength, good
management and reliable competitive ability.
The financial strength and weakness of a supplier
- SWOT analysis of a firm
22. Con’t
Technical capability
• The supplier to provide engineering and design
assistance should be evaluated
• The stage of supplier’s technological development
and his interest in keeping up with current
methods are also vital consideration .
• The inspection methods and the quality control
standards maintained by the prospective supplier
are also important in evaluating service.
23. Con’t
Delivery performance
• refers to the ability of the potential supplier to
provide materials on the scheduled time.
It also includes the
• availability of stocks locally or
• at short distance to effect emergency orders.
24. Con’t
• the geographic location of the supplier is also
important.
• If supplier is located very far from the buying
firm, there are greater risk of interruption b/c
of:- accidents, strikes and floods, delay in
transportation and other problems
• Long d/ce not only poses such risks but also
raises the cost of transportation
25. Con’t
Service
• Good service by the supplier is found to reduce
the buyer’s workload, increase the usefulness
or availability of the product, and diminish the
uncertainty associated with buying decision.
• It includes both presale services such as credit
facilities, warranties and discounts; post sale
services installations and training of personnel,
maintenance, transportation service and other
technical assistance.
26. Con’t
Financial stability
• If a supplier cannot meet obligations due to
financial problems, your own reputation with
customers may suffer.
• There are agencies that can help you
investigate supplier credit history.
• You can also run supplier verification report to
see if this company is a real business
27. Con’t
Quality and continuous improvement
• Ultimately the quality of your product is
directly impacted by the level of product
quality provided by your suppliers.
• Given the variety of product offerings on the
market, this parameter is relative to your own
quality standards.
• You can start by ordering a sample from a
supplier in question.
28. Con’t
Competitive Pricing
• Pricing of products or services when compared
with other potential suppliers
• you might not have enough information about
other suppliers but you can certainly review
several options using supplier directories or by
working with sourcing agents with full
representation of local suppliers.
29. con’t
• Labor Relations
Another possible inference with the continuity
of production in a supplier’s plant may
originate with the workers themselves.
These stoppages may be in the form of strikes
or slowdowns and are the by product of the
labor relations of the supplier.
To a considerable extent, the possibility of the
leadership of the union associated with the
plant.
30. Con’t
• Size of the supplier
• Some individuals argue that the size of an
order should correlate with the size of the
supplier receiving the order
• The main reason for this argument is that if the
buyer places small order to a large supplier, its
order could be ignored
• Similarly, if big/ large order could provide to
small supplier, a supplier may not be able to
provide proper service for such a large amount
31. Con’t
• Number of suppliers- single, dual or
multiple
The use of single source may be justified
when:
• Purchased quantities are small
• The supplier holds patent
• It gives exceptional discounts
• It agrees to carry buyer’s inventory
• If there is low risk
High risk if single supplier fails to provide
32. Con’t
Use of dual or multiple source will protect the
firm:
• From shortage
• There is alternate source of supply
• provide competitive price
Reciprocity
Understand whether there is reciprocity or not
If there is, it restricts competition
It states “I Will buy from you if you buy from
me”
33. Supplier’s Evaluation Methods
There are three supplier evaluation methods
1. Categorical method
2. Weighted Point method
3. Cost ratio method
34. Con’t
1. The Categorical Method
It is the least precise of the evaluating
techniques.
It relies heavily on the experience and ability
of the individual buyer.
Under this method the buyer:
keeps a record of all vendors and their
products.
assigns a grade indicating performance in
each area.
35. Con’t
• This method/system is
• A non-quantitative that relies heavily on the
memory and judgment of the individuals doing
the rating
• it provides a means of systematic record
keeping of performance criteria.
• It is also inexpensive and requires a minimum
of performance data.
36. Con’t
2. The weighted Point Method
This method provides quantifying evaluation
criteria:- quality of shipment, accuracy of
delivery, cost reduction and price
Any number of factors can be include and
their relative weight can be expressed in
numerical terms
so that a composite performance index can be
determined and
finally supplier comparison is made
37. con’t
3. Cost ratio Method
• In this method the objective is to evaluate the
suppliers on the basis of proceeding
considerations.
• the higher the ratio of costs to the value of
shipment, the lower is the chance of selection for
the supplier and the lower the rating for a suppler.
• We should identify elements which express
quality, delivery, service and price in order to
evaluate supplier by finding the cost ratio of each
factor.
38. Suppliers Factors Weight
A Quality of shipment 40
B Accuracy of delivery 30
C Frequency of cost reduction 20
D Price 10
total 100
Example: Assume that an organization has chosen the following
evaluation criteria along with their relative weights as a basis in the
evaluation process
39. con’d
• The organization has also set acceptable and
unacceptable range for the composite rating where at
least 85% is excellent, 70-84% is acceptable and 60%
or less is unacceptable
• The following hypothetical performance figures also
provided about three suppliers or vendors.
40. con’t
Vendor %ge of
shipment
Arrived on
schedule
Cost
reduction
suggestion
Quality of
goods
shipment
Price
(in Birr)
A 80% 20% 90% 40
B 90% 20% 80% 50
C 100% 60% 70% 60
41. con’t
• Given the above information which of the vendor
stands best? Use the weighted point method.
Solution
• The composite rating comparison will be as follows:
42. con’d
Vendor Quality Rating
(% of Quality x
40 pts)
% of shipment
arrived on
time x 30pts)
Cost
reduction
rating %
x 20 pts)
Price rating %
x 10pts
Composite
rating
A 0.9 x 40 = 36 0.8 x 30 = 24 0.2 x 20 = 4 40/40 = 1.0 x 10 =10 74
B 0.8 x 40 = 32 0.9 x 30 = 27 0.2 x 20 = 4 40/50 = 0.8 x 10 = 8 71
C 0.7 x 40 = 28 1.0 x 30 = 30 0.6 x 20 = 12 40/60 = .67 x 10 = 6.7 76.7
43. con’d
Note:
• The quality rating can be obtained by multiplying
the percentage of quality shipment by the weight
of quality given in the evaluation criteria.
• Example:-The quality of good shipment for
vendor “A” is 90% so the quality rating will be
90% x 40 (weight of quality ) = 36 point out of 40
points
• The delivery rating and cost reduction rating will
also be computed like the quality rating.
44. The computation of price rating involves two steps.
Step 1-Develop the percentage for the different unit
prices as follow
Average price per unit Percentage
40 40/40x100% = 100% ( b/se it is the lowest price)
50 40/50x100% = 80%
60 40/60x100% = 67%
We can develop the percentages by dividing the lowest
price by the prices offered by the vendors.
45. con’d
A = 40/40 = 100%
B= 40/50 =80%
C= 40/60 = 67%
Therefore,
Step 2- Multiply these rates by the weight of price.
Based on the above analysis vendor “C” is selected as
best supplier with the overall highest point of 76.7
46. con’d
Based on the given data, answer the following
questions;
Which supplier provides the best quality? A
Which supplier delivers on time? C
Which supplier provides maximum cost reduction?
C
Which supplier is preferable regarding price? C
Rank suppliers based on overall performance?
C,A,B
47. Self Assignment
Given the above information which of the
vendor stands best? Use the Cost–Ratio
Method
