• Make Versus Buy • Benefit of Outsourcing • Source of Supplier Information • Strategis Selection • Supplier Relationship Management (SRM) • Industry Example

1. Purchasing and Supply Chain Management
by W.C. Benton
Chapter Eight
Supplier Selection and
Evaluation

2. Learning Objectives
1.To identify the qualifications a good supplier.
2.To learn about the key elements of the make-versus-buy
3.To identify appropriate supplier selection techniques.
4.To learn about supplier relationship management.
5.To identify potential disadvantages of single sourcing.
6.To analyze how to reduce the number of suppliers.
7.To learn about strategic supplier relationship management.
8.To understand how supplier evaluation is accomplished in a
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3. Suppliers Must be Carefully Evaluated
• In today’s competitive environment, progressive
firms must be able to produce quality products at
reasonable prices. Product quality is a direct result of
the production workforce and the suppliers.
• Buying firms select suppliers based on their
capabilities, and not purely on the competitive
process. The current trend in sourcing is to reduce
the supplier base.
• In order to select suppliers who continually
outperform the competition, suppliers must be
carefully analyzed and evaluated.
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4. A New Role for Purchasing
• Traditional purchasing professionals who act as little
more than order placers are giving way to strategically
involved analytical managers who control vital inputs
to the production process.
• More and more power is being placed in the hands of
professional purchasing managers because industry is
beginning to realize the importance of defect-free parts
and the value-added capabilities of suppliers.
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5. Make Versus Buy
• The use of outsourcing has quickly become a competitive
weapon for an increasing number of businesses.
• It is no easy task for management to decide to make lease or buy
component parts and services.
• The decision to outsource has led to a need for strategic
partnerships.
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6. Key Make-or-buy Mistakes
• In most cases, businesses are not proficient at identifying their
core capabilities . Buyers usually rationalize in-house decisions
based on capacity capabilities.
• Buying organizations wait too late to assess the value of
consultants or strategic partners.
• Buyers do not recognize that the product or service is
approaching maturity.
• There are always new competitors with new technology
attacking the market.
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7. Key Make-or-Buy Success Factors
• Perform a realistic assessment of the capabilities and
expertise of each member of the in-house team. If the
core competencies exist, what happens if a key
member leaves the team. Can the member be easily
replaced?
• Evaluate alternative strategic partnership
arrangements and select the appropriate partner.
• Share information with all functional areas and
request their input.
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8. The Make or Buy Decision
• When a firm has answered the make-or-buy question
with a decision to buy , the question then becomes
to whom to “delegate” this responsibility.
• Thus, the firm must select a supplier or suppliers for
the part (s) in question.
• The buying firm must be highly skilled at
(1) specifying product attributes,
(2) forecasting expected requirements,
(3) ensuring the right quality at a reasonable price.
8-8

9. Strategic Selection
• Each business unit and department should have a
clear understanding of the strategy of the whole firm
and have a departmental strategy that complements
and aids the overall strategy execution of the firm.
• Purchasing, logistics, inventory management, and
production control are all linked tightly together
under the materials management umbrella.
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10. Strategy and Outsourcing
• Since outsourcing is a delegation of
responsibilities, it should be viewed as an
extension of the OEM’s strategy.
8-10

11. Supplier Relationship Management (SRM)
• The supply chain management process is
based on the idea of efficient resource
coordination and teamwork.
8-11

12. Supplier Relationship Management (SRM)
 Buyer and supplier relationships have become
increasingly important for a number of reasons.
1. There is a trend toward specialization away from
manufacturing an entire product and to more
contract manufacturing and purchasing.
2. In some market segments, it is estimated that 80
percent or more of total product revenue often
passes directly to suppliers as payment for labor,
materials, and equipment.
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13. Supplier Relationship Management (SRM)
3. This significant transfer of value downstream
emphasizes the importance and significance of supply
chain relationship management.
4. For any buying organization to stay competitive in
today’s aggressive market sectors, it is essential that
they maintain strong relationships with their best
contract manufacturers and suppliers.
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14. Supplier Relationship Management (SRM)
5. Buying firms experience a great deal of pressure from
customers and competitors to keep their edge and
stay in business by reducing costs, improving product,
improving service quality and enacting continuous
improvement.
6. With the decreasing number of suppliers used by
buying firms, it is more important than ever to
maintain strong buyer-supplier relationships.
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15. Four Pure Supply Management Relationships
• One model that explains supply chain relationship
management includes four behavioral dimensions—
the four Cs:
1. counterproductive (lose-lose)
2. competitive (win-lose),
3. cooperative (win-win),
4. collaborative (win-win) relationships. 8-15

16. Counterproductive Relationships
• Counterproductive relationships are those in which
each organization (buying and supplying) is so
focused on getting what is best for it that each puts
the other at a disadvantage.
• This type of relationship is undesirable because:
– it does not promote a positive rapport between buying
and supplying firms involved and
– neither organization achieves its goals.
• Counterproductive buyer-supplier relationships are
not recommended.
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17. Transactional Relationships
• Transactional or competitive relationships are those
relationships in which both buying and supplying
firms strive to get the very best arrangement
possible in their negotiations and fail to see the
benefits of both organizations obtaining their goals
and objectives.
• In transactional relationships, the buying and
supplying firms will stop at nothing to make sure that
they come out on top and do not care about the
other organization’s well-being.
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18. Transactional Relationships
• A competitive relationship is almost required with
transactional/tier-three suppliers and assumes that
the buying firm can lower prices to help keep its
competitive edge in the market.
• It does not matter if the relationship is not strong
enough to last because by definition, transactional
suppliers can be easily replaced at any time.
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19. Cooperative Relationships
• Cooperative relationships recognize the potential
value of both organizations getting what they
want and maximize the potential of having a
long-term relationship.
• Although it is a strong relationship, a cooperative
alliance lacks the teamwork that is needed
between the various buying and supplying firms
in order to optimize the benefits for all of the
members of the supply chain.
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20. Cooperative Relationships
• Cooperative relationships are commonly found
within a buying organization’s preferred/tier-
two service providers and suppliers list.
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21. Collaborative Relationships
• Collaboration or collaborative relationships, usually
found with the buying firm’s strategic/tier-one
suppliers, include the team component that is
missing in a cooperative relationship.
• In collaboration, the two organizations truly realize
the benefits of working together to optimize
outcomes for both organizations.
• The two firms work together to develop a strategy to
deliver a high-quality product or service on time and
under budget.
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22. Supplier Relationship
Management Programs
• Many large buying firms are implementing supplier
relationship management programs in their business
plans to ensure that they maintain their competitive
edge.
• Most supplier relationship management programs
begin with some sort of ranking or categorization of
potential suppliers.
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23. SRM Programs
• Once the system is developed, it then forces the
various functions in the buying firm to evaluate
which suppliers truly add value.
• The rankings are aggregated to enable a ranking of
all suppliers.
• The company will then categorize the suppliers into
one of three categories:
1. strategic,
2. preferred, or
3. transactional.
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25. Three Categories of Suppliers
1. Strategic suppliers are those that are most
important to the buying firm. They supply the
buying firm with essential materials and
capabilities that are not easily replaced.
2. Preferred suppliers are those that are important to
the buying firm, but alternative suppliers could be
found with some effort.
3. Transactional suppliers are those that can be easily
replaced in a short time.
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26. Performance-based Evaluations
• Performance-based evaluations assess the
company after its product or service has been
delivered.
8-26

27. Criteria for Supplier Evaluation
• There are two main categories of supplier evaluations:
process-based evaluations and performance-based
evaluations.
• The process-based evaluation is an assessment of the
supplier’s production or service process. Performance-
based evaluations are based on objective measures of
performance.
• Typically, the buyer will conduct an audit at the
supplier’s site to assess the level of capability in the
supplier’s systems.
8-27

28. Criteria for Supplier Evaluation
• In addition, large buying organizations increasingly
are demanding that their suppliers become certified
through third-party organizations, such as ISO 9001-
2008 certification or Malcolm Baldrige National
Quality Awards.
8-28

29. Three Common Supplier Performance
Based Evaluation Systems
• The three general types of supplier evaluation
systems in use today are:
– the categorical method,
– the cost-ratio method, and
– the linear averaging method.
• In general, the guiding factors in determining which
system is best are ease of implementation and
overall reliability of the system.
• It must be pointed out the interpretation of the
results from any of these three systems is a matter of
the buyer’s judgment. 8-29

30. Categorical Method
• The categorical method involves categorizing each supplier’s
performance in specific areas defined by a list of relevant
performance variables.
• The buyer develops a list of performance factors for each
supplier and keeps track of each area by assigning a “grade” in
simple terms, such as “good,” “neutral,” and “unsatisfactory.”
• At frequent meetings between the buying organization and
the supplier, the buyer will then inform the supplier of its
performance.
8-30

31. Cost-Ratio Method
• The cost-ratio method evaluates supplier performance by using
standard cost analysis.
• The total cost of each purchase is calculated as its selling price
plus the buyer’s internal operating costs associated with the
quality, delivery, and service elements of the purchase.
• Calculations involve a four-step approach
• A hybrid of the cost-ratio method is the “total cost-of-
ownership rating,” developed by the director of corporate
purchasing of Sun Microsystems.
8-31

32. Cost-Ratio Method
• It includes five performance factors: quality (maximum of 30
points), delivery (25), technology (20), price (15), and service
(10). A perfect supplier would receive a score of 1.00.
• This is calculated by deducting the amount of points received
(100 if perfect) from 100, dividing by 100, and adding 1.
• The idea is to give a simple numeric rating to the so-called
hidden cost of ownership—the additional product-lifetime
cost to Sun.
• A score of 1.20, for instance, means that for every dollar Sun
spends with that supplier, it spends another 20 cents on
everything from line downtime to added service costs.
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33. Linear Averaging
• The linear averaging method is probably the most
commonly used evaluation method.
• Specific quantitative performance factors are used to
evaluate supplier performance.
• The most commonly used factors in goods purchases
are quality, service (delivery), and price, although
any one of the factors named may be given more
weight than the others.
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34. Linear Averaging Method
1. The first step is to assign appropriate weights to each
performance factor, such that the total weights of each
factor add up to 100.
• For example, quality might be assigned a weight of 50, service
a weight of 35, and price a weight of 15.
• The assignment of these weights is a matter of judgment and
top management preferences.
• The weights are subsequently used as multipliers for individual
ratings on each of the three performance factors.
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35. Example
8-35

36. Strategic Supplier
Relationship Management
• For each strategic supplier, a key contact within the
buying firm must be established to ensure that the
relationship is being properly managed.
• This person is the individual within the buying that
others in the buying organization should contact for
information about specific strategic suppliers.
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37. Strategic Supplier
Relationship Management
• Relationships with strategic suppliers need to be
closely managed. One way to keep up on supplier
relationships is for a buying organization is to compile
supplier profiles for each strategic supplier.
• These profiles should include items such as key
management contacts, a company overview, SWOT
analysis, Porter’s five key financial figures, information
on current contracts, “owners” of the relationship
within the firm, and an organizational chart.
8-37

38. The Strategic Supplier Performance
Review Process
• A performance review is a set of expectations and
measurements for controlling long-term relationships
with existing strategic suppliers.
• It includes consistent measurements for establishing
positive relationships with new suppliers and
evaluating current performance of existing strategic
suppliers according to the expectations of the buying
firm.
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39. The Strategic Supplier
Performance Review Process
• The review process must have a standard template that
is used as a guideline for informing a customized review
process with criteria specific to each strategic supplier.
• The performance review template should include a
personal meeting with the functional manager.
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40. Review Categories
• The buying firm should have various review
categories that are used in order to fully assess
their strategic suppliers.
• Quality is a very important review category.
• Customer service should be expected to be
proactive and flexible, and delivery performance
needs to be optimized.
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41. Review Categories
• The most important attributes should be:
* high quality and
* on-time delivery.
• Technology and innovation are also important
in order to stay ahead of or at pace with
competition and help keep the buying firm at
the top of their field.
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42. Strategic Suppliers
• It is necessary for the buying firm to have strategic
suppliers who are open about their total costs.
• Cost reduction and continuous process improvement
are necessary in order to keep costs down and create
trust with strategic suppliers.
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43. Single versus Multiple Sources
• Much debate has taken place concerning the
number of suppliers a firm should use.
1. One side of the debate is the multiple-sources side.
This involves the use of two or more suppliers.
2. The other side of the debate is the single-source
policy, in which only one supplier is used to supply a
particular part.
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44. Advantages of Multiple Sourcing
• The main arguments for multiple sourcing are competition
and assured supply.
– It is commonly believed that competition between suppliers for a
similar part will drive costs lower as suppliers compete against each
other for more of the OEM’s business.
• This sense of competition is in the very root of American
thought as competition is the basis for capitalism and is the
backbone of Western economic theory.
• Multiple sources also can guarantee an undisrupted supply
of parts.
– If something should go wrong with one supplier, such as a strike or a
major breakdown or natural disaster, the other supplier (s) can pick up
the slack to deliver all the needed parts without a disruption.
8-44

45. Advantages of Single Sourcing
• The major arguments in favor of single sourcing are
that with the certainty of large volumes that the
supplier can enjoy lower costs per unit and increased
cooperation and communication to produce win-win
relationships between buyer and seller.
• Naming a certain supplier as the single source and
providing it with a long-term contract (three to five
years) greatly reduces the uncertainty that the
supplier will lose business to another competitor.
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46. Advantages of Single Sourcing
• With this contract guarantee, the supplier is more willing
to invest in new equipment, or change its
business/operating methods to accommodate the buyer.
• Single sources should be able to provide lower costs per
unit compared to multiple sources by reducing the
duplication of operations in areas such as setup.
• Spreading fixed costs across a larger volume should also
result in an accelerated learning curve.
8-46

47. Cross-Sourcing
• Cross-sourcing works this way. If supplier A can produce
parts 1, 2, 3, 4, and 5 and so can supplier B, the
advantages of both single and multiple sourcing can be
achieved if supplier A produces all of parts 1, 3, and 5
and supplier B produces all of 2 and 4. If anything would
happen to supplier A, supplier B can pick up the slack as
it has the capability to produce 1, 3, and 5 as well.
• In sum, neither supplier suffers because overall volume
remains the same. The reverse also can be done if a
buyer wants to increase competition among the
suppliers.
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48. Supplier Reduction
• Regardless of one’s final analysis of the single/multiple
debate, it is recommended to reduce the supply base.
• If the perceived benefits outweigh the risks, and after careful
analysis of both short-term and long-term needs, a single
source may be appropriate.
• However, for operations that would be financially damaged
when a supply stoppage occurs, then the use or development
of a second source is wise.
• Assume that it is desirable to reduce the number of suppliers.
The question now is which one (s)? The grade and hurdle
methods are used to guide the supplier reduction analysis.
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49. Grade
• “Grade” methods are those that are based on a score or grade
given to the supplier by the buyer for some attribute.
• The most common attributes are quality, price, and delivery.
• The supplier’s performances in the past are kept on record and
the suppliers receive a “report card” as to how well they are
doing compared to other suppliers.
• Many additional attributes an be added to the most common
three such as frequency of delivery, but the method remains
the same—for each attribute and purchase transaction, the
supplier is given a grade.
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50. Hurdle
• The second group of methods used to reduce the
number of suppliers a firm uses is what I have termed
“hurdle” methods.
• In this type of situation, suppliers are required to
“jump” over higher and higher hurdles to win the
buyer’s business.
• Usually this is done through some sort of supplier
certification program.
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51. Certification
• Supplier certification programs are very useful tools to
evaluate the quality capabilities of a supplier.
• Since quality is one of the biggest concerns to many
OEMs, this is a good way to control supplied part
quality.
• Basically, certification involves the setting of criteria
regarding quality levels as demonstrated through the
use of SPC and such things as process capability studies
of a supplier’s equipment, record-keeping abilities, and
so forth.
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52. Designing Certification Programs
• When designing a certification program, careful
attention should be paid to the selection of criteria.
• Good certification should include issues regarding
equipment capability, quality assurance, financial
health of the supplier, production scheduling
methods, value analysis abilities, and cost accounting
methods.
8-52

53. Industry Examples
• Consider the apparel, chemical, electronics, and
construction industries.
• A supplier with the lowest per-unit price may not have the
best quality or delivery rating of various suppliers.
• The particular selection strategy may be acceptable in the
apparel industry, where the highest emphasis is placed on
price or price markup, but would be unacceptable in the
chemical industry, where the highest priority is purity of the
chemicals (i.e., quality).
• Each industry must analyze the various associated criteria
trade-offs when selecting a supplier. 8-53

54. Apparel Industry
• Organizational buying can be broken down into two
categories: retail buying and industrial buying.
• There are distinct differences between retail and
industrial buying.
• The most important distinction is that the retail buyer is
unique in serving as both a purchasing agent and
marketing manager.
• Successful retail buying depends on the ability to select
suppliers who meet the perceived needs and wants of
the firm and its customers. 8-54

55. Chemical Industry
• Industrial buying in the chemical industry mostly deals with
buying bulk chemicals for chemical production and synthesis.
• Overall, in ranking which criterion is considered most
important in supplier selection, quality was number one.
Reliability and dependability of the delivery ranked second,
while price considerations ranked third.
• Purchasing managers send requests for quotes (RFQs) to
prequalified suppliers.
• Maintaining quality is by far the most important competitive
advantage of companies in the chemical industry.
8-55

56. Electronics Industry
• Industrial buying within the electronics industry is extremely
competitive.
• Some companies place higher emphasis on pricing and
delivery. The companies also varied in their methods of
purchasing.
• For example, Dynalab prefers to deal with a single source,
while Tandy uses many suppliers to meet their needs.
• Supplier selection at Tandy Corporation is based solely on
price. When Tandy sends out an RFQ, suppliers that lack a
good reputation are ignored.
• Thus, the quality of the supplier chosen to bid is assumed to
be high. 8-56

57. Construction Industry
• In the construction industry, material quality, delivery
dependability, and price appear to be the most critical criteria.
• However, the degree of importance that various construction
firms place on the four criteria varies.
• The supplier selection process begins by choosing potential
suppliers for each material type needed for a specific project.
• The selection process is usually based solely on past
performance.
• Once a pool of potential sources is formed, RFQs are sent out,
negotiations are conducted, and specific suppliers are selected.
8-57

58. Supplier Evaluations
• As firms increasingly emphasize cooperative
relationships with critical suppliers, executives of buyer
firms are using supplier evaluations to ensure that their
per-formance objectives are met.
• Supplier evaluations, one type of supplier develop-
ment program (SDP), are an attempt to meet current
and future business needs by improving supplier
performance and capabilities.
8-58