chapter 7 Supplier Evaluation and Selection

1. Limit Suppliers in Selection Pool

1.1. **Supplier risk analysis** § Financial risk management § Operational risk management

1.2. **Evaluation of supplier performance** § For prior or existing suppliers

1.3. **Evaluation of supplier-provided information** § Entry qualifiers § RFIs, RFPs, or RFQS

2. Sourcing Alternatives

2.1. § Manufacturer vs. distributor

2.1.1. - Size of purchase - Manufacturer’s policies on direct sales - Storage space available - Extent of services required - Supplier-managed inventory - Integrated supply

2.2. § Local, national, or international suppliers

2.2.1. JIT or lean manufacturing support

2.3. § Large vs. small suppliers

2.3.1. - Capability - Variety of products offered - Locations - Dependency

2.4. Multiple vs. single vs. sole sourcing

2.4.1. - Overall trend to rationalize supply base - Leverage vs. assurance of supply-

3. Evaluation and Selection

3.1. Need to know first

3.1.1. There is no “one best way” § Overall objective is to reduce sourcing risk and maximize value to buyer § Need to select suppliers for long-term § Can involve intensive effort and major commitment of resources § Many issues and decisions

3.2. Processess

3.2.1. 1. Recognize need for supplier selection 2. Identify key sourcing requirements 3. Identify potential supply sources 4. Determine sourcing stratregy 5. limit suppliers in selection pool 6. Determine method of supplier evaluation and selection 7. Select supplier and reach agreement

4. Cost Structure

4.1. - Total cost perspective + Direct labor costs + Indirect labor costs + Material costs + Manufacturing or process operating costs - General overhead costs (overhead is any expense incurred to support the business while not being directly related to a specific product or service. - Caveat (Canh bao truoc) + Supplier may not fully understand its own costs in detail

5. Process and Technological Capability

5.1. - Level of technology, design, methods, and equipment used to manufacture products or deliver services - Current vs. future technological capabilities - Review capital expenditure plans - Resources committed to R&D - Supplier design capabilities

6. Challenges of Cost Analysis

6.1. - Supplier’s unsophisticated cost accounting system - Cost data is considered proprietary - Buyer’s knowledge of costs may undermine supplier’s pricing strategy - Competitors may have access to buyer’s cost data - Supplier is concerned about potential misuse of its cost data

7. A Good Supplier Does the Following

7.1. - Builds quality into the product, aiming for zero-defects - Makes delivery performance a priority - Willingness to make short and frequent deliveries to point-of-use - Demonstrates responsiveness to buyer’s needs - Works to reduce lead times

7.2. - Provides buyer with information regarding capability and workload - Creates the future, rather than fears the future - Reinvests part of its profits into R&D,takes a long-term view, and is willing to spend for tomorrow - Meets stringent financial stability criteria

8. Financial Stability

8.1. - Often used as screening process in initial selection phase - Risks of financially weak supplier + Supplier will go out of business + Insufficient resources to invest in improved plant, equipment, and research + Supplier may become too financially dependent on buyer - May be indicator of other problems

9. Sustainability and Environmental Compliance

9.1. - Ongoing sustainability practices and top management support - Corporate Responsibility Report - Current and projected CO2 emissions - Attainment of ISO 14000:2004 certification - Evidence of measuring or requiring sustainable practices in supply base

9.2. - Formal hazardous and toxic waste reduction programs exist - Purchasing recycled materials - Encouraging recycling and reuse internally - Disclosure of environmental infractions - Programs to control or eliminate ozonedepleting substances

10. Employee Capabilities

10.1. - Degree of commitment to quality and continuous improvement - Overall workforce skills and abilities - Employee-management relations - Frequency of work stoppages - Worker flexibility

10.2. - Employee morale - Workforce turnover - Willingness of employees to contribute to improved operations

11. Key Supplier Evaluation Criteria

11.1. - Primary criteria + Cost or price, quality, and delivery - Management capability - Employee capabilities - Cost structure - Total quality performance, systems,and philosophy - Process and technological capability

11.2. - Sustainability and environmental compliance - Financial stability - Scheduling and control systems - E-commerce capability - Supplier’s sourcing strategies, policies, and techniques - Longer-term relationship potential

12. When to Use a Sole Source

12.1. - Supplier holds a patent - Only 1 company is licensed or holds the IP rights - Only 1 company has the most efficient process, making it less expensive - You hold patent or IP rights that need to be carefully guarded

13. Benefits of Single Sourcing

13.1. - Optimum leverage and power over supplier - Ability to develop closer relationships - Development of value-adding programs such as supplier stocking, process improvement, etc.

14. Benefits of Multiple Sourcing

14.1. - Improved assurance of supply - Check against price increases - Active competition that motivates suppliers to perform effectively

15. Identify Potential Supply Sources

15.1. How well existing suppliers can satisfy cost, quality, or other performance variables § Strategic importance of purchase requirement § Technical complexity of purchase requirement

16. Supplier Categories

16.1. **Preferred supplier** - One that consistently satisfies the performance and service standards as defined and responds to unexpected changes

16.2. **Certified supplier** § Have had quality systems extensively audited and are capable of consistently meeting or exceeding quality needs

16.3. **Partnered supplier** § Limited to a select group who provide critical high value items

16.4. **Disqualified supplier** § No longer meet buyer’s standards and will not be considered for future business until problems are corrected

17. Identify key sourcing requirements

17.1. May be determined by internal and external customers within the value chain § Supplier quality § Cost § Delivery performance § Vary widely from item to item

18. Total Quality Performance, Systems, and Philosophy

18.1. - Degree of management commitment - Use of SPC (statistical process control) techniques - Level of defects - Safety, training, and facilities - Equipment maintenance - Use of MBNQA and ISO 9000:2008 criteria

19. Entry Qualifiers

19.1. - Financial strength - Proven manufacturing or service capability - Capable and supportive management - Adequate facilities - Skilled professional and technical staff

20. Evaluate Critical Issues

20.1. - Size relationship - Risk/Reward issues - Sustainability and diversity objectives - Competitors as suppliers - Offshore suppliers and countertrade

21. Determine Sourcing Strategy

21.1. No single strategy will satisfy all situations § Influences the approach taken § The environment changes § Market conditions § User preferences § Corporate objectives § Reevaluate as necessary