Purchasing and Supply

Chain Management
Chapter 7: Supplier
Evaluation and Selection
Learning Objectives

▪ LO1. The Supplier Evaluation and Selection Process

▪ LO2. Key Supplier Evaluation Criteria
▪ LO3. Developing a Supplier Evaluation and Selection Survey
▪ LO4. Reducing Supplier Evaluation and Selection Cycle Time

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“
Coming together is a beginning;
keeping together is progress;
Working together is success”
- Henry Ford-

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The Supplier Evaluation and
Selection Process

Most purchasing experts will

agree that there is no one best
way to evaluate and select
suppliers, and organizations use a
variety of different approaches.

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The Supplier Evaluation and Selection Process

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When Do Supplier
Evaluation and
Selection Decisions
Arise?

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1. The Supplier Evaluation and Selection Process

▪ When internal users submit requisitions ▪ When faced with countertrade requirements
for goods or services ▪ During outsourcing analyses
▪ During new-product development ▪ When consolidating volumes across a
▪ Because of poor internal or external business
supplier performance ▪ When issuing an RFQ or conducting a reverse
▪ When the contract period ends auction
▪ When buying new equipment ▪ When current suppliers have insufficient
▪ When expanding into new markets or capacity
product lines ▪ When reducing the size of the supply base
▪ When performing market tests 8
In group, follow the
Supplier Evaluation and
Selection Process, create a
process to buy your
favorite product/service.

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2. Identify Key Sourcing Requirements

▪ These requirements, often determined by internal and

external customers within the value chain, can differ widely
from item to item.

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3. Identify Potential Supply Sources

▪ How well existing suppliers can satisfy cost, quality, or

other performance variables
▪ Strategic importance of purchase requirement
▪ Technical complexity of purchase requirement

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3. Identify Potential Supply Sources

High
The following offers
some guidelines Minor to
Major
regarding the effort and Moderate
Strategic
intensity of search Importance
required to Buyer
during supplier
evaluation Minor to
Minor
Moderate

Capability of Suppliers High 12

3. Identify Potential Supply Sources

Sources of Information

▪ Current suppliers ▪ Organizational knowledge

▪ Preferred suppliers ▪ Trade journals
▪ Sales representatives ▪ Trade directories
▪ Internet searches and social ▪ Trade shows
media ▪ 2nd-party or indirect information
▪ Informational databases ▪ Internal sources
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4. Determine the sourcing strategy

▪ No single strategy will satisfy all situations

▪ Influences the approach taken
▪ The environment changes require reevaluate
▫ Market conditions
▫ User preferences
▫ Corporate objectives
▪ In developing a sourcing strategy the purchaser must consider
his/her sourcing alternatives as well as critical sourcing issues.
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4. Determine the sourcing strategy

Sourcing alternatives
▪ Manufacturer vs. distributor
▫ Size of purchase
▫ Manufacturer’s policies on direct sales
▫ Storage space available
▫ Extent of services required
▫ Supplier-managed inventory
▫ Integrated supply
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4. Determine the sourcing strategy

Sourcing alternatives
▪ Local, national, or international suppliers
▫ JIT or lean manufacturing support
▪ Large vs. small suppliers
▫ Capability, Variety, Locations, Dependency
▪ Multiple vs. single vs. sole sourcing
▫ Overall trend to rationalize supply base
▫ Leverage vs. assurance of supply
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5. Limit suppliers in the selection pool

Prior to deciding whether to use multiple or single sourcing the

purchaser reviews the categories of suppliers available to meet the
needed purchase requirement.
▪ Preferred supplier
▪ Certified supplier
▪ Partnered supplier
▪ Disqualified supplier

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Single sourcing
or
Multiple
sourcing?
When to use a Sole Source?

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5. Limit suppliers in the selection pool

Each of these sourcing alternatives will generate specific critical

issues that must be addressed to achieve an effective source selection
process.
▪ Size relationship
▪ Risk/Reward issues
▪ Sustainability and diversity objectives
▪ Competitors as suppliers
▪ Offshore suppliers and countertrade
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5. Limit suppliers in the selection pool

After information has been gathered, Several criteria may support the
narrowing of the supplier list.
▪ Supplier risk analysis
▫ Financial & Operational risk management
▪ Evaluation of supplier performance
▪ Evaluation of supplier-provided information
▫ Entry qualifiers
▫ RFIs, RFPs, or RFQs
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6. Determine method of supplier evaluation and selection

▪ Evaluation from supplier-provided information

▪ Supplier visits
▪ Use of preferred, certified, or partnered suppliers
▪ External or third-party information
▫ Domestic vs. international suppliers
▪ Purchasers usually evaluate potential suppliers across multiple
categories using their own selection criteria with assigned weights.

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6. Determine method of supplier evaluation and selection

▪ Evaluation from supplier-provided information

▪ Supplier visits
▪ Use of preferred, certified, or partnered suppliers
▪ External or third-party information
▫ Domestic vs. international suppliers

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7. Select supplier and reach agreement

The final step of the evaluation and selection process is to select

the supplier(s) and reach a contract agreement. The activities
associated with this step can vary widely depending on the
purchase item under consideration.

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Key Supplier Evaluation
Criteria

In what ways should he

company evaluate suppliers?

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 Key Supplier Evaluation Criteria

▪ Primary criteria: Cost or price, quality, ▪ Sustainability and environmental

and delivery compliance
▪ Management capability ▪ Financial stability
▪ Employee capabilities ▪ Scheduling and control systems
▪ Cost structure ▪ E-commerce capability
▪ Total quality performance, systems, ▪ Supplier’s sourcing strategies,
and philosophy policies, and techniques
▪ Process and technological capability ▪ Longer-term relationship potential
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Primary criteria

Most evaluations rate suppliers on three primary criteria:

▪ Cost or price
▪ Quality,
▪ Delivery.
For critical items needing an in-depth analysis of the supplier’s
capabilities, a more detailed supplier evaluation study is required.

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Management Capability
▪ What is top management’s vision, strategy, and plan?
▪ Has management committed to TQM and continuous improvement?
▪ How high is management turnover?
▪ What are professional experience and educational background of key managers?
▪ Is management customer focused?
▪ What is history of labor-management relations?
▪ Is organization making necessary capital investments?
▪ Is organization prepared to face future competitive challenges?
▪ Does management put priority of supply chain management?
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Employee Capabilities

▪ Degree of commitment to quality and continuous improvement

▪ Overall workforce skills and abilities
▪ Employee-management relations
▪ Frequency of work stoppages
▪ Worker flexibility
▪ Employee morale
▪ Workforce turnover
▪ Willingness of employees to contribute to improved operations
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Cost Structure

▪ Total cost perspective

▫ Direct labor costs
▫ Indirect labor costs
▫ Material costs
▫ Manufacturing or process operating costs
▫ General overhead costs
▪ Caveat
▫ Supplier may not fully understand its own costs in detail

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Total Quality Performance, Systems, and Philosophy

▪ Degree of management commitment

▪ Use of SPC techniques
▪ Level of defects
▪ Safety, training, and facilities
▪ Equipment maintenance
▪ Use of MBNQA and ISO 9000:2008 criteria

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Process and Technological Capability

▪ 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

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Sustainability and Environmental Compliance

▪ Ongoing sustainability practices and ▪ Formal hazardous and toxic waste

top management support reduction programs exist
▫ Corporate Responsibility Report
▪ Purchasing recycled materials
▪ Current and projected CO2 emissions ▪ Encouraging recycling and reuse
▪ Attainment of ISO 14000:2004 internally
certification ▪ Disclosure of environmental
▪ Evidence of measuring or requiring infractions
sustainable practices in supply base ▪ Programs to control or eliminate
ozone-depleting substances

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Financial Stability

▪ 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

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Financial
Stability

Interpreting
Financial
Ratios

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Scheduling and Control Systems

▪ Does supplier use MRP or MRP II?

▪ Does supplier track material, product, or service cycle
times?
▪ Can supplier support buyer’s delivery requirements?
▪ What are supplier’s real lead times?
▪ What is supplier’s on-time delivery performance?

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E-Commerce Capability

▪ Web-based B2B vs. EDI systems

▪ Does supplier have CAD capability?
▪ Does supplier use bar coding or RFID?
▪ Can supplier provide ASNs or accept EFT transfers?
▪ Does supplier communicate via e-mail?
▪ Does supplier use social media for business purposes?

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Supplier’s Sourcing Strategies, Policies, and Techniques

▪ Track supply base performance of Tier 1 vs. Tier 2 vs. Tier 3

suppliers
▪ Sharing of information
▪ Extent of supplier development activities in its own supply
base

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Longer-Term Relationship Potential

▪ Is supplier willing to participate or commit? ▪ Can supplier maintain buyer’s need for
▪ confidentiality?
Can supplier commit necessary resources?
▪ Is corporate culture similar to buyer’s?
▪ Does supplier have requisite technical expertise?
▪ How well does supplier understand buyer’s
▪ How is supplier unique?
industry and business?
▪ Can supplier participate in joint problem solving
▪ Will supplier share cost data?
and improvement?
▪ Is supplier willing to share innovations with
▪ Will there be free and open information sharing?
buyer first?
▪ Will supplier engage in and share future
▪ Can supplier dedicate exclusive capacity to
planning?
buyer?
▪ What is overall commitment level?

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Developing a Supplier Evaluation
and Selection Survey

Supplier evaluation often follows

a rigorous, structured approach
using formal surveys.
An effective supplier survey
should have certain characteristics

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Developing a Supplier Evaluation and Selection Survey

▪ Survey should …
▫ Be comprehensive and include important performance
categories
▫ Be as objective as possible
▫ Include reliable items and measurement scales
▫ Be flexible
▫ Be mathematically straightforward and simple to understand

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Steps in
Developing a
Supplier
Evaluation and
Selection
Survey

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Initial Supplier
Evaluation

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 Sample
Recommendation
Form

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Reducing Supplier Evaluation
and Selection Cycle Time

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Reducing Supplier Evaluation and Selection Cycle Time

▪ Map current evaluation and ▪ Integrate technology into

selection process organizational design
▫ Commodity CFTs
▪ Integrate with internal customers
▫ Product families or groups of
▪ Utilize data warehouse software products
with supplier information
▪ Supplier categorization
▪ Engage third-party support
▪ Electronic tools
▪ Predefined contract language and
shorter contracts
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What
makes a
good
supllier?
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A Good Supplier Does the Following

▪ Builds quality into the product, ▪ Provides buyer with information

aiming for zero-defects regarding capability and workload
▪ Makes delivery performance a ▪ Creates the future, rather than fears
priority the future
▫ Willingness to make short and
▪ Reinvests part of its profits into
frequent deliveries to point-of-use
R&D, takes a long-term view, and is
▪ Demonstrates responsiveness to willing to spend for tomorrow
buyer’s needs
▪ Meets stringent financial stability
▪ Works to reduce lead times criteria

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Looking ahead

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