Supplier Selection & Evaluation BPT3133 – 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 Recognize the need for supplier selection Identify key sourcing requirements Determine sourcing strategy Identify potential supply sources Limit suppliers in selection pool Determine method of supplier evaluation and selection Select supplier and reach agreement

Supplier Evaluation & 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 Quality Management Ability to meet or exceed current and future customer expectations or requirements within critical performance areas on a consistent basis

Supplier Quality Management Importance of Supplier Quality 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 Continuous-Improvement Requirements continuous quality improvements in all aspects; one way to do this is through effective management of supplier quality 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: The ability of a supplier to affect a buyer’s total quality The resources available to support supplier quality management and improvement The ability of a buying firm to practice world class quality A supplier’s willingness to work jointly to improve quality A supplier’s current quality levels

Supplier Quality Management 8 Key Principles of TQM Define quality in terms of customers and their requirements Pursue quality source Stress objective rather than subjective analysis Emphasize prevention rather than detection of defects Focus on process rather than output Strive for zero defects Establish continuous improvement as a way of life Make quality everyone’s responsibility

Supplier Management & Development 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 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

Global Sourcing 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

Summary 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.