1 Supplier Evaluation and Selection. Outline supplier evaluation & selection (Chapter 7) industrial practices effect of operations and culture on supply.

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Supplier Supplier Evaluation and SelectionEvaluation and Selection

OutlineOutline

supplier evaluation & selection (Chapter 7)

industrial practices

effect of operations and culture on supply management

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Relation Between ChaptersRelation Between Chapters

Supplier Evaluation & Selection (Chapter 7)

Supplier Management & Development

(Chapter 9)

Supplier Quality Management

(Chapter 8))

Specifications and Operations Standards

Well before …

Chapter 7 OverviewChapter 7 Overview

supplier evaluation and selection process

key supplier evaluation criteria

developing a supplier evaluation and selection survey

critical supplier selection issues

reducing supplier evaluation and selection cycle time

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Evaluation and Selection ProcessEvaluation and Selection Process

no best way, at least no known best wayno best way, at least no known best way

overall objective: best trade off in overall objective: best trade off in maximizing value and minimizing risk maximizing value and minimizing risk

long-term relationship with supplierslong-term relationship with suppliers

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Supplier Supplier Selection and EvaluationSelection and Evaluation

66Supplier Evaluation and Selection Process

Strategic Sourcing DecisionsStrategic Sourcing Decisions

single vs. multiple sourcingsingle vs. multiple sourcing

short-term vs. long-term contractsshort-term vs. long-term contracts

design support vs. operational supportdesign support vs. operational support

full-service vs. non-full-service suppliersfull-service vs. non-full-service suppliers

domestic vs. foreign-based suppliersdomestic vs. foreign-based suppliers

collaboration vs. arm’s length relationshipcollaboration vs. arm’s length relationship


Information Search Information Search RequirementsRequirements


Importance of Purchased item to Buyer

HighHigh LowLow

HighHigh

LowLow

Capability of Suppliers

Minor Information Search

Minor to Moderate Information Search

Major Information Search

Minor to Moderate Information Search

Sources of InformationSources of Information

Current suppliersCurrent suppliers

Preferred suppliersPreferred suppliers

Sales representativesSales representatives

Information databasesInformation databases

ExperienceExperience

Trade journalsTrade journals

Trade directoriesTrade directories

Trade showsTrade shows

Second-party or Second-party or indirect informationindirect information

Internal sourcesInternal sources

Internet searchesInternet searches


Sourcing AlternativesSourcing Alternatives

multiple vs. single sourcingmultiple vs. single sourcing

large vs. small supplierslarge vs. small suppliers

manufacturer vs. distributor manufacturer vs. distributor

local, national, or international supplierslocal, national, or international suppliers


Limit Suppliers Limit Suppliers in Selection Poolin Selection Pool

removing obviously inappropriate removing obviously inappropriate suppliers, by, e.g.,suppliers, by, e.g., financial risk analysisfinancial risk analysis

Ex. Dun and Bradstreet reportsEx. Dun and Bradstreet reports

evaluation of supplier performanceevaluation of supplier performance for existing suppliersfor existing suppliers

evaluation of supplier-provided informationevaluation of supplier-provided information preliminary surveys (entry qualifiers)preliminary surveys (entry qualifiers)


Methods of Methods of Evaluation and SelectionEvaluation and Selection

evaluation from supplier-provided evaluation from supplier-provided informationinformation

supplier visitssupplier visits

use of preferred suppliersuse of preferred suppliers

external or third-party informationexternal or third-party information


Key Suppliers Evaluation Key Suppliers Evaluation CriteriaCriteria

price, quality, and deliveryprice, quality, and delivery

management capabilitymanagement capability

employees capabilitiesemployees capabilities

cost structurecost structure

total quality performance, systems, and total quality performance, systems, and philosophyphilosophy

process and technological capabilityprocess and technological capability1313Key Supplier Evaluation Criteria


environmental regulation complianceenvironmental regulation compliance

financial stabilityfinancial stability

production scheduling and control systemsproduction scheduling and control systems

e-commerce capabilitye-commerce capability

supplier’s sourcing strategies, policies, and supplier’s sourcing strategies, policies, and techniquestechniques

longer-term relationship potentiallonger-term relationship potential1414Key Supplier Evaluation Criteria

Interpreting Financial RatiosInterpreting Financial RatiosLiquidity Ratios Interpretation

Current ratio =Current assets / Current liabilities

Should be > 1.0, but look atindustry averages

Quick ratio =(Cash + Receivables) / Current liabilities

At least 0.8 if supplier sells on creditLow = cash flow problems

Activity RatiosInterpretation

(compare with industry average)Inventory turnover =COGS / Inventory

low = slow inventory or possible cash flow problems

Fixed asset turnover =Sales / Fixed assets

Too low = supplier may be inefficient using its fixed assets

Total asset turnover =Sales / Total assets

Too low = supplier may be inefficient using its total assets

Days sales outstanding =(Receivables x 365) / Sales

Too high hurts cash flow;Too low shows restrictive credit policy

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Interpreting Financial RatiosInterpreting Financial Ratios

Profitability RatiosInterpretation

(compare industry average)Net profit margin =

Profit after taxes / SalesRepresents after-tax return

Return on assets =Profit after taxes / Total assets

Represents the return earned on what a company owns

Return on equity =Profit after taxes / Equity

Represents return on shareholders’ investment

Debt RatiosInterpretation

(compare industry average)Debt-to-equity =

Total liabilities / Equity> 3 means highly leveraged

Current debt-to-equity =Current liabilities / Equity

Too high means supplier may be unable to pays its bills

Interest coverage =(Pretax income + Interest) / Interest

Should be > 3; low may mean difficulty in paying creditors

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Evaluation and Selection SurveysEvaluation and Selection Surveys

identify supplier evaluation categoriesidentify supplier evaluation categories

assign a weight to each categoryassign a weight to each category

identify and weight subcategoriesidentify and weight subcategories

define a scoring system for categories and define a scoring system for categories and subcategoriessubcategories

evaluate supplier directlyevaluate supplier directly

review results and make decisionreview results and make decision1717

developing a supplier evaluation and selection survey

Initial Supplier EvaluationInitial Supplier EvaluationCategory Weight Subweight Score (1 - 5

scale)Weighted

Score Subtotal

Quality Systems 20 Process control systems 5 4 4.0 Total quality commitment 8 4 6.4 PPM defect performance 7 5 7.0 17.4

Management Capability 10 Management/labor relations 5 4 4.0 Management capability 5 4 4.0 8.0

Financial Condition 10 Debt structure 5 3 3.0 Turnover ratios 5 4 4.0 7.0

Cost Structure 15 Costs relative to industry 5 5 5.0 Understanding of costs 5 4 4.0 Cost control/reduction efforts 5 5 5.0 14.0

Delivery Performance 15 Performance to promise 5 3 3.0 Lead-time requirements 5 3 3.0 Responsiveness 5 3 3.0 9.0

Technical/Process Capability 15 Product innovation 5 4 4.0 Process innovation 5 5 5.0 research and development 5 5 5.0 14.0

Information Systems Capability 5 EDI capability 3 5 3.0 CAD/CAM 2 0 0.0 3.0

General 10 Support of minority suppliers 2 3 1.2 Environmental compliance 3 5 3.0 Supply base management 5 4 4.0 8.2

Total Score 80.6

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DellDell

Make or Buy

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Make or Buy a TechnologyMake or Buy a Technology

merits in either way

general strategy buy if there are many developers in the market

follow and invest on the winners

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Dell

Selecting Suppliers

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Selecting an ODM of Selecting an ODM of Notebooks for DellNotebooks for Dell

1991, Aug, three potential suppliers Compal (仁寶 ), Inventec Corporation (英業達 ), and Quanta (廣達 ) Compal: most promising Quanta: relatively immature by then

result: Inventec Corporation, because of site visits GM of Compal answered all questions, even cutting answers of

subordinates insufficient respect for professional, insufficient delegation of power,

reliability of answers

Inventec Corporation showed division of labor during interview, and provided detailed test in reliability


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price, quality, and deliveryprice, quality, and deliveryenvironmental regulation environmental regulation

compliancecompliance

management capabilitymanagement capability financial stabilityfinancial stability

employees capabilitiesemployees capabilitiesproduction scheduling and production scheduling and

control systemscontrol systems

cost structurecost structure e-commerce capabilitye-commerce capability

total quality performance, total quality performance, systems, and philosophysystems, and philosophy

supplier’s sourcing strategies, supplier’s sourcing strategies, policies, and techniquespolicies, and techniques

process and technological process and technological capabilitycapability

longer-term relationship longer-term relationship potentialpotential


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Selecting a Supplier of Selecting a Supplier of Power Supply for DellPower Supply for Dell

early 1991, three qualified suppliers: Delta (台達 ) 、 Lite-On (光寶 ) 、 Vidar-SMSCO (三光惟達 )

Delta distant leader

result: Lite-On Lite-On: proactive and responsive in quotation

stage and in preparation of sample


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price, quality, andprice, quality, and delivery deliveryenvironmental regulation environmental regulation










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Large or Small Suppliers?Large or Small Suppliers?

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Which One to Choose from, Which One to Choose from, Large or Small?Large or Small?

possible problems with small ones (first clip: 00:25:48 – 00:28:53) unreliable

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McDonaldMcDonald

Selecting SuppliersSelecting Suppliers

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McDonaldMcDonald

competition in the fast food industry not advanced technology helpful with resource in marketing and expansion, but

not critical keys

the lowest prices from suppliers the lowest operations costs the most appropriate technology the highest morale in operations the strongest desire to improve

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McDonaldMcDonald

large suppliers played no attention to the strict rules and standards of McDonald operations standards of McDonald

risky with small ones unsure technological and financial ability to

expand in the pace of McDonald

successfully to turn into organized, efficient, and motivated suppliers

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Effect of Effect of Operations and Culture Operations and Culture on Supply Managementon Supply Management

Japanese Influences in Japanese Influences in Manufacturing ProcessesManufacturing Processes

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Relation Between ChaptersRelation Between Chapters

Supplier Evaluation & Selection (Chapter 7)

Supplier Management & Development

(Chapter 9)

Supplier Quality Management

(Chapter 8))

Specifications and Operations Standards

Well before …

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General Trend: General Trend: Reduction of Number of SuppliersReduction of Number of Suppliers

Dell more than 140 suppliers in early days about 40 in 1999

US operations of McDonald hamburger suppliers: from 170 in early days down to 5 in late 80’s potato chips: from 175 in early days to mostly 1 in late 80’s

reason: best trade off in maximizing value and minimizing risk manage and develop with suppliers that can grow with the

company

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Philosophy and Ideology Philosophy and Ideology in Manufacturing in Manufacturing (Early 70s to Mid 90s)(Early 70s to Mid 90s)

affected heavily by Japan Just-in-Time and Lean Manufacturing (Toyota)

Keiretsu (Japanese 「經連」 )

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Conventional Purchasing Conventional Purchasing versus JIT Purchasingversus JIT Purchasing

Delivery time dictated by production schedule of buyer

Delivery time set by buyer

Sole to few suppliers per part, Multiple suppliers per part, for

quality and price

Little inventory on partsInventory on parts

Long-term purchasing agreement

Short-term purchasing agreement

Frequent deliveries for immediate production

Infrequent deliveries, possible for a few weeks’ consumption

JIT PurchasingConventional Purchasing

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Conventional Purchasing Conventional Purchasing versus JIT Purchasingversus JIT Purchasing

Supplier close to buyerProximity of supplier being

unimportant

Buyer work with suppliers to reduce supplier cost and price

Supplier set price

Communication between supplier and multiple sections, e.g.,

production, design, QC, etc., facilitated by purchasing

Communication between supplier and purchasing

More information exchange, traditional plus production

schedules, production processes, including real-time information

Traditional information exchange, on quality, quality, price, time,

venue

Product design to minimize # of parts

Free product design

JIT PurchasingConventional Purchasing

1 Supplier Evaluation and Selection. Outline supplier evaluation & selection (Chapter 7) industrial practices effect of operations and culture on supply.

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