Supplier Selection RJ Whitehead BYU Undergraduate - Class of 2011.

Supplier Selection

RJ WhiteheadBYU Undergraduate - Class of 2011

What will be covered

• Supplier Selection Overview• Brainstorming Exercise• Supplier Selection in-depth• Real World example• Exercise• Summary• Reading List

Supplier Selection

• Supplier selection is the process by which firms identify, evaluate, and contract with suppliers

Why is Supplier Selection Important?

50%50%

Average Percent of Revenue Use in COGS

COGSRevenue after COGS

Brainstorming Exercise

• What is the role of strategy in supplier selection?

• What are some of the difficulties with selecting suppliers?

Nuts and BoltsSupplier Selection Process

• Steps to Supplier Selection1. Determine the type of Relationships

2. Find Potential Suppliers

3. Evaluate Suppliers

4. Select Suppliers

Step 1- Determine type of Relationship

• 3 Types of Relationships1) Transactional

• Not mission critical• Commodity items• Mostly focused on prices• Minimal time and energy are required• Less loyalty• Inflexible• Potential Communication problems

Step 1- Determine type of Relationship

2) Collaboration• Non-commodity items and services• Requirement of improvement of products (R&D)• Long-term agreements• Higher two-way communication• Higher levels of trust• Supply disruptions reduced considerably• Lower total costs

Step 1- Determine type of Relationship

3) Alliance• Relationship-specific capital investments• Lower Total Cost• Reduced time to market• Improved quality• Highest levels of trust• High time commitment• High switching costs

Step 2 – Find Potential Suppliers

• Finding a Supplier:o Internet

o Supplier Records

o Trade Registers

o Trade Journals

o Company Personnel

o Trade Shows

o Professional Organizations

Step 3 – Evaluate Suppliers

• Evaluate Suppliers:o Supplier Survey

o Financial Analysis

o Facility Visits

o Quality Capability Analysis

o Capacity Capability Analysis

o Service Capability Analysis

o Flexibility Capability Analysis

o Information Technology Capability

Analysis

Step 3 – Evaluate Suppliers

• Evaluate Suppliers:o Supplier Survey

o Helps provided preliminary information about the company and whether they

should be considered further for selection

o Example information: Principal officers, bank references, credit references,

history of sales and profit, number of employees, space currently occupied,

Current defect rate, etc.

Step 3 – Evaluate Suppliers

• Evaluate Suppliers:o Financial Analysis

o This is essential for a company to know if the supplier is financially stable

enough to reliable

o A member from the finance department generally does the analysis

o The risk may be too great if they are financially unstable. Your supply may be

disrupted at anytime without notice.

Step 3 – Evaluate Suppliers

• Evaluate Suppliers:o Facility Visits

o Visiting a suppliers plant can be very educational. It allows you to decided if they

are going to be able to do what they promised in their survey and other

information they provided.

o It helps you to survey their true technical capabilities.

Step 3 – Evaluate Suppliers

• Evaluate Suppliers:o Quality Capability Analysis

o Quality is a critical factor for any supplier. It effects your product and your

bottom line directly. They analysis should include a study of upper

management’s philosophy on quality

o Capacity Capability Analysis

o This helps you assure if a supplier can meet the requested demand. It isn’t

uncommon for suppliers to promise the sky and under delivery

Step 3 – Evaluate Suppliers

• Evaluate Suppliers:o Service Capability Analysis

o This is an analysis of what levels of service they will offer. How they will react to

special orders, rush orders, settling disputes, delivering on time, etc.

o Flexibility Capability Analysis

o This is an analysis of how lean they operate and how they will be able to react to

changes in supply and demand, changes in regulation, etc.

Step 3 – Evaluate Suppliers

• Evaluate Suppliers:o Information Technology Capability Analysis

o Information Technology is what has allowed to supply chain to become core

competencies of companies. Their capability should fit in with your companies

strategy. It should include information about integration through EDI and XML-

SOAP services.

Step 4 – Select Supplier

• Selection Methods:o BiddingoNegotiationo Reverse Auctionso Two-Step Bidding/Negotiationo SolicitationoWeighted-Factor Analysis

Step 4 – Select Supplier

o BiddingoBidding is the process of sending out request for bids

to a few suppliers and the lowest price winsoGood when contract is large enough to justify the

bidding expenseoSpecification are explicitoMust have sufficient number of qualified suppliersoSuppliers must want the contractsoThere must be sufficient to for suppliers to send bids

Step 4 – Select Supplier

oNegotiationoNegotiation is the process where there is deliberation

between supplier and purchase over price and termsoGood technique when difficult to estimate costsoUsed when prices aren’t the only determining factoroUsed when there are possibilities to specifications

changesoUsed when there is required tooling and setup costs

Step 4 – Select Supplier

o Reverse AuctionoReverse auctions allow a company to get as close as

possible to the true market priceoAll bidders must already meet all requirementsoMust be used with caution. It can often damage long-

term relationships. It shows that you are more concerned with the lowest price than relationships

Step 4 – Select Supplier

o Reverse AuctionoReverse auctions allow a company to get as close as

possible to the true market priceoAll bidders must already meet all requirementsoMust be used with caution. It can often damage long-

term relationships. It shows that you are more concerned with the lowest price than relationships

Step 4 – Select SupplieroWeighted-Factor Analysis

oWeighted-Factor Analysis allows you to quantify different factors and attribute of suppliers to easily compare them

oBest used when the best supplier isn’t easily identifiable

o4 Steps1. Determine Factors and Weights

2. Determine Sub-factors and Weights

3. Determine Scoring point scale (1-5, 1-10, etc)

4. Score and Evaluate suppliers

Weighted Factor AnalysisFactors Weight Sub Weight Score

(1-10)Supplier -1Weighted

Score Supplier -2Weighted

Technical 25

Design 10 7 7 6 6

Experience 15 8 12 10 15

Finance 25

References 15 10 15 7 10.5

Liquidity 10 5 5 10 10

Quality 25

Defect Rate 20 7 14 6 12

Practices 5 8 4 4 2

Price 25 6 15 10 6

Total 72 61.5

Real World Example• In 1997 Quaker Oats realized that their supplier was

charging them a 40% mark up on the plastic bottles for Gatorade.

• They explored new options supplier options. They decided that an alliance would prove to be the most lucrative. They came up with requirement and visited 8 different bottling companies. After negotiation they found one supplier that best fit with their strategic plans.

Exercise

• On the following slides take each exercise and determine the following things:– What is the optimal type of relationship?– What would be the best way to find the

supplier?– What factors would you focus on for your

weighted-factor analysis?

Exercise

• #1 - You are a producer of silicon memory chips. You have been working with a long-time supplier for silicon but you are trying to lower your costs. Silicon is a commodity and there are many suppliers

Exercise

• #2 – You are a manufacturer of medical equipment and are considering outsourcing major mechanical assemblies. You have long produced them yourself. You are hoping to gain design insights from your new supplier.

Exercise

• #3 – You are a small niche market company. You provide consulting for reverse logistics providers. You have identified the need for web based tracking program for the industry.

Summary

• Supplier selection is a integral part of any company.

• If ignored there is a gold mine of savings waiting to be found.

• Supplier selection should always work within the bounds of company goals

Reading List• Beil Damian Supplier Selection [Online]. - July 2009. - April 11, 2010. -

http://www-personal.umich.edu/~dbeil/Supplier_Selection_Beil-EORMS.pdf.• Burt David, Petcavage Sheila and Pinkerton Richard Supply Management

[Book]. - New York : McGraw-Hill Irwin, 2010. - Eighth.• http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1073920782• http://www.asq.org/learn-about-quality/supplier-quality/overview/tutorial.html• http://www.ism.ws/education/PastConfDetail.cfm?ItemNumber=19340