The Importance ofSupplier Selection

Presented by:Deborah AndersonDanaillie Woodfine

Evolution of the Supply FunctionEvolution of the Supply Function The Handling of Railway Supplies – Their Purchase and DispositionThe Handling of Railway Supplies – Their Purchase and Disposition

– Published in 1887– Published in 1887

Attention in the first half of 1900’s to reliable access to supply of Attention in the first half of 1900’s to reliable access to supply of raw materials, supplies, and serviceraw materials, supplies, and service

Two problems arise in the 1970’s that puts senior managements Two problems arise in the 1970’s that puts senior managements attention on the supply function:attention on the supply function:• International shortage of basic raw materialsInternational shortage of basic raw materials• Price inflationPrice inflation

1990’s, firms are faced with challenges of global supply chains and 1990’s, firms are faced with challenges of global supply chains and increased reliance on suppliersincreased reliance on suppliers

Technological developments in the early 21Technological developments in the early 21stst century provides century provides expectations for supply chain integration, lower transaction costs, expectations for supply chain integration, lower transaction costs, and faster response times.and faster response times.

Supplier Selection CriteriaSupplier Selection Criteria

1.1. PricePrice

2.2. QualityQuality

3.3. DeliveryDelivery

4.4. ServiceService

Four Product CategoriesFour Product Categories Routine Order ProductsRoutine Order Products – no problems associated with – no problems associated with

learning to use the productlearning to use the product

Procedural Problem ProductsProcedural Problem Products – no question about the – no question about the capability of the product, but problems in learning to use capability of the product, but problems in learning to use the productthe product

Performance Problem ProductsPerformance Problem Products – some doubt as to – some doubt as to whether the product will perform satisfactorily in the whether the product will perform satisfactorily in the application for which it is being consideredapplication for which it is being considered

Political Problem ProductsPolitical Problem Products – require large capital – require large capital outlays, and the buying decision will likely involve people outlays, and the buying decision will likely involve people from several functional areas within the organization.from several functional areas within the organization.

Buyer-Supplier Relationship:Buyer-Supplier Relationship:Investment Versus Rewards ObtainedInvestment Versus Rewards Obtained

Supply Risks and DollarsSupply Risks and Dollars

Source: Peter Kraljic, Purchasing Must Become Supply Management,” Harvard Business Review, September-October, 1983

Bottleneck• Unique specification• Supplier technology

important• Production-based scarcity• Substitution difficult• Usage fluctuates• Potential storage risk

Strategic• Continuous availability essential• Custom design or unique

specifications• Supplier technology important• Few adequate suppliers• Changing source of supply difficult• Substitution difficult

Non-Critical• Standard or commodity type • Substitute products available• Competitive supply market

Leverage• Unique cost management important• Substitution possible• Competitive supply market

Low

Low

High

High

Value

View of Buyer-Supplier Relationship:View of Buyer-Supplier Relationship:A Paradigm ShiftA Paradigm Shift

TraditionalTraditional Lowest priceLowest price Specification-drivenSpecification-driven Short-term, reacts to marketShort-term, reacts to market Trouble avoidanceTrouble avoidance Purchasing’s responsibilityPurchasing’s responsibility TacticalTactical Little sharing of informationLittle sharing of information

PartnershipPartnership Total cost of ownershipTotal cost of ownership End-customer drivenEnd-customer driven Long-termLong-term Opportunity maximizationOpportunity maximization Cross-functional teams and top Cross-functional teams and top

management involvementmanagement involvement StrategicStrategic Both supplier and buyer on Both supplier and buyer on

both sides share short- and both sides share short- and long-term planslong-term plans

Shared risk and opportunityShared risk and opportunity StandardizationStandardization Joint venturesJoint ventures Share dataShare data

Supply Strategy QuestionsSupply Strategy Questions

WhereWhere• Local, regionalLocal, regional• Domestic, internationalDomestic, international• Large versus smallLarge versus small• Multiple versus sole sourceMultiple versus sole source• High versus low supplier turnoverHigh versus low supplier turnover• Supplier relationsSupplier relations• Supplier certificationSupplier certification• Supplier ownershipSupplier ownership

Supply Strategy QuestionsSupply Strategy Questions HowHow

• Systems and Systems and proceduresprocedures

• ComputerizationComputerization• NegotiationsNegotiations• Competitive bidsCompetitive bids• Fixed bidsFixed bids• Blanket orders/open Blanket orders/open

ordersorders

• Blank check systemBlank check system

• Group buyingGroup buying

• MRPMRP

• Long-term contractsLong-term contracts

• EthicsEthics

• Aggressive or Aggressive or passivepassive

• Purchasing researchPurchasing research

• Value analysisValue analysis

Formal Supplier EvaluationsFormal Supplier Evaluations

QualityQuality

PricePrice

DeliveryDelivery

ServiceService

Good Performance

Fair Performance

Unsatisfactory Performance

Weighted Point Evaluation SystemsWeighted Point Evaluation Systems

Identify suppliersIdentify suppliers• Important suppliers and/or critical goods and Important suppliers and/or critical goods and

servicesservices

Identify factors or criteria for evaluationIdentify factors or criteria for evaluation

Determine the importance of each factorDetermine the importance of each factor

Establish a system for rating each supplier on Establish a system for rating each supplier on each factoreach factor

Evaluation of Potential Sources: Evaluation of Potential Sources: Two Key QuestionsTwo Key Questions

1.1. Is this supplier capable of supplying our Is this supplier capable of supplying our requirements satisfactorily in both the requirements satisfactorily in both the short- and long-term?short- and long-term?

2.2. Is this supplier motivated to supply these Is this supplier motivated to supply these requirements in the way we expect in the requirements in the way we expect in the short- and long-term? short- and long-term?

Arguments in Favor of Multiple Arguments in Favor of Multiple SourcingSourcing

Traditional practiceTraditional practice Keep suppliers “on their toes”Keep suppliers “on their toes” Assurance of supplyAssurance of supply Capable of dealing with multiple suppliers efficientlyCapable of dealing with multiple suppliers efficiently Avoid supplier dependence on one customerAvoid supplier dependence on one customer Obtain a greater degree of volume flexibilityObtain a greater degree of volume flexibility Strategic considerationsStrategic considerations Government regulationsGovernment regulations Limited supplier capacityLimited supplier capacity Opportunity to test a new supplierOpportunity to test a new supplier Supply market volatilitySupply market volatility

Arguments in Favor of Single SourcingArguments in Favor of Single Sourcing Exclusivity: The supplier may be only available sourceExclusivity: The supplier may be only available source

• patent protection, exclusive distributorshippatent protection, exclusive distributorship

Outstanding quality or service Outstanding quality or service value value

Order too small to splitOrder too small to split

Opportunities for discounts or lower freight costsOpportunities for discounts or lower freight costs

More important customer More important customer more attention from supplier more attention from supplier

Cost of duplication prohibitiveCost of duplication prohibitive

Easier to schedule deliveriesEasier to schedule deliveries

JIT, stockless buying or EDI arrangementsJIT, stockless buying or EDI arrangements

Easier to manage one supplierEasier to manage one supplier

Prerequisite to partneringPrerequisite to partnering

The customer’s point of view

The suppliers’ point of view

Helpful WebsitesHelpful Websites International Federation of Purchasing and Supply International Federation of Purchasing and Supply

Management (IFPSM)Management (IFPSM)http://http://www.ifpmm.org//

Purchasing and Supply Management Certificate ProgramPurchasing and Supply Management Certificate Program

Louisiana State University (LSU) http://www.is.lsu.edu/newDOCE/Professional/certificate.asp?Home=1

Institute of Supply Management (ISM)Institute of Supply Management (ISM)http://www.ism.ws/

Questions?Questions?

Works Cited:

Purchasing and Supply Management, McGraw Hill Companies

ProQuest – The Relative Importance of Supplier Selection Criteria: A Review and Update