Case Study_2

Global Supplier Selection

In this era of global competition, the modern business organizations pay particular attention to
the identification and selection among alternative supply sources. Today’s highly competitive
environment is forcing the manufacturing organizations to establish a long-term effective
collaboration with the efficient organizations. As a result an effective supplier selection process
is very important to the success of any manufacturing organization. As the market becomes
globalized and all business boundaries collapsed, the manufacturers that once concentrated on
domestic sourcing are now seeking their supply sources around the world. The search of global
partners or suppliers involves new challenges and complexities. An efficient supplier selection
process is capable to handle the complexity of the current business scenario.

Supplier Selection Criteria

As the global competition among organizations has increased and customer demands have
diversified in the global business environment, the manufacturing and logistics costs of the
firms have been sharply increasing. Most of the organizations are concentrating on their core
competencies and trying to outsource other functions from the specific experts globally. In this
process they are thinking to establish an organized global supply network to maintain a
continuous supply relationship. One of the important issues to do so is how to select good
suppliers which can help in build up an efficient and profitable supply chain.
The selection criteria and sub-criteria are given below:
Criteria Sub-criteria
Product cost (𝑆1)
Cost of ownership (𝐶1 ) Total logistics management cost (𝑆2 )
Tariff and taxes (𝑆3 )
Conformance to specification (𝑆4 )
Product reliability (𝑆5 )
Quality (𝐶2 )
Quality assessment technique (𝑆6 )
Process capability (𝑆7 )
Delivery reliability (𝑆8 )
Information sharing (𝑆9 )
Service (𝐶3 )
Flexibility and responsiveness (𝑆10 )
Customer response (𝑆11)
Technological capability (𝑆12)
Financial status (𝑆13)
Background (𝐶4 )
Facility and infrastructure (𝑆14)
Market reputation (𝑆15)
Geographical location (𝑆16)
Political stability and foreign policies (𝑆17)
Risk factors (𝐶5 )
Exchange rates and economic position (𝑆18)
Terrorism and crime rate (𝑆19)
Cost of ownership (𝐶1 )
The profit of an organization can directly be affected by the cost of the operation. It is the most
influential factor in the supplier selection process. In the current global market, the firm must
find a low cost supply base where it can minimize its purchase price, import duties,
documentation cost, transportation cost, communication cost and cost of investigating the
potential supplier’s past performances and financial background. The factors (sub-criteria)
which can affect this criterion are as follows:
Product cost (S1): The cost of the product is one of the direct preference measurement factors
of the supplier. Low cost products always attract the attention of large numbers of customers.
In this cut throat competition, manufacturing firms’ primary goal is to provide the most cost
effective products to customers to increase its profitability. The firm therefore must prefer the
supplier providing low manufacturing cost. The cost of the product involves the processing
cost, maintenance cost, warranty cost and other costs related to the manufacturing of the
product.
Total logistics management Cost (𝑆2 ): In global sourcing it is customary to check the high
logistics cost of each supplier with a great precision. This contains the lengthy distribution
channel cost, transport expenses, inventory cost, handling and packaging cost, damages in the
way and insurance costs, these are usually high when suppliers are international. The firm
should also carefully look into various freight terms and condition among different countries.
Tariff and taxes (𝑆3 ): Each country has its own guidelines for the tariff imposed on the import-
export of goods. A foreign government wants to attract buyers from other countries to boost its
economy, whereas the importing country would like to impose high tariffs to protect its
domestic industry. Therefore despite the general agreement on tariffs and trade (GATT), tariffs
will be imposed on the goods and services purchased from foreign countries. The
manufacturing firm (buyer) should carefully estimate these additional charges before choosing
its global supplier since tariff and dumping duties can lead to a substantial increase in
purchasing price. The preferences are given to the nations with less duties and taxes, because
it ultimately helps in reducing the final price of the product to the customers.
Quality of the product (𝐶2 )
The most important factor leading to overseas sourcing is the high quality of foreign products
resulting from the emphasis placed on quality—at the source. The quality of the product can
be measured by following sub-criteria:
Conformance to specification (𝑆4 ): The supplier’s ability to provide the products that conform
to the manufacturer’s specification is one of the measuring factors to check the quality of the
product. The rejection of the products on the basis of unfulfilled criteria from the manufacturer
gives the information about the bad quality of the product.
Product reliability (𝑆5 ): The suppliers should deliver the reliable and durable products to the
manufacturer. This can be measured in terms of the ability of the supplier to deliver the required
product to the specified manufacturer in the specified period of time.
Quality assessment techniques (𝑆6 ): This encounters the issues like frequent quality assessment
of the part is done by the supplier or not. Accordingly the buyer should investigate whether or
not potential suppliers are certified for strict quality assurance and have a strong commitment
for preventing quality failures.
Process capability (𝑆7 ): This attribute helps in investigating the supplier’s ability to produce
the quality products.
Service performance (𝐶3 )
The performance of the supplier in providing service to the manufacturer is the prime criteria
to decide its suitability for a particular product. The good service given by the supplier may
help in increase the customer base and so this criterion is important in global supplier selection.
It is analyzed based on the following sub-criteria:
Delivery reliability (𝑆8 ): The major obstacle to global sourcing is the transport delays and the
subsequent increase in lead time which disrupts the successful implementation of Just-in-time
(JIT) principles. In the process of selection of the most appropriate supplier the manufacturer
should access the complete supply chain network on time and have the ability to follow the
exact delivery schedule according to the customer’s demand.
Information sharing (𝑆9 ): The ease of communication and negotiability with the suppliers
decides the long-term relation between the supplier and manufacturer and so this should be
included in deciding the global supplier selection. Since languages, business customs, ethics
and communication devices vary from country to country, the manufacturing firm should
consider sub-criteria such as cultural similarity, ethical standard, and electronic data
interchange capabilities in order to ensure effective communication and negotiation with the
foreign supplier. A good relationship can help to better understand their objectives and they
can help each other to enhance their performance towards customers.
Flexibility and responsiveness (𝑆10): The ability of the supplier to change according to the
customer’s demand, price structure, order frequency and current business scenario has a great
importance in the selection of global suppliers. These things can affect the performance of the
firm in case of urgent and uncertain demand. More flexible and responsive suppliers in terms
of the demand constraints can be chosen for better performance towards the customer.
Customer response (𝑆11): The response of the customer towards the supplier is one of the
important factors to decide the performance of the supplier. A good customer response equates
to satisfaction with the supplier and this is the ultimate aim of each organization. Suppliers
with good customer base should be preferred more than the others with no satisfied customers.
Supplier’s background (𝐶4 )
The performance and past history of the suppliers help in selecting the best global supplier of
particular product. Manufacturers should keep suppliers’ information on files and gather
information about its past performance. The supplier information files include the name of each
supplier, a list of material available from each supplier, the suppliers’ quality records, the
supplier’s overall desirability and general information concerning the supplier’s plant and
management. The different characteristics of the supplier should be checked based on past
history to decide the superiority of the organization over other. Some of the sub-criteria to be
analyzed and can be stated as below:
Technological capability (𝑆12): The technological advances are moving at a very fast pace in
this competitive world to satisfy the customer first and get its appreciation. Furthermore
suppliers are more likely to assume greater responsibility for outsourced design, engineering
service, prototype development and research to increase the performance of the products. The
supplier ability to provide advanced technological and R&D support to produce a good product
is of prime concern in global supplier selection. The advanced technology also helps to
maintain better communication between the supplier and the manufacturing firm which further
helps to maintain a long-term relation.
Financial status (𝑆13): The financial status of the supplier can be analyzed by getting the
information about the annual turnover of the supplier and their financial structure based on the
past history. Foreign supplier’s shaky financial situation will gradually weaken the long-term
relation with the manufacturer. Financial stability is the necessary requisite for long-term
partnership programs.
Facility and infrastructure (𝑆14): The production facilities and ability of the supplier to increase
its capacity should also be taken in account to judge the best global supplier. The potential
production capability of each supplier should be analyzed to meet a specified production plan
and also to develop a new product according to the demand of market.
Market reputation (𝑆15): The performance history of the supplier should be analyzed carefully
keeping in mind the competitive nature of the supplier, its past production schedule, response
to market, and its ability to make commercial relations and business references. The honesty,
discipline and ability of the supplier to cope up with the manufacturers help in building the
good reputation in the market.
Risk factor (𝐶5 )
Owing to a number of exogenous factors influencing international sourcing, global supplier
selection is much riskier than its domestic counterpart. Consequently, the global supplier
selection decision is most strongly affected by perceived risks. Effective supply risks require
the identification and monetization of risk events, probability of occurrence, and the firm
contingencies for alternative sources of supply. A risk and uncertainty lens is the newest and
perhaps one of the most important capabilities and contributions that can be made to a firm’s
competitiveness and viability. The risk factors which can affect the selection process of the
global supplier are presented below as:
Geographical location (𝑆16 ): The location of the supplier and its physical and social status
should be analyzed properly before selecting a global partner. The mother country of the
supplier, the location of plant, the nature of natural calamities and other factors should be
checked before the selection because for long-term relation it may create problems in the
supply of the goods. The larger distance between supplier and manufacturer may also affect
the product supply and so this should also be analyzed.
Political stability and foreign policies (𝑆17): The political status of the supplier’s country and
its nature towards the business policies may affect the long-term relations of supplier with the
manufacturer. The more stable government should be preferred because upon changing the
political leadership, different foreign policies can change and this may create big problems in
maintaining further the relations with supplier. The business policies of the communist
government in China and Russia are different from the democratic government of USA and
India, therefore this must be analyzed with great precision.
Exchange rates and economic position (𝑆18): Different countries have their own currency and
relative value of the currencies changes frequently, so the exchange rate of the currency may
also play an important role in deciding the product and transportation cost. This should also be
properly discussed in the process of global supplier selection. The economic status of the
supplier’s country can affect the currency exchange rate, local price control, inflation rate and
so forth. This can result high hidden costs for international sourcing and so these should be
factored into the global supplier selection decision.
Terrorism and crime rate (𝑆19): Terrorism is identified as a great enemy of the business
process. Manufacturers should avoid the supplier which is situated in the terrorist areas.
Nowadays manufacturers are more concerned about it because it can hamper the delivery
schedule and ultimately the performance of the firm towards the customer will be affected
badly. The manufacturer should choose the supplier base situated in the area having less crime
rate and less terrorist activities as compared to other possible sources.