Supplier Selection Criteria- An Overview

Rajnish Kumar
National Academy of Indian Railways, Vadodara

Contents
1.1 INTRODUCTION ..................................................................................................................................2
1.2 SELECTION OF CRITERIA IN RESEARCH ...............................................................................................2
1.3 QUANTIFICATION OF CRITERIA FOR SUPPLIER SELECTION ..................................................................3
1.4 SYSTEMS AT MAJOR MANUFACTURERS .............................................................................................6
1.4.1 BHEL- Bharat Heavy Electricals Limited ...............................................................................6
1.4.2 ABB........................................................................................................................................ 11
1.4.3 VOLVO .................................................................................................................................. 12
1.4.4 ALCOA HOWMET ................................................................................................................ 14
1.4.5 General Dynamics Land Systems .......................................................................................... 17
1.4.6 Ordnance Factories Board (OFB)......................................................................................... 18
1.4.7 RAIL COACH FACTORY - INDIAN RAILWAYS .................................................................. 21
1.4.8 COAL INDIA LIMITED ........................................................................................................ 23
1.4.9 STEEL AUTHORITY OF INDIA LTD (SAIL) ........................................................................ 26
1.4.10 LOCKHEED MARTIN AERONAUTICS ........................................................................... 29
1.4.11 UNITED TECHNOLOGIES CORPORATION ................................................................. 30
1.4.12 SCHAEFFLER TECHNOLOGIES AG & CO. KG ........................................................... 31
1.4.13 BUREAU OF INDIAN STANDARDS, IS 12040:2001 ...................................................... 36
1.5 REFERENCES .................................................................................................................................... 40
 1.1 Introduction

The dynamics of market has forced all manufacturers to resort to large scale outsourcing.
Traditional manufacturers have been forced to outsource major activities. Selecting a
supplier is a very complex and risky process since the factors responsible for selection are
difficult to be quantified. It is not possible to quantify all factors and predicting supplier’s
behaviour is quite difficult. For a public procurement agency it is all the more difficult as
it has to maintain the image of a fair, transparent and just decision maker. The
manufacturers and companies have evolved several methods for supplier evaluation. Few
of the systems followed in major companies were analyzed for finding patterns of
similarity and also their closeness to models in research. Generally quality is considered
the most important criteria for selection of supplier. But quality is not the factor which is
decisive, in most cases it is the purchase price. Thus an integrated approach is must for
qualifying the suppliers. The paper has analyzed a few of the major manufacturer’s
systems to get a fair idea of prevalent practices in industry. The research done on this
topic of supplier selection has been compiled to find the gaps and similarities. The aim of
the work is to reconcile the practice with research.

1.2 Selection of criteria in research

Bureau of Indian Standards has published a standard IS: 12040-2001 which provides the
broad guidelines for development of Vendor Rating System. The standard stipulates
Quality, Price, Delivery, Service and System as five key factors to work out rating
system.

Factors for supplier evaluation which have evolved over the years have been compiled as
listed in Table I.

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 Table I Factors/criteria for supplier selection

FACTOR/CRITERION FACTOR/CRITERION

Quality systems in operation at the Production facilities and capacity

supplier’s place/quality philosophy
Communication openness
Financial capability of the supplier
Labour problems at the supplier’s
Technological capability/R&D place
capability
Business volume/amount of past
Reputation for integrity/believability business
and honesty/Vendor’s image
Price
Existence of IT
standards/communication system Quality/Reliability of the product

Performance awards/performance Ability to meet delivery promise/

history Delivery lead time/ Consistent
Delivery
Bidding procedural compliance
Management sensitivity to buyer’s
Profitability of suppliers requirements/ Attitude

Breadth of product line/ability of a After Sales Support/ Technical

supplier to supply a number of items support available

Supplier’s proximity/geographic Positive attitudes towards

location complaints

Management and organization

Contribution to productivity

Conflict resolution

1.3 Quantification of criteria for supplier selection

The important point in the selection of criteria is that they it must be possible to quantify
them and the data also be available. Each such criterion, therefore has been analyzed
(Table II) for its feasibility to be included in the list of selection criteria.

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 Table II Feasibility of selection criteria

CRITERION FEASIBILITY
For existing suppliers, only certificate can be asked,
Quality systems in
cannot be quantified. This will automatically reflect in the
operation at the
quality of supply. But for assessing capability of
supplier’s place/quality
potential supplier, this is an important basis.
philosophy
For new bidders this can be factor, but no discrimination
can be done on this basis and it is difficult to assign
ranking to a prospective or current supplier. This can
Financial capability of also have the effect of restricting competition and allow
the supplier only established players to bid/supply. But even with this
drawback, it is a very important factor while determining
potential suppliers.

For regular well established items, this may not be a

important criterion. Moreover, there is no scale possible
for this subjective opinion. This can have a similar effect
Technological
as financial capability criterion. When new suppliers are
capability/R&D
invited, this again is very important. Independent expert
capability
opinion may be required for assigning ranking/marks for
this criterion.

This is a very important. However, to assign ranking is a

Reputation for very difficult problem. And in the present condition, the
integrity/believability onus of ranking the integrity lies with the purchasing
and honesty/Vendor’s organization. This therefore, cannot form the part of
image selection criteria.

This is an important for increasing the efficiency of the

supplier; however, the purchasing organization should
be more concerned about delivery and quality than the
internal arrangements of the supplier. The
Existence of IT
professionalism of the supplier is best reflected in the
standards/communicati
ensuing supplies. This criterion also cannot be
on system
quantified to a satisfactory level with reduced
subjectivity. For potential suppliers some credit has to
be given for their systems.

This is an important criterion, but is covered in quality of

Performance
product and delivery history. It can be a basis for a
awards/performance
potential supplier. Credit can be given for market
history
reputation and delivery performance for other supplies.

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 Without this in public procurement no supplier can
Bidding procedural
qualify so it is a redundant criterion in case of public
compliance
procurement.
It may not be possible to assess this factor completely;
moreover the focus of organization is on quality and
timely delivery. If these are achieved this criteria
becomes redundant. If the supplier cannot breakeven
Profitability of suppliers
then it may no longer supply and which is surely a
matter for concern. But in public procurement
quantifying is must which only can lead to objectivity,
but for this factor it will not be possible.
This item is not quantifiable. Since the aim is to reduce
Breadth of product subjectivity it will not qualify to be in the criteria list.
line/ability of a supplier Moreover, when the judgement has to be on several
to supply a number of items this will play an important role but as long as the
items supplier is being evaluated for a single item, it does not
matter.
This is an important factor in reducing cost of
Supplier’s
transportation and ease in case of crisis. But in a
proximity/geographic
globalization era, this may not be right way to assess
location
suppliers.
Management and Cannot be quantified
organization
Contribution to This will automatically reflect in price of product and
productivity cannot be quantified.
This also cannot be quantified and any opinion will be
Conflict resolution
subject of dispute.
This is an important criterion for first time registration of
Production facilities
suppliers, once the track record of supply is there, it may
and capacity
not be useful
Communication Cannot be quantified
openness
Labour problems at
Similarly, this criterion also cannot be quantified.
the supplier’s place
Business
This criterion is important for assessment of new
volume/amount of past
suppliers.
business
Price This is a very important criterion and can be quantified
Quality/Reliability of This is a very important factor and methods to quantify
the product this are available.
Ability to meet delivery This can be quantified and one of the most important
promise/ Delivery lead criterion for a supplier to qualify.
time/ Consistent
Delivery

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Management Difficult to quantify but is covered in warranty obligations
sensitivity to buyer’s etc.
requirements/ Attitude
After Sales Support/ This is an important factor and can be quantified on
Technical support basis of history of problem resolution for old suppliers
available and industry feedback for new suppliers.
Positive attitudes This can be factored in a common criterion “service”
towards complaints which includes a few of the above mentioned criteria.

Based on past research, and evaluation of criteria applicable and manageable in present
context, the four salient criteria which may be identified as most relevant in supplier
evaluation and selection are,

a. Quality

b. Delivery

c . Price

d. Service

The principle to be adopted is “You can’t manage what you don’t measure”.

1.4 Systems at Major Manufacturers

Few important and famous companies whose supplier evaluation and rating system could
be found have been detailed to find out the which are the most relevant and practical
criteria for supplier evaluation and selection.

1.4.1 BHEL- Bharat Heavy Electricals Limited

Bharat Heavy Electricals Limited (BHEL) is a Public Sector Enterprise manufacturing

integrated power plant equipments It is based in New Delhi, India. BHEL was established
in 1964, ushering in the indigenous Heavy Electrical Equipment industry in India. It is
engaged in the design, engineering, manufacture, construction, testing, commissioning
and servicing of a wide range of products and services for the core sectors of the
economy, viz. Power, Transmission, Industry, Transportation, Renewable Energy, Oil &
Gas and Defence. It has 15 manufacturing divisions, two repair units, four regional
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offices, eight service centres, eight overseas offices and 15 regional centres and currently
operates at more than 150 project sites across India and abroad. Most of its manufacturing
units and other entities have been accredited to Quality Management Systems (ISO
9001:2008), Environmental Management Systems (ISO 14001:2004) and Occupational
Health & Safety Management Systems (OHSAS 18001:2007).

It is the 7th largest power equipment manufacturer in the world. It has a workforce of
about 50,000.

BHEL has a scientific method of Supplier Performance monitoring and rating system.

Supplier Performance Rating (SPR):

Supplier performance is assessed with respect to the following main factors and it is
calculated for each consignment/ purchase order:

Rating Weightage
Quality 60

Delivery 30

Service 10

Total 100

Quality Rating (QR) is given 60% weightage.

Quality rating is based on acceptable quantity of material offered for inspection or

delivered by supplier

(𝑄1 + 0.75 × 𝑄2 + 0 × 𝑄3) × 60

𝑄𝑅 =
𝑄

where,

Q =Quantity inspected

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 Q1 =Quantity accepted

Q2 =Quantity accepted with concession / deviation/ rectification

Q3 =Quantity rejected

The pre-inspection report (at supplier’s works) includes the quantity accepted after
rework in Q2 category.

Delivery Rating (DR) is given 30% weightage

Supplier is rated on delivery parameters as follows.

Adherence to P.O delivery date 30

One mark is deducted for each day’s delay.

Service Rating (SR) is given 10% weightage

Service Rating is given on the basis of the following criteria.

SR

Cooperation and readiness to help in emergency, submission of 5

Support documents such as GA Drawings, TC,GC etc. as
applicable, submission of final technical documents, O&M
Manuals and as built drawings complete and in time.

Promptness in reply/attending quality problems at site/shop 5

Thus, the Supplier Performance Rating (SPR) = QR+DR+SR

The period for calculation of SPR is previous year plus elapsed period of current year or
period for last three executed purchase orders whichever is more.

There is a system of FEEDBACK FROM SHOP FLOOR at BHEL. If non-

conformance/defects in components are noted while processing at shop floor overall

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performance rating will be multiplied by demerit factor (DF). The demerit factor is
calculated in the following manner:

DF

Components used after rectification 0.9

Components replaced by supplier 0.8

Supplier does not rectify/ replace/respond 0.0

Supplier Rating

Now based on total score the supplier performance is rated.

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 Total Score Rating Action

98-100 A1 Supplier can be considered as Preferred

Supplier for self –certification and long term
contract.

90 to less than 98 A Supplier can be considered for self –certification

100% Quality Rating consistently.
Supplier can be considered for reduced witness
points during inspection. Supplier can be
considered for long-term contracts.

75 to less than 90 B Supplier to be informed about deficiency for

immediate corrective and preventive action.
Supplier can be considered for long-term
contracts.

60 to less than 75 C Supplier to be informed about deficiency for

immediate corrective and preventive action.
Response to be obtained from supplier.
Necessary technical help may be provided to the
supplier.
Inspection stages may be reviewed for tightened
inspection.
Enquiry to be sent only after approval at higher
level.

Less than 60 D Supplier to be put under hold and informed.

In order to provide motivation to A1 and A category rating supplier, BHEL has suggested
the following steps,

a) May be considered for self-certification

b) May be preferred for long term contracts

c) In tenders, where quantity is to be split amongst suppliers, 10% quantity may

be reserved for A1 category supplier in addition to normal distribution of
remaining 90% quantity as per normal practice.

d) Appreciation/commendation in structured get-together/suppliers meets.

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The feed back to the supplier is given annually in a prescribed format. The system at
BHEL is very structured, and has transparency inbuilt. It is done so as it is a Public
Sector Unit subjected to various statutory audits, investigations etc.

1.4.2 ABB

ABB is a multinational corporation headquartered in Zurich, Switzerland, operating in

robotics and mainly in the power and automation technology areas. It ranked 143rd in
Forbes Ranking (2010). ABB is one of the largest engineering companies as well as one
of the largest conglomerates in the world. ABB has operations in around 100 countries,
with approximately 145,000 employees in June 2012, and reported global revenue of $40
billion for 2011. The supplier evaluation at ABB has both formal and informal methods.
Purchase items are classified according to Kraljic’s model. They have a fairly simple
supplier qualification and assessment system.

Supplier Qualification Status

Suppliers can determine their potential qualification status by looking at the Summary
Sheet of the Supplier Qualification Questionnaire. According to the qualification level
achieved they can see below the actions that need to be taken.

Rejected: Their score is under 20%: Their Company is too far from ABB requirements.
If and when they have implemented corrective actions which permit them to reach a score
of more than 20%, they can get in touch with ABB again.

Under Development: Their score is between 20% and 50%: they can be part of the ABB
Supplier List, provided their Quality, Costs and Delivery (QCD) performance is best in
class and they have a plan to reach 50% within one year.

Qualified: Their score is above 50%: they can be part of the ABB Supplier List, provided
their Quality, Costs and Delivery (QCD) performance is best in class. The decision to

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include a supplier on the ABB supplier list will be based on the combination of the score
and the action plan to address weak areas.

Supplier Scorecard

Suppliers’ overall performance is measured on quality, on-time delivery and cooperation.

The relative importance depends on division to division. In general most important is on-
time delivery in which supplier receives 40-60% of the points, quality as second most
important with 20-40% points and cooperation is last. The supplier’s objective is:

Measurement Suppliers’ Objective

On-Time Delivery 100% on-time

As-Received Quality Zero defects

1.4.3 VOLVO

The Volvo Group is one of the world’s leading manufacturers of trucks, buses,
construction equipment and marine and industrial engines. The Group also provides
complete solutions for financing and service. The Volvo Group, which employs about
115,000 people, has production facilities in 19 countries and sells its products in more
than 190 markets. In 2012 the Volvo Group’s sales amounted to about USD 45 billion.
The Volvo Group is a publicly-held company headquartered in Göteborg, Sweden.

In their Supplier Quality Assurance Manual Edition 06-2010, Volvo has stated their goal
as “PREMIUM SUPPLIERS FOR PREMIUM BRAND, our effort is directed towards
selecting the best suppliers based on capability and performance. Once selected, our
goal is to work with these suppliers to develop a strong, long-term, structured
relationship with them.”

The objectives are well defined for the suppliers. The targets are mentioned in the table
below:

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Measurement GENERAL TARGET

PPM- Rejected Part Per Million

(Safety critical characteristics excluded)

Explanation: The PPM value is defined as the 10 PPM

number of rejected parts divided by the total
quantity delivered multiplied by 1000000.

QPM- Quality Performance Measurement

Calculated at Supplier manufacturing Parma
level
30

Explanation: Compound quality grading from 0

point (Outstanding) to 100 (worst case)

Fault Frequency 0 % for safety features

Explanation: The number of Warranty Claims Unless otherwise specified in the

per vehicle within the first 12 months of use
(after zero Km/miles)
technical specifications, fault frequency
targets shall be:
 Below 0.0005% for fasteners ,
brackets and similar parts
 Below 0.005% for other
components

Service campaign
0
Explanation: The number of vehicle recalled
after zero KM/miles due to a reliability/warranty
problem

Safety recall 0

Explanation; The number of trucks recalled This is a MUST (non-negotiable)

after zero km/miles due to a safety problem

Delivery precision 98% as minimum requirement.

Explanation: A percentage: The quantity of 100% For delivery in sequence.

parts delivered on time divided by the total
delivered.

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For managing performance, the following performance parameters are monitored,

Quality Performance Measurement Level, Field Failure, Delivery Precision, Rejected

Parts Per Million Level, Breakdown Failure, Unplanned Stop, Production Feedback,
Warranty Claims and Safety Problem.

The scorecard for suppliers is used for monitoring the quality trends and acts as alert for
low performing supplier. A low performing supplier (LPS) is identified and quality
improvement activities are initiated. There is a unique system of exit criteria of a four
stage performance improvement elevation process.

1.4.4 ALCOA HOWMET

Headquartered in Cleveland, Ohio, Alcoa Howmet is a world leader in the investment

casting of superalloys, aluminum and titanium primarily for jet aircraft engines and
airframes as well as Industrial Gas Turbine (IGT) engine components. Alcoa Howmet
also provides hot isostatic pressing, precision machining and protective coating services.
An important supplier of superalloy metals, titanium ingots, ceramic products and
advanced tooling, Alcoa Howmet conducts extensive research to aid development of its
material, product and process technologies.

Alcoa Howmet and affiliates operate 27 manufacturing facilities in the United States,
Canada, France, the United Kingdom and Japan.

Howmet uses a computer database to evaluate suppliers’ performance in the areas of:

 Quality

 Delivery

 Service

 Total Cost

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A combination of data from each category determines total overall performance. The
Supplier Price Index (SPI) factors rework and other quality and delivery issues to
calculate the real cost of a purchase to Howmet. The information is used for negotiating
contracts and awarding new business.

The company has the following Performance Categories for suppliers

Preferred

Suppliers that sustain composite performance levels of 94% to 100% will receive
preference for new and follow-on business.

Certified

Suppliers that sustain composite performance levels of 90% to 93.9% will be awarded
business based on the supplier’s ability to provide products, materials or services in
accordance with the Supplier Certification Control plan.

Acceptable

Suppliers that sustain composite performance levels of 75% to 89.9% will be awarded
business before those in lesser performance categories.

Marginal

Suppliers that sustain composite performance levels of 65% to 74.9% will be awarded
business that has not already gone to preferred and acceptable suppliers.

Measurement Criteria

Quality = 55% of Performance Measurement

Formula

(Receipt Rejected / Total Monthly Receipts) – (Reason Code weight + Point of Location
weight / Total Monthly Receipts) = Point Loss

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The result is subtracted from the available supplier’s quality percentage points.

Quality ratings for high volume components are different, for a specific month the
following formula is used, based on parts per million (PPM):

Quality Performance
PPM Criteria
Measurement Score
000-800 100 Points
800-1600 95 Points
1600-1800 90 Points
1800-2400 85 Points
2400 or greater 0 Points

Delivery = 35% of Performance Measurement

Suppliers are penalized for deviations in delivery dates and quantities. Within 6-day
delivery window, 100 points are credited and late beyond 5 days as 0.

Service = 10% of Performance Measurement

The service rating reflects a few factors: like how well the suppliers carry out the
purchase order; their support systems and ethical conduct.

Rating Service Performance Level Credit (% Points)

Good Competent, meets expectations 90.0 –100.0

Acceptable Tolerable but below expectations 80.0 – 89.9

Unacceptable Results are not adequate 70.0 –79.9

Rating Ethics Performance Level Credit (% Points)

Acceptable Has an Ethics program 100.0

Unacceptable Does not have an Ethics program 0.0

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1.4.5 General Dynamics Land Systems

General Dynamics is a market leader in business aviation; combat vehicles, weapons

systems and munitions; shipbuilding and marine systems; and mission-critical
information systems and technology. It has integrated more than 60 businesses, including
six in 2011. The gross revenue was approximately $32 billion in 2011 and the workforce
is about 95,000 employees. The company is organized into four business groups:
Aerospace, Combat Systems, Information Systems and Technology and Marine Systems.

General Dynamic Land Systems is one of its divisions. It rates suppliers in relation to
various performance factors. The company strives to identify problem areas and work
with the supply base to improve their performance ratings with the various General
Dynamics Land Systems locations. The Monthly Supplier Performance Report includes
the following performance ratings.

Metric Definition Goal Weight Performance Ranges

Factor

Red Yellow Green

Delivery 100% of score based on: 100% 40% <85% 85%- >95%
95%
On-Time Delivery of Shipments to the “
Promise Date” /”Need by Date”

Quality 100% of score based on; 100% 30% 98% 98%- 100%
99.9%
Quality Acceptance Percentage of parts
Received

Financial 100% of score based on: 100% 10% <=25% 75% 100%
stability
Current Dun and Bradstreet (D&B)
Supplier Evaluation of Risk (SER) Score
SER of 1, 2 or 3 = 100%
SER of 4, 5,or 6 = 75%
SER of 7 or 8 = 25%
SER of 9 = 0%

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 Compliance 50% of score based on: 100% 20% 0% 50% 100%
Supplier adherence to iSupplier Activity
Requirements
50% of Score based on:
Supplier adherence to Barcode
Requirements

Overall Combination of Delivery, Quality , 100% 100% <71.5% 71.5- >93.5%

Financial Stability, and Compliance 93.5%

The key attributes of performance are

1. Delivery
2. Cost
3. Quality
They have a structured supplier development process.

1.4.6 Ordnance Factories Board (OFB)

Ordnance Factories Board (OFB), consisting of the Indian Ordnance Factories is an

industrial setup functioning under the Department of Defence Production, Ministry of
Defence, Government of India. It is engaged in production, testing, logistics, research,
development and marketing of a comprehensive product range in the areas of land, air
and sea systems. The Headquarter is at Kolkata, it consists of forty-one Factories, nine
Training Institutes, three Regional Marketing Centres and four Regional Controllerates of
Safety. OFB is the world's largest government operated production organization. It has a
total workforce of about 164,000. Its total sales were at $2.6 billion.

OFB has issued a detailed procedure for vendor registration and monitoring called
VENDOR REGISTRATION SOP Ver 2.2. The suppliers are short-listed by a Capacity
Verification Team. The performance of successful established suppliers is monitored
regularly against every completed order based on Vendor Rating System. Following
parameters are used for Vendor Rating System:

1. Quality Rating

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 2. Delivery Rating

3. Price Rating

4. Service Rating.

There are formulae suggested for the different parameters.

QUALITY RATING

𝑉𝑅𝑄 = {(𝑄1 + (0.7 × 𝑄2) + (0.3 × 𝑄3) + (0 × 𝑄4)}/ 𝑄

where

Q1 = Quantity Accepted Conforming to Specification,

Q2 = Quantity accepted with deviation

Q3 = Quantity accepted after rectification

Q4 = Quantity rejected and

Q = Total quantity offered for inspection (Q1 + Q2 + Q3 + Q4 )

DELIVERY RATING

𝑉𝑅𝐷 = (𝑄𝑎 / 𝑄𝑐) + {𝑄𝑏 /𝑄𝑐} × {𝑇𝑐 /𝑇𝑎} × 0.5

where

Qa = Quantity Supplied on Time,

Qc = Quantity Ordered,

Qb = Quantity supplied late beyond delivery period

Tc = Delivery period as per supply order in days,

Ta = Total Time taken to complete the supplies, including late deliveries in

number of days.

PRICE RATING

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 𝑉𝑅𝑃 = 𝑃𝐿/𝑃𝑄

where,

PL = Lowest price quoted by any Supplier against that tender

PQ = Price quoted by the Supplier.

SERVICE RATING

The Index/Score for performance with respect to service is determined jointly by the
production/user and the materials management department. They use the service rating
break-up as per IS 12040:2001,

PARAMETER MAXIMUM SCORE

Co-cooperativeness and readiness to help in emergencies 30

Readiness to replace rejected material 20

Providing support documents in time 10

Promptness in reply 10

Co-operation in delivering and implementing measures or 30

avoiding recurrence of defects/complaints

TOTAL 100

COMPOSITE INDEX FOR PERFORMANCE OR OVERALL RATING.

𝑉𝑅𝐼 = 𝐴 × 𝑉𝑅𝑄 + 𝐵 × 𝑉𝑅𝐷 + 𝐶 × 𝑉𝑅𝑃 + 𝐷 × 𝑉𝑅𝑆

where,

A, B, C, D are the weightage for parameters of quality, delivery, price and service
respectively. The values of which are given in succeeding paragraph.

In case an established source fails to secure any order in the last three years, it shall
continue to be an established supplier subject to its renewal of registration.

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Following weightage factor have been suggested for different parameters,

Weightage for Quality - 60%

Weightage for Delivery - 25%

Weightage for Price - 10%

Weightage for Service - 05%

The overall rating of selected established suppliers is worked out using the above
formulae against the orders placed on the firm. The firms getting average overall rating
of less than 70% against orders completed in last three years shall not be considered for
issue of LTE thereafter for a period of one year. After the reinstatement, their rating will
be monitored afresh as above. Second such occasion of rating falling below 70% will
permanently disqualify a firm from the status of established suppliers.

OFB has a system for INSPECTION CATEGORIZATION of firms, Self-Certification

category inspection status is be awarded to Firms securing more than 95% vendor rating
apart from other requirements mentioned in SOP for input material Inspection. This
categorization is valid for a period of one year. After the expiry of validity period it is
reviewed again.

For “Inspection at Firm premises” category inspection status, Firm should secure more
than 85% marks in vendor rating apart from other requirements mentioned in SOP for
input material Inspection. “Inspection on receipt” category inspection shall be applied to
the firms securing 70% to 85% marks in vendor rating apart from other requirements
mentioned in SOP for input material Inspection.

1.4.7 RAIL COACH FACTORY - INDIAN RAILWAYS

Established in 1986, Rail Coach Factory (RCF) is a coach manufacturing unit of Indian
Railways. It has manufactured around 16000 passenger coaches of 51 different types
including Self Propelled passenger vehicles which constitute over 35% of the total
population of coaches on Indian Railways. It is located in near Jalandhar, Punjab, India.

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The overall SUPPLIER RATING (Sr) has been defined as

𝑆𝑟 = 0.6 𝑄𝑟 + 0.4 𝐷𝑟

Where Sr = Supplier’s rating for a Purchase Order.

Dr = Delivery rating and Qr = Quality rating.

Delivery rating (Dr) is computed for each Purchase Order as under:

𝑇𝑑
𝑄𝑡 + ∑ 𝑄𝑑(1 − 𝐾 × 𝑇 )
𝐷𝑟 =
𝑄

where, Q = Qty ordered.

T = Promised delivery time

Qt = Qty supplied in time

Qd = Qty delayed

Td = time delay for quantity delayed.

K = Constant with value as 2.

Quality rating (Qr) is computed for each PO as under:

𝑄𝑟 = 𝑄𝑎/𝑄𝑠

where, Qs= Total quantity supplied/ offered for inspection = (Qa+Qrr+Qcr)

Qa = Quantity accepted

Qrr = Quantity rejected during RITES(Third Party) inspection

Qcr = Quantity rejected during consignee inspection

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Some other conditions have also been specified by RCF,

1. If quantity accepted is < 50% of the PO quantity and original Delivery Period has
expired, then Quality Rating (Qr) is taken as “zero” for that PO.

2. When a lot is accepted with improvement advice to the vendor, Qr for that lot is
considered as 75% only.

3. When a rejected lot is used in distress, the use is condoned by the competent
authority, but such a lot is assigned zero quality rating (Qr).

4. En-route detachment of a coach from a train due to failure of a component/

assembly is a serious failure. If it happens within the warranty period, a severe
penalty is imposed by way of reduction in quality rating of the vendor for that
group of items. The overall supplier rating (Sr) is reduced by 15% for every
instance reported during the period of review.

5. In case of delays in executing warranty claims, the Quality rating is reduced with
the following scheme.

Days taken to attend the 11-20 21-30 31-40 41-50 51-60 >60
failure

Reduction in Qr 5 10 20 40 60 100

6. For two consecutive rejections of the same item at consignee’s end, a vendor is
delisted for that item/group of items. However in case there are three or less
approved vendors left (Part-I and Part-II combined), for that item/ group of items,
he can be considered for retention as a Part-II vendor only.

1.4.8 COAL INDIA LIMITED

Coal India Limited (CIL) is a state owned coal mining corporate. CIL is the single
largest coal producer in the world. Operating through 81 mining areas CIL is an apex

Page 23 of 42
body with 7 wholly owned coal producing subsidiaries and one mine planning and
Consultancy Company spread over 8 states of India. CIL having fulfilled the financial
and other prerequisites was granted the Maharatna recognition in April 2011. It is a
privileged status conferred by Government of India to select state owned enterprises in
order to empower them to expand their operations and emerge as global giants. It
produces around 81.1% of India's overall coal production. It produces over 400 Million
tonnes of Coal annually.

Coal India has issued a Purchase manual which has detailed out the procedure to be
followed by all its units. It has laid emphasis on objective assessment of vendor
performance. The performance is to be measured on following three parameters:

1. Quality

2. Delivery

3. Price

The Quality performance is measured by a formula,

(𝑄𝑎 +0.5×𝑄𝑟 )×100

Quality Performance Index (QPI) =
𝑄𝑠

where,

Qa = Quantity accepted as per specifications

Qr = Quantity accepted after replacement

Qs = Quantity supplied

There is a provision of acceptance of material after rectification, in which case weightage

is taken as 50% and not 100%.

For delivery performance, there are two conditions:

1. In case of completed supply,

Delivery Performance Index (DPI) =

Page 24 of 42
 𝑄𝑎 𝑄𝑏 𝑇𝑐
{ + ( × )} × 100
𝑄𝑐 𝑄𝑐 𝑇𝑎

2. In case of incomplete supply, after expiry of extended delivery period

Delivery Performance Index (DPI) =

𝑄𝑎 𝑄𝑏 𝑇𝑐
{ + ( × × 0.5)} × 100
𝑄𝑐 𝑄𝑐 𝑇𝑎

Here, index is given 50% weightage as delivery is not completed even after extension of
delivery period.

where,

Qa = Quantity supplied in time

Qc = Quantity ordered

Qb = Quantity supplied beyond delivery period

Tc = Original delivery period in days

Ta = Number of days taken to complete supply, including delayed supply

For price performance of the supplier, the Price Performance Index (PPI) =

𝑄𝑝
(2 − ) × 100
𝑂𝑝

Qp = Quoted price

Op = Ordered price

If the PPI is less than zero, the value is taken as zero. Suppliers quoting twice or more
will score zero.

The Composite index is obtained by giving weightage to the three performance

parameters.

1. Quality 40%

Page 25 of 42
 2. Delivery 20%

3. Price 40%

Thus the Composite Performance Index = (0.4×QPI + 0.4×PPI + 0.2×DPI)

The suppliers are classified into four groups

CPI Group
80-100 A
50-79 B
30-49 C
Less than 30 D

It is obvious that preference is given to “A” group suppliers. Supplier in “D” group for
two consecutive years will be deregistered or removed from the approved list.

1.4.9 STEEL AUTHORITY OF INDIA LTD (SAIL)

SAIL is India's largest steel producing company. With a turnover of Rs. 49,350 crore, the
company is among the seven Maharatnas of the country's Central Public Sector
Enterprises. SAIL has five integrated steel plants, three special plants, and one subsidiary
in different parts of the country.

Vendor Rating shall be based on the following factors:

a) Quality
b) Delivery
c) Price

Quality Factor

Quality Rating (QR) for an item in a lot/consignment/Goods Receipt Note (GRN), as

applicable, will be determined by the following formula:

Page 26 of 42
 𝑞 + 𝑥1 × 𝑞1 + 𝑥2 × 𝑞2
𝑄𝑅 = × 𝑊𝑄
𝑄

where,

q = quantity accepted
q1 = quantity accepted with deviation

q2 = quantity accepted with rectification

q3 = quantity rejected

Q = total quantity offered for inspection = (q + q1 + q2 + q3)

x1 = 0.5 (demerit factor for deviation)

x2 = 0.4 (demerit factor for rectification)

WQ = 50 (weightage for quality factor)

Delivery Factor

Delivery Rating (DR) will be calculated by the following formula:

𝑞1 + 0.8𝑞2 + 0.6𝑞3
𝐷𝑅 = × 𝑊𝐷
𝑄

where,

q1 = quantity accepted within delivery period (DP)

q2 = quantity supplied beyond delivery period but within 10% of the

scheduled DP
q3 = quantity supplied beyond 10% of the scheduled DP but within 25% of

scheduled DP
Q = quantity to be supplied by that time as per PO
WD = 35 (weightage for delivery factor)

Page 27 of 42
Price Factor

Price Rating (PR) for an item will be calculated by the following formula:

𝑃𝐿
𝑃𝑅 = × 𝑊𝑃
𝑃

Where

PL = lowest of the prices quoted by vendors for the item

P = price quoted by the vendor being rated
WP = 15 (weightage for price factor)

Price will mean the final cost worked out for tender evaluation which shall be the landed
cost.

VENDOR RATING

The formula given above shall be applied to one complete order at a time.

The composite Vendor Rating (VR) score shall be calculated by the following formula:

𝑉𝑅 = 𝑄𝑅 + 𝐷𝑅 + 𝑃𝑅

CLASSIFICATION OF VENDORS

Based on the Vendor Rating scores calculated for each executed order, average VR score
will be worked out by the following formula:

𝑉𝑅1 + 𝑉𝑅2 + . . . . . . . . 𝑉𝑅𝑛

𝐴𝑅 =
𝑛

where

AR = average VR score

Page 28 of 42
 VRn = VR score for the nth order

n = number of rated orders

Vendor Ratings are done every financial year and the data is maintained for five years
including the current year. Based on the AR score, vendors shall be classified into three

categories as follows:
AR obtained Class of Vendor
Above 75 A
66 to 75 B
55 to 65 C

Where a vendor obtains AR below 55, his performance will be highlighted to the Head of

Purchase Department for decision on issuing intimation to the vendor.

1.4.10 LOCKHEED MARTIN AERONAUTICS

Lockheed Martin Aeronautics Company designs and manufactures military aircrafts such
as F-16 Fighting Falcon, F/A-22 Super Hercules, and F-117 Nighthawk. It is the largest
supplier to USA’s Defense Department. Lockheed Martin Aeronautics Company is a
subsidiary of Lockheed Martin Corporation. It has a workforce of nearly 25,000. Since it
is a high precision industry, the suppliers ought to maintain extremely high quality in
supplies.

A New Supplier Quality Rating formula has been given in its Vendor Quality Rating
guide.

Quality Rating = 100 – (P1 + P2 + P3 + P4 + P5)

Where,
P1 = Pre-Install defects
P2 = Line rejections
P3 = Corrective Action Request (CAR) Quantity

Page 29 of 42
 P4 = CAR Responsiveness
P5 = Customer Escapes due to Supplier

The vendor quality rating used by Lockheed Martin Aeronautics consists of five
elements. These are referred to as P1, P2, P3, P4 and P5.

The maximum deduction for each element has also been defined

1 The first element of the formula, P1, is referred to as the “yield” portion of the
formula and consists of a possible 30 points.

2 The second element of the formula, P2, is also referred to as the “stick factor”

3 The third element of the formula, P3, is Corrective Action Request portion of the
formula and consists of a possible 10 points

4 The fourth element of the formula, P4, is CAR Responsiveness and consists of a
possible 20 points

5 The fifth element of the formula, P5, is Customer Escapes due to supplier issues

1.4.11 UNITED TECHNOLOGIES CORPORATION

United Technologies Corporation (UTC) is a diversified company that provides a broad

range of high-technology products and services to the global aerospace and building
systems industries. Its main businesses are Otis elevators and escalators and UTC
Climate, Controls & Security, aerospace businesses like Sikorsky aircraft and the new
UTC Propulsion & Aerospace Systems, which includes Pratt & Whitney aircraft engines
and UTC Aerospace Systems aerospace products. It employs 218,300 employees (2012),
has net sales of $57.7 billion (2012) of which Sales To U.S. Government are of the order
of $10.1 billion (2012).

It has a scheme called SUPPLIER GOLD PROGRAM. As per its manual, the supplier
gold program is a program that facilitates superior performance by its suppliers. It
recognizes supplier excellence.

Page 30 of 42
Four performance levels have been defined,

Quality Delivery Customer Supplier Health

Satisfaction
High Volume Low volume
(PPM) (Escapes)
≥80% for 4
Gold 0* 0* 100%* ≥6.0 categories +pass all
Gold questions
Performing <500 ≤5 ≥95%

Progressing <1,500 ≤15 ≥85%

Under
≥1,500 >15 <85%
performing

UTC Goal is have its entire supplier base attain Performing or Gold Status. A supplier
scorecard is maintained at its website (http://supplierscorecard.utc.com/) which gives
real-time supplier health status. It has Quality, Delivery, Lean and Customer Satisfaction
shown on the board and the needle indicates performing, progressing and
underperforming status.

The Complete Supplier Health assessment is done at three levels:

1. Manufacturer

2. Service Provider

3. Distributor

UTC has link to Hiperos System, which is a third party management system. It has a set
of Gap closure tools and supplier resources for improving the supplier. Thus UTC
basically has a collaborative approach to it suppliers and considers them a s part of
system.

1.4.12 SCHAEFFLER TECHNOLOGIES AG & CO. KG

Schaeffler is a leading manufacturer of bearings worldwide and a renowned supplier to

the automotive industry. The company had sales of 11.1 billion Euros in 2012. It has

Page 31 of 42
approximately 76,000 employees worldwide, with 180 locations in over 50 countries. The
main brands ate INA, LuK, and FAG. It is a high precision industry.

The Overall Performance Indicator GKZ for the Supplier Evaluation comprises the two
main criteria of Quality Performance QZ and Delivery Performance LZ, which are
weighted as follows:

Abbreviation Main criterion Weighting

QZ Quality Performance 65%

LZ Delivery Performance 35%

The Overall Performance Indicator GKZ is defined as

𝐺𝐾𝑍 = 0.65 × 𝑄𝑍 + 0.35 × 𝐿𝑍 𝑉𝑅

Quality Performance QZ

The main criterion of Quality Performance QZ comprises the four sub-criteria QZ 1 to

QZ 4 illustrated in the following overview that each has different weightings:

Abbreviation Sub-criterion Weighting Type(s) of claim

Mass Production Complaint for mass

QZ 1 50 %
Quality production

Defective Quantity Complaint for

QZ 2 30 %
(ppm) accumulated scrap

QZ 3 Certification 10 % -

Complaint for
QZ 4 Sample Quality 10 % samples
M4, M5 and M6

The formula for calculating the criterion Quality Performance QZ is as follows:

𝑄𝑍 = 0.5 × 𝑄𝑍 1 + 0.3 × 𝑄𝑍 2 + 0.1 × 𝑄𝑍 3 + 0.1 × 𝑄𝑍 4

Page 32 of 42
The quality criteria QZ 1, QZ 2 and QZ 4 are determined by evaluating the justified
complaints (with status either open or closed) occurring within a defined assessment
period.

Mass Production Quality QZ 1

The criterion of Mass Production Quality QZ 1 is generated from the ratio between the
number of complaints on mass production parts and the number of goods receipt items

The formula for calculating the criterion QZ 1 is as follows:

Number of complaints (number of cases) mass production

𝑄𝑍 1 = 100 – 1000 ×
Number of goods receipt items in total

If the calculated value is less than 1, a value of 1 is always assigned in accordance with
the definition to QZ 1 for technical reasons. If 10% of deliveries are the subject of
concerns, the QZ 1 value is therefore 1 instead of 0.

Defective Quantity QZ 2 (ppm)

The standard formula for determining ppm values on the basis of quantity is defined as:

Rejected quantity delivered

𝑝𝑝𝑚 𝑣𝑎𝑙𝑢𝑒 = × 1000000
Total quantity delivered

(ppm=parts per million)

The following applies to the formula for calculating the criterion QZ 2:

𝑝𝑝𝑚 𝑣𝑎𝑙𝑢𝑒
𝑄𝑍 2 = 100 – 𝐵 ×
100

The commodity factor B, (the evaluation parameters underlying the calculation formulae
are listed in a table, e.g. B=1 for tube) is used when calculating the defective quantity in
order to compensate for the differing requirements specific to technologies or product
groups. If the calculated value is less than 1, a value of 1 is always assigned in
accordance with the definition to QZ 2 for technical reasons.

Page 33 of 42
Certification QZ 3

In line with the requirements of its customers, Schaeffler has introduced quality
management systems to ISO/TS 16949 (Automotive), IRIS (Rail) and AS 9100
(Aerospace), as well as an environmental management system to ISO 14001 and requests
appropriate certificates from its suppliers.

For the Schaeffler certificate(s) held by the supplier, points are awarded as follows for the
criterion Certification QZ 3 :

Points
Certification
(1) (2)
ISO/TS 16949, AS 9100, NADCAP or IRIS
plus environmental certification in accordance with ISO 14001 or 100 100
EMAS
ISO 9001
plus environmental certification in accordance with ISO 14001 or 90 100
EMAS
ISO/TS 16949, AS 9100, NADCAP or IRIS 80 90
ISO 9001 70 80
Escalation status New Business Hold 1 1
No QM system present or quality certificate expired 3) 1 1

Sample Quality QZ 4

The procedure for the criterion Sample Quality QZ 4 is the same as for the criterion Mass
Production Quality QZ 1.

Number of complaints (number of cases) on samples

𝑄𝑍 4 = 100 – 500 ×
Number of goods receipt items in total

If the calculated value is less than 1, a value of 1 is always assigned in accordance with
the definition to QZ 4. If 20 % of sample deliveries are the subject of concerns, the QZ 4
value is therefore 1 instead of 0.

Main criterion Delivery Performance LZ

The second main criterion of the Supplier Evaluation, Delivery Performance LZ,
comprises three sub-criteria that have different weightings:

Page 34 of 42
 Weighting
Abbreviation Sub-criterion Type of claim
1) 2) 3)

LZ 1 Date Reliability 40 % 0% 40 % -

Quantity
LZ 2 40 % 0% 0% -
Reliability

Complaint on
LZ 3 Logistics Quality 20 % 100 % 20 %
logistics

The formula for calculating the criterion Delivery Performance LZ is:

0.4 × 𝐿𝑍 1 + 0.4 × 𝐿𝑍 2 + 0.2 × 𝐿𝑍 3

𝐿𝑍 =
0.4 + 0.4 + 0.2

Should individual partial criteria not be used for the purposes of evaluation, the weighting
of the remaining criteria is adapted.

Date Reliability (LZ 1) and Quantity Reliability (LZ 2)

The criteria for Date Reliability LZ 1 and Quantity Reliability LZ 2 are generally
calculated in accordance with a standardised evaluation scheme.

Logistics Quality LZ 3

The criterion Logistics Quality LZ 3 is calculated on the same basis as QZ 1 using

logistics complaints occurring within the evaluation period in relation to volume
products.

The following applies to the calculation of the criterion Logistics Quality LZ 3:

Number of logistics complaints (number of cases)

𝐿𝑍 3 = 100 – 1000 ×
Number of goods receipt items in total

The system at FAG is very exhaustive and several parameters have to be quantified.

Page 35 of 42
1.4.13 BUREAU OF INDIAN STANDARDS, IS 12040:2001

The Bureau of Indian Standards, New Delhi has issued a comprehensive standard IS
12040:2001 on “Guidelines for development of Supplier Rating System”. The purpose
was to give guidelines to organizations in India on methodology for supplier rating.

The overall supplier rating system comprises of

1. Supplier rating

2. Supplier grading

3. Supplier preferences

4. Rewards system

As per the standards, the suppliers can be rated based on any or all of the following
factors:

a) Quality
b) Delivery
c) Price
d) Service
e) System

For Quality Rating, a standard formula has been devised; it also defines Quality rating for
variable parameter of the product. It has also given table of the calculated values of
tolerance for various clauses.

For Price Rating (𝑃𝑅 ), the formula is,

𝑃𝑈 − 𝑃
𝑃𝑅 = × 100
𝑃𝑈 − 𝑃𝐿

Where,

PL = lowest of the price quoted by suppliers

PU = highest price quoted

Page 36 of 42
 P = price quoted by the supplier being rated

The standard also defines rating using life cycle costs.

The delivery rating (𝐷𝑅 ) for a consignment depends upon the quantity supplied within
delivery time and some other factors, the standard has defined.

𝑄1 𝑇
𝐷𝑅 = ×
𝑄 𝑇 × 𝑄1 + 𝑇 × (1 − 𝑄1 )
𝑄 1 𝑄

Where,

Q = quantity agreed to be supplied within the stipulated delivery time

Q1 = actual quantity supplied

T = agreed delivery time for full consignment

T1 = actual delivery time for full consignment

The Service rating has been recommended based on following parameters,

Cooperativeness and readiness in help in emergencies S1

Readiness to replace rejected material S2

Providing support documents in time S3

Cooperation in delivering and implementing measures or

S4
avoiding recurrence of defects/complaints

The System Rating is based on several criteria which are judgement based, and the
standard mentions the ISO 9004 to be referred for guidance.

The composite supplier rating is obtained by giving weightages for the individual ratings.

Rating Weightage

Quality, QR W1

Page 37 of 42
 Delivery, DR W2

Price, PR W3

Service, SR W4

System, SY W5

Total 100

𝑊1 𝑄𝑅 + 𝑊2 𝐷𝑅 + 𝑊3 𝑃𝑅 + 𝑊4 𝑆𝑅 + 𝑊5 𝑆𝑌
𝑆𝑅 =
100

The standard has mentioned that weights of the factors are to be decided by the
management based on experience and opinion. It may be based on criticality of the
product with respect to quality and delivery. It has recommended that W5 may be kept 30.
It has also given a table indicating weights of individual factors based on criticality.

The standard has illustrated a classification scheme.

Rating Class Remarks

Above 90 A Efforts must be made for long term relationship.

75-90 B If price of A is higher then, limited order on B must be given

50-75 C This class must be provided help to upgrade.

Upto 50 D Not to be considered.

The standard also emphasizes the role of reward systems. It has also published annexure
as proforma for supplier capability report and appraisal report.

Page 38 of 42
The study of various systems at national and international companies brings out the fact
that criteria for supplier evaluation are more or less common. Some companies have
exhaustive and very scientific methods to assess the performance. They have formal
feedback systems also. The four factors namely, quality, delivery, price and service are
the criteria for assessing supplier performance by all organizations.

Page 39 of 42
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