Vendor Evaluation and

Methods
Group 9
SCAP
Researched and Presented By- Prabir, Shreya, Siddharth
VENDOR / SUPPLIER EVALUATION
 The basic requirement of vendor / supplier evaluation is to develop an objective way to
evaluate vendors for selecting the best within the best.
 The evaluation process is done to keep in consideration all the relevant factors
and select the right vendor / supplier.
 In this process, all the relevant factors and subjective issues that can influence selection are
considered.
 The supplier evaluation is based on his / her performance in the areas of quality, quantity,
delivery time adherence, pricing and service.
 The performance in the abovesaid areas is based on many factors like company policy,
business strategy and competitiveness.
 The most common benefits expected from a third party vendor are:

• Reduction in cost
• Quality / performance improvement
• More flexibility
• Quicker turnaround times and delivery
• Easy access to external expertise
• Aiding easier and increased availability of services.
PRICING FACTORS
 Price stability,
 Accuracy in pricing,
 Competitive pricing,
 Price change notification in advance,
 Price sensitivity and billing.
 Price stability – The vendors should have stability in prices over time and should not be increased or
decreased frequently.
 Accuracy in pricing – The difference in purchase price and invoice price should not exist or even if it
exists, it should be meagre thereby providing more accuracy in pricing.
 Competitive pricing – The pricing given in the quotation by the vendor should be competitive and
should be more or less equal to other vendors who have given the quotation. If the pricing is on the
higher side, then they might be excluded from selection. Vendors should provide pricing based on
competition.
 Price change notification in advance – The supplier should keep the buyer informed well in
advance if there is any price change.
 Price sensitivity – The supplier should understand the customer’s needs and sensitivity towards
pricing and should price the product based on it. He / she should suggest possible cost savings to
the customer.
 Billing – Proper billing should be done by the vendor. Errors should be avoided in billing and it
should be easy to read and understand. The vendor invoices must be accurate.
QUALITY FACTORS

• Purchase order compliance

• Conformity to specifications
• Reliability
• Long life service,
• After sales support,
• Latest technology usage.
 Purchase order compliance – The supplier should adhere to the terms and conditions stated in the
purchase order.
 Conformity to specifications – The material delivered should conform to the requirements and
specifications of the customer as requested by him / her in the purchase order.
 Reliability – It is an important measure of the product quality. The product failures should be minimal and
should be within a reasonable limit. The service factors should be clearly mentioned in the quotation.
 Long life – The products or services delivered should have a longer
life and should not be less durable.
 After sales support – Any issue in the product or service after sales should be immediately resolved by the
vendor. Warranty details should be mentioned clearly during quotation issue and delivery of products.
 Latest technology usage – The products and services delivered
should be based on the latest technology.
DELIVERY FACTORS

• Time
• Quantity
• Lead time
• Packing and documentation.
 Time – The supplier must adhere to the time frame mentioned in the purchase order for
delivery of goods or services. He / she should not deviate from the date mentioned in the
purchase order.
 Quantity – There should not be any deviation in the quantity of the items to be delivered.
 Lead time – The supplier should maintain lesser lead time than his competitors in delivering the
product or service.
 Packing – Product packing should be as per the requirement of the customer and also should
not be easily damaged. It should be free from leakage, pilferage, etc.
 Documentation – The supplier should provide all the required documents during delivery like
packing list, delivery challan, warranty cards, invoices, product manual, etc., correctly.
SERVICE FACTORS

• Service is a very important factor that influences vendor evaluation and

selection.
• Poor service will lead to avoidance of a particular vendor. The vendor should always have a win–
win approach towards the customer and ensure that the customer gets the best product at the
lowest possible price.
• He / she should adopt professional approach with more courteousness and should be ready to
handle customer issues and complaints.
• The vendor should have technical competence and should be well equipped to solve customer’s
technical issues with the product or service.
• There should be an immediate response to any issue that arises from the customer related to a
product or service. The supplier should also provide emergency support for the customers.
VENDOR EVALUATION METHODS

Supplier evaluation is a term used in business and refers to the process of evaluating and approving
potential suppliers by quantitative assessment. The purpose of supplier evaluation is to ensure a portfolio
of best in class supplier is available for use.
There are several techniques that are used by companies to evaluate suppliers and measure performance.
The first step in implementing any of the techniques being discussed is to determine the attributes that
should be considered. A firm should focus on the attributes that it finds most important. Some attributes
are easy to measure while others are not. Some models are proficient in considering total costs, but they
are usually very difficult to implement and time-consuming. Thus, there sources available to the firm’s
purchasing function will drive the firm’s model choice.
 The three most common approaches are-
• The categorical system,
• Weighted-point average system and
• The cost-based system.

The categorical system is the most subjective technique since it does not differentiate between
the weights of the attributes considered. The weighted-point average system overcomes this
drawback by assigning weights to each attribute. The cost-based system is the most objective of
the three methods because it also considers non-performance costs.
CATEGORICAL SYSTEM

 In this method, the customer or buyer selects attributes that are most appropriate and ideal for their
particular situation. The buyer assigns either a preferred (+), unsatisfactory (-), or neutral (O) rating for
each of the selected attributes to every vendor. Then the ratings are summed up for each vendor.
The representatives of the involved departments agree upon the ratings. Categorical supplier
measurement is the easiest method to implement, however, it suffers from 166 Apparel Merchandising
subjectivity.
 The categorical system does not provide a detailed knowledge on supplier’s true performance because
the attributes being measured are weighted equally. This method relies on an individual’s perception
about performance and not on quantitative data as it is based on the involved individual’s ratings.
 Here, the evaluation factors or attributes differs between factories based on their company’s policy and
requirements. Small firms and firms in the process of developing an evaluation system are the major
users of this system.
SUPPLIER EVALUATION USING
CATEGORICAL SYSTEM
ADVANTAGES AND DISADVANTAGES OF THE
CATEGORICAL SYSTEM
1. Advantages -
• Easy to implement
• Requires minimal data
• Different personnel contribution
• Good for firms with limited resources
• Low-cost system.
2. Disadvantages -
• Least reliable
• Less frequent generation of evaluation
• Most subjective and it relies on memory, personal judgment, and the
experience/ability of the buyers
• Usually manual.
WEIGHTED POINT METHOD

The weighted point method considers attributes that are weighted by the buyer. The weight for each
attribute is then multiplied by the performance score that is assigned. Finally, these products are
summed up to determine Sourcing for merchandiser 167 final rating for each supplier. Typically this
system is designed to utilise quantitative measurements. The advantages of the weighted point
method include the ability for the organisation to include numerous evaluation factors and assign
them weights according to the organisation’s needs. The subjective factors on the evaluation are
minimised. The major limitation of this approach is that it is difficult to effectively take qualitative
evaluation criteria into consideration.
The basic steps involved in the weighted point evaluation method are:

• Determine the evaluation criteria

• Estimate the importance of each criterion
• Rate each product against all evaluation criteria
• Compute the average rating for each criterion for each product
• Weight the product rating for each criterion by importance
• Compute the total rating for each product
• Compare product rating.

Assume that there are seven criteria that are being used to evaluate suppliers, quality, price, service,
production capacity, engineering capacity, business structure and delivery. These attributes are
weighted with the relative importance considered by the buyer on a 10 (less important) to 100 (most
important).
DIFFERENT ATTRIBUTES AND THEIR
WEIGHTED PERCENTAGES
Consider this example where three suppliers namely X, Y and Z are evaluated for their previous order
performances. The results are tabulated in the table below. The performance of the supplier is rated 0
(poor) to 5 (excellent).
ADVANTAGES AND DISADVANTAGES OF THE
WEIGHTED POINT METHOD
1. Advantages
• Flexible system
• Allows supplier ranking
• Moderate implementation costs
• Combines qualitative and quantitative factors into a single system.
2. Disadvantages
• Tends to focus on unit price
• Requires computer skills.
COST-RATIO BASED SYSTEM

The cost ratio method evaluates supplier performance by using a standard cost analysis. In this
system a buyer is able to quantify the additional costs incurred if a supplier fails to perform as
expected. The total cost of each purchase is calculated as its selling prices and the buyers internal
operating costs associated with the quality, delivery and service element of the purchase.
Cost ratio is calculated by the following formula:

As derived from the equation, the closer the value is to 1, the better the supplier.
Under this method, the most strategic issue is the identification of various costs and their allocation
among different variables and suppliers. Certain important heads of quality costs and delivery costs can
be listed as under:
 Quality costs
1) Visits to vendor’s plant for approval of samples, etc.
2) Inspection costs
3) Cost of defectives
4) Reworking costs
5) Manufacturing losses on rejected items.
 Delivery costs
1) Postage and fax
2) Telephones
3) Visit vendor’s plant for expediting the delivery
4) Extra cost for getting quick delivery e.g., costlier means of
transportation.
An example of cost the associated with the quality factors are provided here for supplier PQR, the various
elements and cost associated with quality are provided in the table below.
In this manner, the manufacturing firm will collect the cost ratios of different heads of the single supplier
and use it to compare with the other suppliers. The sample for the comparison with the different supplier
is provided in the table below. The fundamental idea is to provide a numerical ratio to the so called
hidden cost of ownership.
• The benefits a buyer can achieve by using this approach are, possibility to source requirements based on
considering the total cost of the product or services required. Way to increase supplier accountability and
control
• A consistent and reliable evaluation tool
• A way to communicate the company’s buying priorities to suppliers
• The ability to provide positive supplier reinforcement.

The cost ratio based method is the least subjective of the three because it quantifies the total cost of doing
business by considering non-performance costs. The method is very complex to use and the other difficulty is
its requirement that users have a developed cost accounting system. Identifying costs of supplier non-
performance is difficult. However, even with these drawbacks, the categorical method, the weighted point
method and the cost-ratio methods are the most widely used techniques in supplier evaluation due to their
ease of use and implementation.
Supplier evaluation methods are usually a time consuming activity, so they are not performed
frequently. In real time situation, many companies do the evaluation on a monthly or quarterly basis.
Some companies evaluate suppliers only once in a year. These assessments, however, are mutually
beneficial only if both parties are willing to cooperate and provide the necessary 172 Apparel
Merchandising inputs.
Supplier measurement systems are most commonly used for the following purposes:
1) Track performance of supplier
2) Identify supplier improvement opportunities
3) Develop supplier
4) Benchmark suppliers against best practices.
CONCLUSION

 In this chapter, the various sourcing methods are discussed. The factors affecting
sourcing are elaborately detailed. This chapter talks about the responsibilities of a
merchandiser with respect to sourcing. The types of suppliers in an apparel
industry are discussed. The ways to identify make or buy decisions are explained
in this chapter. The vendor evaluation system is explained with the merits and
demerits of the various systems available to select the vendor. The overall
sourcing process and sourcing cycle followed in the apparel industry are provided
precisely for the benefit of merchandisers.