Supplier Selection & Evaluation

Preparing a Prospective Supplier List 
You can search for the potential vendors by

looking at several information sources: 
  

Past experiences Interviewing with the salesperson of the supplier Catalogs published by the vendors Trade Directories  

Classifies suppliers according to the products they make Includes names of company personnel, financial status, and location of sales offices
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Information sources« 
Trade Journals or Business Magazines 

These are oriented towards specific industries 

Fairs and Trade shows 

Specific to industry. Ex: Computer, textile, etc.

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Types of Suppliers 
In the search for suppliers, all available types (that is,

distributors, manufacturers, and foreign sources) should be considered. 
The number of suppliers to be used should also be

considered. 
Trade-offs between price, delivery, and service and

community relations and goodwill must be weighed when selecting various types of vendors.
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Local vs. National Suppliers 
There are inherent natural advantages to buying from

local suppliers whenever possible. 
Among the most significant are the following: 1. There is usually a freight savings when the distance between firms is relatively short. 2. Local vendors tend to share the same political and tax concerns as the purchaser. 3. Close proximity permits many possibilities for communication and service; shorter lead times, and exchanges.
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which exercise considerable raw material purchasing power and maintain large inprocess and raw materials inventories.Local vs. National Suppliers«  There are also considerations that favor national suppliers: 1. National concerns may offer lower prices because of their ability to produce in mass quantities for large numbers of customers. 3. Continuity of supply may be more certain with largervolume producers. 6 . 2. Technical assistance may be better from large firms that provide extensive research and development support.

Direct  The buyer will often have to choose between buying through a distributor or direct from a manufacturer.  The manufacturer often offers lower prices than the distributor.  Both options have their advantages and disadvantages.Distributor vs. this difference usually depends on the volume of business. 7 .  Manufacturers generally prefer large-quantity orders.

distributors are able to ship quickly and handle rush orders as well as visit the buyer's facility frequently and provide personal services. Direct«  Manufacturers often find small-quantity purchases unprofitable. considering the expenses involved.  For instance. a distributor may offer lower prices on purchases of smaller quantities. and charge a premium price to compensate.  Since distributors are generally local firms.  Thus. they are often able to provide better service than manufacturers.Distributor vs. 8 .

9 . the distributor maintains a local inventory.Distributor vs. and the purchaser must hold these quantities in inventory. Direct«  Another factor in the decision concerns inventory levels. making smaller. and the buyer can utilize it. more frequent buys.  In contrast.  Buying direct usually means buying in large quantities.

has made foreign purchasing increasingly attractive in recent years. coupled with lower labor costs. the drawbacks of foreign sources sometimes negate the cost savings.Foreign Sources  The increasing industrialization of third-world countries. 10 .  However.  The quality problems formerly associated with foreign goods have in many instances been transformed into quality standards that challenge domestic firms.

 In addition to the actual travel time of the goods.Foreign Sources«  The first problem is long lead times. time is spent in customs. 11 .  When a source has no domestic facilities. there are few avenues of recourse if the supplier makes a mistake.  A large volume of paperwork is necessary to import goods. and there is a lack of service.

Foreign Sources«  Another problem is currency fluctuation.  With such long lead times.  These problems can be dealt with in many ways.  Information about foreign sources can be obtained from embassies or trade offices operated by various countries in major cities. the price agreed upon may rise or fall between purchase and payment simply because the foreign currency exchange rate fluctuates against the buyer country¶s currency. and the supplier will often handIe most of the import details. 12 .

a major multinational will move into a developing country and set up a factory. do very little local purchasing. 13 . developing countries.  First.Looking at Suppliers in Developing Countries  Often.  Countries tend to develop in a structured way. you will be investigating suppliers in low-cost.  This factory will be mainly an assembly plant and will  The components will be imported.

and with varying degrees of speed. 14 .Country Development  Next. supporting suppliers will grow up around the multinational and replace the imports. the country has what Michael Porter calls a "cluster.  At this point." and the potential for world-class competitive industries.  Eventually local employees will leave the multinational and start their own competing companies.

there is good chance that the multinational may be able to offer lower prices quickly.  You should start checking early and be prepared to move to be the supporting company's customer. 15 . you should know and explore these possibilities. when the supporting industry starts to develop.  If you are buying from the company already.Buying from Developing Countries«  When a major multinational moves into a less- developed country.  Later. it becomes attractive to buyers of the supporting products.

it may be more economical to concentrate purchases with a single supplier.  Other purchases that encourage the use of a single 16 . supplier are those of parts made by processes employing expensive tools or dies.Single vs. Multiple Sourcing  Because of quantity discounts or low shipping rates.  In other instances the total amount needed may be too small to justify splitting the order among suppliers because it would increase per-unit handling and processing costs.  JIT and blanket orders lead to single sourcing.

flood.  Multiple sourcing also stimulates competition among vendors in price. which might disrupt the operations of a single plant. many buyers use multiple sources for most of the items purchased.Single vs.  Therefore. Multiple Sourcing«  In most cases. or strikes. and service. however. 17 . quality. delivery. the buyer who utilizes multiple suppliers has greater assurance of uninterrupted supply in the event of fire.

 Although these questions cannot be answered universally.How many suppliers?  The decision to use multiple sources prompts questions about how many suppliers to use and on what basis to allocate the business.  Most buyers split orders between two or three suppliers. the relative size of the suppliers. these decisions are influenced primarily by the amounts required. 18 . and their past performances.

 This process compares suppliers in terms of their ability to provide the desired quality. a qualitative evaluation and elimination process is used. referring not only to the total amount required but also to the schedule according to which the goods must be received. and service. quantity has a somewhat specialized meaning. price. quantity.  In purchasing parlance. 19 .Supplier Evaluation Factors  After potential suppliers have been determined and located.

but could not supply this quantity on specified dates. a supplier who might be able to supply the desired quantity during the specified period.  A price is good only if the item supplied has the desired quality and quantity and is accompanied by sufficient useful services.Supplier Evaluation Factors«  Thus.  In purchasing. 20 . price is meaningless when considered in isolation from other factors. would not be a satisfactory supplier.

branch warehouses. and make-and-hold services. strikes.  The possibility of using substitute modes of transportation is also lessened as distance increases.  Companies may overcome some of their geographical disadvantages by providing pool car shipments.Location  The geographical location of the supplier is an important consideration in evaluating service. 21 .  Shipments from distant suppliers are subject to more and greater risks of interruption by accidents. and acts of nature.

from the buyer.  In ³make-and-hold´ service.  The seller is then ready to ship immediately upon word 22 . minimizing total order time.  Pool car shipments may be used in conjunction with ³branch warehouses´ that act as distributing points for shipments originating at the home plant. the seller produces in anticipation of a buyer's needs and stores the merchandise.Managing the Disadvantages of Location  ³Pool car shipment" refers to the practice of collecting a number of small orders from a given geographical region and combining them into one shipment. thereby economizing on freight by obtaining the full-car rate rather than the much higher less-than-carload (LCL) rate.

Reserve Capacity  The reserve facilities of a supplier are another consideration in evaluating service.  This issue is of special importance during business booms. 23 .  A supplier with an adequate reserve of productive facilities can respond to increased customer requirements.

outreach research. service as an extension of its own research and development facilities.  Technological capabilities give the buyer access to  Buyers rely on vendors to suggest design and material changes as new concepts are perfected.  The buying firm often relies on the provision of such 24 .Technological capabilities  The stage of a supplier's technological development and its ability to keep up with current methods are other considerations affecting service.

goods will ship items that must eventually be rejected and returned as unsatisfactory for their purpose. 25  A supplier who is careless about inspecting finished  If such a supplier is also careless in controlling . production quality. the problem is aggravated.Inspection  The inspection methods and quality control procedures used by the prospective supplier are also considered. because some imperfections may not be discovered until the item has been incorporated into the finished product.

 If relations of the supplier with its workers are poor.Labor Relations  Another source of interference with the continuity of production in a supplier's plant may be the workers themselves. there may be strikes or slowdowns in production. contract also reflects the labor management climate.  The possibility of such delays can sometimes be projected by determining the morale of the workforce. 26  The history of strikes and the length of the union . and reviewing the labor policies as expressed by general management.

Warranties  Service also includes the kind and form of warranties that accompany a supplier's products.  The supplier should assure the buyer that the product delivered will be maintained throughout its normal life. 27 .  Relevant considerations include a vendor's ability to provide installation wherever necessary and to provide replacement parts as needed.

 To the degree that the supplier has well-developed sources of supply.  A good supplier has well-developed sources of raw materials and components that will ensure continuity of production during periods of fluctuating business conditions. the firm will be able to produce effectively during business booms.  The volume of raw materials carried in inventory and the relationship between direct and distributor sources affect this evaluation.Vendor Sources  Vendor relations also influence a supplier's service rating. 28 .

 They found nine important tactics in use for handling perceived personal risk.  The uncertainty about the consequences of any given selection heightens the anxiety or stress.  Hawes and Barnhouse examined how purchasing executives handle personal risk.Plant visitations  Buyers perceive risk when deciding upon a choice among alternative market offerings. 29 .

"  In addition to reducing buyer stress. especially if the products are highly technical. visits to the plants of suppliers are an important means of initial evaluation and periodic examination of existing vendors. production or engineering departments to accompany the buyer on such visits. to observe its viability firsthand.Visit the supplier  The foremost tactic mentioned consisted in "Visit the operations of the potential vendor. 30  It is often desirable for a representative of the .

Financial Status of Supplier  The financial status of the supplier directly affects its ability to serve and should be carefully evaluated.  Credit reports contain information about suppliers' financial standings.  One way to perform this evaluation is through the analysis of credit reports. and facilities of the potential vendor. management. 31 .  These reports also provide information on the experience.

pricing policies. 32 .Financial Status of the Supplier«  A related supplementary procedure is independent analysis of the vendor's financial statements.  The purchasing official can obtain information regarding the vendor's financial stability. and general operating efficiency by applying the tools of ratio analysis to the vendor's balance sheet and income statements.

 Because current assets and liabilities are those that can be turned into cash within a short period of time (a year or less).  The usual rule-of-thumb acceptable ratio is two to one. this ratio measures the financial ability of the firm to continue in the short run. because in recent years companies have often maintained current ratios less than two to one to avoid idle and unproductive assets. this ratio should not be overemphasized.  However.Financial Status «Popular Ratios  The current ratio relates current assets to current liabilities. 33 .

Financial Status «Popular Ratios«  The acid test ratio is a variant of the current ratio in that it relates current assets. to current liabilities. excluding inventories. 34 .  Inventories are omitted from current assets because they are often difficult to liquidate.  Like the current ratio.  An acceptable ratio here is one to one. it is a reflection of a company's short-term functioning ability.

Financial Status «Popular Ratios«  The sales-receivable ratio represents sales divided by accounts receivable.  A firm with annual sales of $6 million and 90-day terms should not have much more than $1.  This ratio is related to the seller's standard terms of payment.  For example.5 million in accounts receivable. if the terms are 90 days. 35 . not much more than this amount of total sales should be in receivables.  It indicates whether customers are paying their bills promptly or whether too much of the vendor's assets are tied up in receivables.

Financial Status «Popular Ratios«  Net profit to sales is an overall measure of the firm's profitability after all expenses have been deducted.  The size of the profits gives an indication of the possibility of successful price negotiations. 36 .

which are allocations against profits that do not reflect actual cash outflow.  Cash flow assists profit evaluation because it is a measure of how much cash a company is likely to require for meeting short-term expenses. 37 .  It measures the amount of dollars the firm is receiving.Financial Status «Popular Ratios«  Cash flow is obtained by adding net profit after taxes to depreciation charges.

 It indicates the degree of efficiency in inventory management and the freshness and sale-ability of the inventory.  If the ratio is low. 38 . the firm is either over-inventoried or undersold.  A high turnover ratio is usually preferable to a low one.Financial Status «Popular Ratios«  The inventory turnover ratio is the cost of goods sold divided by the average inventory.

39 .Supplier Goodwill  Developing supplier goodwill is a vital part of purchasing personnel's strategic planning.  Goodwill benefits the organization in emergencies and helps ensure adequate levels of supply during periods of shortages.

but the most important.  Without good quality. not a quality requirement. it is a quality systems and documentation specification. the lowest-cost supplier in the world will not be acceptable. factor on the evaluation list.  However. 9002. 9003) of quality standards is becoming more and more a requirement worldwide.Quality Management  Quality is the last.  A company produces a set of operating specifications that guarantee consistency in its processes and its production. 40 .  The ISO series (ISO 9001.

the need to survey a quality system.ISO Quality Standards  If the operating specifications meet ISO requirements and the company passes an audit showing it follows the specifications. 41 .  There are two problems to consider. but does not eliminate. the specification guarantees consistency.  First.  This reduces. it can obtain an ISO certification. not quality.  The specification could state that a defined level of quality that you regard as mediocre (moderate quality) would be acceptable.

 Second. 42 .ISO Quality Standards«Problems  If the potential supplier follows the operating specification consistently. even an ISO-qualified supplier needs some quality auditing.  There can be years between auditors' visits.  For these reasons.  You should check the quality level produced.  It may not be good enough for you. they will produce to that quality level consistently. the supplier may not follow the specification consistently. once granted an ISO certification.

and there are sample plans that allow a lot with known rejects in it to ship. or AQLs.4 percent) faulty parts has a 95 percent chance of being shipped. (AQL)  You should ask what a supplier's outgoing quality level is.  This AQL is measured by sample inspection.Acceptable Quality Level.4.  There are still suppliers who ship to acceptable quality levels.  An AQL of 0. 43 . means that a lot with 4.  What you are really looking for here is the attitude toward shipping faulty parts.000 parts per million (0. for example.

 It relies heavily on the experience and ability of the individual buyer. 44 .  In recent years buyers have emphasized the setting of objective standards and procedures for evaluating and comparing existing suppliers.  The least precise evaluation technique is the categorical method.Supplier Evaluation Methods  The measure of a supplier's value is expressed in its performance record.

production. based on past experience.  The buyer then assigns a grade to each supplier.The Categorical Method  Basically.  Initially. for each criterion. 45 .  Evaluation lists are often provided to other departments involved. and neutral grades may be used. and receiving. such as quality control. engineering. a list of evaluation criteria is identified.  A simple marking system of plus. minus. it is a procedure whereby the buyer relies on a historical record of supplier performance.

 It is also inexpensive and requires a minimum of performance data.The Categorical Method«  Vendors with composite high or low ratings are noted. and future supply decisions are influenced by them.  Although this system is non-quantitative. the process relies heavily on the memory and judgment of the individuals providing the ratings. it is a means of keeping systematic records of performance.  However. 46 . and the ratings may become routinely performed without much critical thought.

 Assuming that quality and delivery are the most 47 .  For example. following evaluation criteria have been chosen: quality of shipments. 40 points. and their relative weights can be expressed in numerical terms so that a composite performance index can be determined and supplier comparisons made. and price. delivery.  A number of evaluation factors can be included. significant.The Weighted Point Method  Weighted-point method quantifies the evaluation criteria. and price. accuracy of delivery. 40 points. a point rating system such as the following might be used:  quality. 20 points.

(C) Price %20 60 12 80 16 90 18 (A+B+C) Total Score 76 72 78 48 .Weighted Point Method« % Perf. Delivery 70 60 80 (B) %40 28 24 32 %Perf. Vendor Quality A 90 B 80 C 70 (A) %40 36 32 28 % Perf.

Weighted Point Method«  The advantage of the weighted-point plan is that a number of evaluation factors can be used with relative weights corresponding to the needs of the firm. suppliers can be evaluated on a quantifiable basis and many of the intangible aspects of service can still be considered.  If this individually assigned plan is used in conjunction with the categorical method. thereby minimizing subjective evaluation. 49 .

delivery. service. 50 .  The higher the ratio of costs to shipments. the lower  What cost categories are used depends on the  Quality. the rating for that supplier.The Cost-Ratio Method  The cost-ratio method relates all identifiable purchasing costs to the value of the shipments received from the respective suppliers. products involved. and respective costs are accumulated for each. and price are the overall categories.

 unusual inspection costs of incoming shipments. 51 . costs associated with quality normally include  the costs of unusual visits to a vendor's plants. and  all costs associated with defective products. including rejected parts and the resulting manufacturing losses.The Cost-Ratio Method«  For example.

The Cost-Ratio Method« Quality Cost Ratio Vendor__________________________ Visit to vendor plant Sample approval Incoming inspection Manufacturing losses Reworking costs Value of rejected parts Other Total costs Total value of purchases Quality cost ratio: (total cost / purchases) January.000 %1 52 .000 100. 20__ 200 300 75 0 0 425 9 1.