Introduction The evaluation and selection of suppliers, structuring the supplier base is an important task in any organization. It assumes utmost importance in the current scenario of global purchasing. Every Organization especially manufacturing organizations need to have a Supplier evaluation matrix or model in place. This paper tries to bring in a typical Supplier Evaluation Framework, which blends with company’s basic values, and help in establishing a Strategic sourcing policy.
It also outlines ways and means to reward a supplier and establish long-standing relationships with suppliers. Vendor selection range of criterions Today’s consumers demand cheaper, high quality products, on-time delivery and excellent after-sale services. Hence, companies are under intense pressure to cut product and material costs while maintaining a high level of quality and after-sale services. Achieving this starts with supplier selection. Therefore, an efficient supplier selection process needs to be in place and of paramount importance for successful supply chain management.
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It begins with the realisation of the need for a new supplier; determination and formulation of decision criteria; pre-qualification (initial screening and drawing up a shortlist of potential suppliers from a large list); final supplier selection; and the monitoring of the suppliers selected (i. e. continuous evaluation and assessment). The supplier selection can be seen as decision making under uncertainty and can be illustrated by a decision tree diagram as follows:- | | | | | | a| Satisfactory| | | | | | | | | | Supplier | A| | | | | | | | | | 1a| Unsatisfactory| | | | | | | | | | | | | | | | | | | | | | b| Satisfactory| | Supplier | B| | | | | | | | | | | | | | | | | | | 1b| Unsatisfactory| | | | | | | | | Above diagram show a simple decision making situation with only two suppliers considered and two possible outcomes. It shows, however, the uncertainty environment present in almost every supplier choice and the risk inherent in the decision. To use the decision method effectively, buyer must identify the options and criteria for evaluation and assess the probabilities of success and failures.
The vendor selection process can be a very complicated and emotional undertaking if one don’t know how to approach it from the very start. Here are five steps to help to select the right vendor. This guide will show how to analyze business requirements, search for prospective vendors, lead the team in selecting the winning vendor and provide with insight on contract negotiations and avoiding negotiation mistakes. It begins by gathering data or perform interviews, assemble a team of people who have a vested interest in this particular vendor selection process.
The first task that the vendor selection team needs accomplish is to define, in writing, the product, material or service that you are searching for a vendor. Next define the technical and business requirements. Also, define the vendor requirements. Finally, publish document to the areas relevant to this vendor selection process and seek their input. Have the team analyze the comments and create a final document. In summary: 1. Assemble an Evaluation Team 2. Define the Product, Material or Service 3. Define the Technical and Business Requirements 4.
Define the Vendor Requirements 5. Publish a Requirements Document for Approval The identification of potential sources is a primary qualification for any effective buyer. Information sources from internet, trade portals and journals, e-catalogue, advertisements, suppliers and commodities directories, sales interviews, professional contacts are some of the most common tools used. The choice of suppliers selection can considers the following parameters as the Common supplier selection criteria: * Previous experience and past performance with the product/service to be purchased. Relative level of sophistication of the quality system, including meeting regulatory requirements or mandated quality system registration (for example, ISO 9001, QS-9000). * Ability to meet current and potential capacity requirements, and do so on the desired delivery schedule. * Financial stability. * Technical support availability and willingness to participate as a partner in developing and optimizing design and a long-term relationship. * Total cost of dealing with the supplier (including material cost, communications methods, inventory requirements and incoming verification required). The supplier’s track record for business-performance improvement. * Total cost assessment. Now when the agreement on the business and vendor requirements had been compiled, the team now must start to search for possible vendors that will be able to deliver the material, product or service. The larger the scope of the vendor selection process the more vendors you should put on the table. Of course, not all vendors will meet the minimum requirements and the team will have to decide which vendors you will seek more information from. Vendor evaluation range of criterions
The areas that company chooses to measure and manage and the criteria used will be a direct result of the company’s goals and strategy and the objectives for the supplier performance management program. There are a wide variety of areas of supplier performance that may be measured. It is important to select the ones that are most important for the organization. Common areas that companies choose to measure include financial health (risk of bankruptcy, liquidity, sales, etc), operational performance (quality, lead times, customer services, etc), contract compliance, business processes (defect prevention, inspections, etc), and overall cost.
There are other metrics that may be important to aparticular company. These metrics should be defined as Key Performance Indicators (KPIs) Another factor that should influence the choice of evaluation methodology includes the type of suppliers that a company has. In the supplier performance management program, it is important for company personnel to focus on the higher value and more strategic suppliers since these suppliers contribute the greatest amount of risks. It often doesn’t make economic sense to include low dollar value, one time business, or non-strategic suppliers in this type of program.
By grouping these top suppliers together and examining the company’s relationships with them, some common attributes will become evident. These attributes of the relationship can be used to develop the areas and metrics with which to measure. It is also important to work with the suppliers when developing these metrics and areas of focus. Some of the companies that are best at examining supplier performance continually interact with their suppliers, communicate with them frequently, and use a mutually agreed upon system of metrics. This is a more collaborative approach with suppliers and ensures that supplier know what is expected of them.
They can also make business plans and take steps to meet the goals and objective that were set for them. The suppliers are also acutely aware of whether or not they have performed well or have performed poorly. Quality The most important vendor selection criterion is usually quality. Quality refers to the specifications a user desires in an item. For example, these can be the technical specifications, physical properties, or design. Quality also includes the additional factors such as life span of the product, durability, maintenance requirement, ease of use and dependability.
Typical measures of product quality are ‘Returns’ or ‘Parts per Million’ (PPM). End users are more affluent & well learnt today and have higher expectation for value for money purchase. The pursuant of quality excellence will continue to be the main criterion for delivery of the product. Reliability Reliability comprises delivery and performance history. The capability to consistently meet delivery schedules (on-time delivery), to adjust to changes in delivery schedules (flexibility), and to consistently deliver the right parts (accuracy).
Inorder to prevent production line shut down resulting from longer than expected lead times, the buyer requires consistent, on-time deliveries. Also, the product’s performance life can directly affects the quality of the final product, the manufacturer’s warranty claims, and repeat sales. Capability The third criterion is capability of the supplier. It considers the potential vendor’s production facilities and capacity, technical know-how, management and organizational strengths and operating controls. The supplier’s capability to reduce the customer’s cycle time and bring products to market at a faster pace.
For example, a supplier can reduce time-to-market for a customer through accelerating design work, developing prototypes faster than competitors, and speeding up the product testing and validation process. Supplier’s knowledge of the supply market may provide an opportunity to present the customer with new sourcing solutions. Second, a thorough understanding of the customer’s operations creates an opportunity for the supplier to assist the customer in improving existing products – both in terms of functionality and costs.
Third, a supplier may assist the customer in developing new products. These factors examine the vendor’s ability to provide a needed quality and quantity of material in a timely manner. Financial The vendor price is a major consideration in the selection process but it may not be the most important determinant. The material’s quality, reliability and capability are more important. In addition to price, the buying firm needs to consider vendor’s financial position. Financially unstable suppliers can pose possible disruptions in a long-run continued supply of materials.
For example the bankruptcy of a key supplier that supplies critical material to a final product could result the stop in the buyer’s production line. Miscellaneous categories of desirables We may group the remaining selection factors into miscellaneous categories of desirables. Suppliers are evaluated and selected according to homogeneous methods, which are based on objective parameters. | Service SupportIn addition to tangible products, a supplier provides a range of accompanying services. These services can be: services directly related to the product (i. e. warranty, spare parts, or product adaptations), appropriate customer information (i. e. providing the ‘right information’ at the ‘right time’), and outsourcing a number of tasks to the supplier (i. e. , sub-assembly, design, or testing). Personal InteractionThough business relationships exist between firms, they are actually managed by individuals. Personal interaction in a manufacturer-supplier relationship may create value in different ways such as improved communication between both parties, more effective and efficient problem resolution, and a better understanding of each partner’s objectives in the relationship.
Geographical locationThis factor addresses the issues of whether to buy from local or overseas vendors. Transportation cost is one obvious reason. Other reasons such as the ability to fill rush orders, meet deliveries dates, provide shorter delivery times and utilize greatersupplier-buyer cooperation, favour the use of local suppliers. However, distant vendors may provide lower prices, greater technical ability, supply reliability & higher quality. | | Conclusion It is of utmost importance that the co-operation between customer and suppliers is based on common values and that the improvement work is focused at all times.
The Supplier Evaluation Framework is a way to point at the requirements and values, which are put on the supplier’s development. By a close co-operation and common processes for target setting (quality, delivery, productivity etc. ) and suited measuring systems the common competitive strength of the Customer – Supplier will be enhanced. Vendor evaluation is important as it can reduce supply chain costs and improve the quality and timeliness of the delivery of items to your company.
The skill in evaluating vendors is to determine which criteria are important and the weighting that these criteria are given. It is important to remember that these criteria may be different for each item you are sourcing and possibly different between regions or countries. Objective data is useful to compare the information that you can obtain from each purchase order and goods receipt, but sometimes the subjective data that your purchasing agents can provide such as customer service and the willingness of the vendor to accommodate your requirements, is as or more important in a vendor evaluation.