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1 Supplier Evaluation and Selection. Outline supplier evaluation & selection (Chapter 7) industrial practices effect of operations and culture on supply.

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Presentation on theme: "1 Supplier Evaluation and Selection. Outline supplier evaluation & selection (Chapter 7) industrial practices effect of operations and culture on supply."— Presentation transcript:

1 1 Supplier Evaluation and Selection

2 Outline supplier evaluation & selection (Chapter 7) industrial practices effect of operations and culture on supply management 2

3 3 Relation Between Chapters Supplier Evaluation & Selection (Chapter 7) Supplier Management & Development (Chapter 9) Supplier Quality Management (Chapter 8)) Specifications and Operations Standards Well before …

4 Chapter 7 Overview supplier evaluation and selection process key supplier evaluation criteria developing a supplier evaluation and selection survey critical supplier selection issues reducing supplier evaluation and selection cycle time 4

5 Evaluation and Selection Process no best way, at least no known best way no best way, at least no known best way overall objective: best trade off in maximizing value and minimizing risk overall objective: best trade off in maximizing value and minimizing risk long-term relationship with suppliers long-term relationship with suppliers 5

6 Supplier Selection and Evaluation Select supplier and reach agreement Determine method of supplier evaluation and selection Limit suppliers in selection pool Identify potential supply sources Determine sourcing strategy Identify key sourcing requirements Recognize the need for supplier selection6 Supplier Evaluation and Selection Process

7 Strategic Sourcing Decisions single vs. multiple sourcing single vs. multiple sourcing short-term vs. long-term contracts short-term vs. long-term contracts design support vs. operational support design support vs. operational support full-service vs. non-full-service suppliers full-service vs. non-full-service suppliers domestic vs. foreign-based suppliers domestic vs. foreign-based suppliers collaboration vs. arms length relationship collaboration vs. arms length relationship 7 Supplier Evaluation and Selection Process

8 Information Search Requirements 8 Supplier Evaluation and Selection Process Importance of Purchased item to Buyer High Low High Low Capability of Suppliers Minor Information Search Minor to Moderate Information Search Major Information Search Minor to Moderate Information Search

9 Sources of Information Current suppliers Current suppliers Preferred suppliers Preferred suppliers Sales representatives Sales representatives Information databases Information databases Experience Experience Trade journals Trade journals Trade directories Trade directories Trade shows Trade shows Second-party or indirect information Second-party or indirect information Internal sources Internal sources Internet searches Internet searches 9 Supplier Evaluation and Selection Process

10 Sourcing Alternatives multiple vs. single sourcing multiple vs. single sourcing large vs. small suppliers large vs. small suppliers manufacturer vs. distributor manufacturer vs. distributor local, national, or international suppliers local, national, or international suppliers 10 Supplier Evaluation and Selection Process

11 Limit Suppliers in Selection Pool removing obviously inappropriate suppliers, by, e.g., removing obviously inappropriate suppliers, by, e.g., financial risk analysis financial risk analysis Ex. Dun and Bradstreet reports Ex. Dun and Bradstreet reportsDun and Bradstreet Dun and Bradstreet evaluation of supplier performance evaluation of supplier performance for existing suppliers for existing suppliers evaluation of supplier-provided information evaluation of supplier-provided information preliminary surveys (entry qualifiers) preliminary surveys (entry qualifiers) 11 Supplier Evaluation and Selection Process

12 Methods of Evaluation and Selection evaluation from supplier-provided information evaluation from supplier-provided information supplier visits supplier visits use of preferred suppliers use of preferred suppliers external or third-party information external or third-party information 12 Supplier Evaluation and Selection Process

13 Key Suppliers Evaluation Criteria price, quality, and delivery price, quality, and delivery management capability management capability employees capabilities employees capabilities cost structure cost structure total quality performance, systems, and philosophy total quality performance, systems, and philosophy process and technological capability process and technological capability 13 Key Supplier Evaluation Criteria

14 Key Suppliers Evaluation Criteria environmental regulation compliance environmental regulation compliance financial stability financial stability production scheduling and control systems production scheduling and control systems e-commerce capability e-commerce capability suppliers sourcing strategies, policies, and techniques suppliers sourcing strategies, policies, and techniques longer-term relationship potential longer-term relationship potential 14 Key Supplier Evaluation Criteria

15 Interpreting Financial Ratios Liquidity RatiosInterpretation Current ratio = Current assets / Current liabilities Should be > 1.0, but look at industry averages Quick ratio = (Cash + Receivables) / Current liabilities At least 0.8 if supplier sells on credit Low = cash flow problems Activity Ratios Interpretation (compare with industry average) Inventory turnover = COGS / Inventory low = slow inventory or possible cash flow problems Fixed asset turnover = Sales / Fixed assets Too low = supplier may be inefficient using its fixed assets Total asset turnover = Sales / Total assets Too low = supplier may be inefficient using its total assets Days sales outstanding = (Receivables x 365) / Sales Too high hurts cash flow; Too low shows restrictive credit policy 15

16 Interpreting Financial Ratios Profitability Ratios Interpretation (compare industry average) Net profit margin = Profit after taxes / Sales Represents after-tax return Return on assets = Profit after taxes / Total assets Represents the return earned on what a company owns Return on equity = Profit after taxes / Equity Represents return on shareholders investment Debt Ratios Interpretation (compare industry average) Debt-to-equity = Total liabilities / Equity > 3 means highly leveraged Current debt-to-equity = Current liabilities / Equity Too high means supplier may be unable to pays its bills Interest coverage = (Pretax income + Interest) / Interest Should be > 3; low may mean difficulty in paying creditors 16

17 Evaluation and Selection Surveys identify supplier evaluation categories identify supplier evaluation categories assign a weight to each category assign a weight to each category identify and weight subcategories identify and weight subcategories define a scoring system for categories and subcategories define a scoring system for categories and subcategories evaluate supplier directly evaluate supplier directly review results and make decision review results and make decision 17 developing a supplier evaluation and selection survey

18 Initial Supplier Evaluation CategoryWeightSubweight Score (1 - 5 scale) Weighted Score Subtotal Quality Systems20 Process control systems Total quality commitment PPM defect performance Management Capability10 Management/labor relations Management capability Financial Condition10 Debt structure Turnover ratios Cost Structure15 Costs relative to industry Understanding of costs Cost control/reduction efforts Delivery Performance15 Performance to promise Lead-time requirements Responsiveness Technical/Process Capability15 Product innovation Process innovation research and development Information Systems Capability5 EDI capability CAD/CAM General10 Support of minority suppliers Environmental compliance Supply base management Total Score80.6

19 19 Dell Make or Buy

20 20 Make or Buy a Technology merits in either way general strategy buy if there are many developers in the market follow and invest on the winners

21 21 Dell Selecting Suppliers

22 22 Selecting an ODM of Notebooks for Dell ODM 1991, Aug, three potential suppliers Compal ( ), Inventec Corporation ( ), and Quanta ( ) Compal: most promising Quanta: relatively immature by then result: Inventec Corporation, because of site visits GM of Compal answered all questions, even cutting answers of subordinates insufficient respect for professional, insufficient delegation of power, reliability of answers Inventec Corporation showed division of labor during interview, and provided detailed test in reliability

23 Key Suppliers Evaluation Criteria 23 price, quality, and delivery environmental regulation compliance management capability financial stability employees capabilities production scheduling and control systems cost structure e-commerce capability total quality performance, systems, and philosophy suppliers sourcing strategies, policies, and techniques process and technological capability longer-term relationship potential

24 Key Suppliers Evaluation Criteria 24 price, quality, and delivery environmental regulation compliance management capability financial stability employees capabilities production scheduling and control systems cost structure e-commerce capability total quality performance, systems, and philosophy suppliers sourcing strategies, policies, and techniques process and technological capability longer-term relationship potential

25 25 Selecting a Supplier of Power Supply for Dell early 1991, three qualified suppliers: Delta ( ) Lite-On ( ) Vidar-SMSCO ( ) Delta distant leader result: Lite-On Lite-On: proactive and responsive in quotation stage and in preparation of sample

26 Key Suppliers Evaluation Criteria 26 price, quality, and delivery environmental regulation compliance management capability financial stability employees capabilities production scheduling and control systems cost structure e-commerce capability total quality performance, systems, and philosophy suppliers sourcing strategies, policies, and techniques process and technological capability longer-term relationship potential

27 Key Suppliers Evaluation Criteria 27 price, quality, and delivery environmental regulation compliance management capability financial stability employees capabilities production scheduling and control systems cost structure e-commerce capability total quality performance, systems, and philosophy suppliers sourcing strategies, policies, and techniques process and technological capability longer-term relationship potential

28 28 Large or Small Suppliers?

29 29 Which One to Choose from, Large or Small? possible problems with small ones (first clip: 00:25:48 – 00:28:53) possible problems with small ones unreliable

30 30 McDonald Selecting Suppliers Selecting Suppliers

31 31 McDonald competition in the fast food industry not advanced technology helpful with resource in marketing and expansion, but not critical keys the lowest prices from suppliers the lowest operations costs the most appropriate technology the highest morale in operations the strongest desire to improve

32 32 McDonald large suppliers played no attention to the strict rules and standards of McDonald operations standards of McDonald risky with small ones unsure technological and financial ability to expand in the pace of McDonald successfully to turn into organized, efficient, and motivated suppliers

33 33 Effect of Operations and Culture on Supply Management Japanese Influences in Manufacturing Processes Japanese Influences in Manufacturing Processes

34 34 Relation Between Chapters Supplier Evaluation & Selection (Chapter 7) Supplier Management & Development (Chapter 9) Supplier Quality Management (Chapter 8)) Specifications and Operations Standards Well before …

35 35 General Trend: Reduction of Number of Suppliers Dell more than 140 suppliers in early days about 40 in 1999 US operations of McDonald hamburger suppliers: from 170 in early days down to 5 in late 80s potato chips: from 175 in early days to mostly 1 in late 80s reason: best trade off in maximizing value and minimizing risk manage and develop with suppliers that can grow with the company

36 36 Philosophy and Ideology in Manufacturing (Early 70s to Mid 90s) affected heavily by Japan Just-in-Time and Lean Manufacturing (Toyota)LeanManufacturingToyota Keiretsu (Japanese ) Keiretsu

37 37 Conventional Purchasing versus JIT Purchasing Delivery time dictated by production schedule of buyer Delivery time set by buyer Sole to few suppliers per part, Multiple suppliers per part, for quality and price Little inventory on partsInventory on parts Long-term purchasing agreement Short-term purchasing agreement Frequent deliveries for immediate production Infrequent deliveries, possible for a few weeks consumption JIT PurchasingConventional Purchasing

38 38 Conventional Purchasing versus JIT Purchasing Supplier close to buyer Proximity of supplier being unimportant Buyer work with suppliers to reduce supplier cost and price Supplier set price Communication between supplier and multiple sections, e.g., production, design, QC, etc., facilitated by purchasing Communication between supplier and purchasing More information exchange, traditional plus production schedules, production processes, including real-time information Traditional information exchange, on quality, quality, price, time, venue Product design to minimize # of parts Free product design JIT PurchasingConventional Purchasing


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