1. Supplier Evaluation and Selection1

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

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

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
overall objective: best trade off in maximizing value and minimizing risk
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 selection
Supplier Evaluation and Selection Process 6

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

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

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

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

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

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

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

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

15. Interpreting Financial Ratios
Liquidity Ratios
Interpretation
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
assign a weight to each category
identify and weight subcategories
define a scoring system for categories and subcategories
evaluate supplier directly
review results and make decision 17
developing a supplier evaluation and selection survey

18. Initial Supplier Evaluation
Category
Weight
Subweight
Score (1 - 5 scale)
Weighted Score
Subtotal
Quality Systems 20
Process control systems 5 4
4.0
Total quality commitment 8
6.4
PPM defect performance 7
7.0
17.4
Management Capability 10
Management/labor relations
Management capability
8.0
Financial Condition
Debt structure 3
3.0
Turnover ratios
Cost Structure 15
Costs relative to industry
5.0
Understanding of costs
Cost control/reduction efforts
14.0
Delivery Performance
Performance to promise
Lead-time requirements
Responsiveness
9.0
Technical/Process Capability
Product innovation
Process innovation
research and development
Information Systems Capability
EDI capability
CAD/CAM 2
0.0
General
Support of minority suppliers
1.2
Environmental compliance
Supply base management
8.2
Total Score
80.6

19. Dell
 Make or Buy 19

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 20

21. Dell
 Selecting Suppliers 21

22. Selecting an ODM of Notebooks for Dell
1991, Aug, three potential suppliers Compal (仁寶), Inventec Corporation (英業達), and Quanta (廣達)
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 22

23. Key Suppliers Evaluation Criteria
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
supplier’s sourcing strategies, policies, and techniques
process and technological capability
longer-term relationship potential 23

24. Key Suppliers Evaluation Criteria
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
supplier’s sourcing strategies, policies, and techniques
process and technological capability
longer-term relationship potential 24

25. Selecting a Supplier of Power Supply for Dell
early 1991, three qualified suppliers: Delta (台達)、Lite-On (光寶)、Vidar-SMSCO (三光惟達)
Delta distant leader
result: Lite-On
Lite-On: proactive and responsive in quotation stage and in preparation of sample 25

26. Key Suppliers Evaluation Criteria
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
supplier’s sourcing strategies, policies, and techniques
process and technological capability
longer-term relationship potential 26

27. Key Suppliers Evaluation Criteria
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
supplier’s sourcing strategies, policies, and techniques
process and technological capability
longer-term relationship potential 27

28. Large or Small Suppliers?28

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

30. McDonald
 Selecting Suppliers 30

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 31

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 32

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

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

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 80’s
potato chips: from 175 in early days to mostly 1 in late 80’s
reason: best trade off in maximizing value and minimizing risk
manage and develop with suppliers that can grow with the company 35

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

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

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