Supplier Evaluation and Selection 1

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dell  Make or Buy 19

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

Dell  Selecting Suppliers 21

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

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

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

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

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

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

Large or Small Suppliers? 28

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

McDonald  Selecting Suppliers 30

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

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

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

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

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

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

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

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