Supplier Selection

Question 1

When do you select suppliers?

Answer 1

Once made the decision to ‘buy’ (make-buy decision) and selected an appropriate ‘sourcing strategy’ (i.e. # of suppliers).
Traditionally buyers would obtain three bids per required component and award the contract to the lowest price quote.

Question 2

What are the 4 steps to select suppliers?

Answer 2

1. Initial supplier qualification
   2a. Agree measurement criteria
   2b. Operationalise criteria
2. Obtain relevant information
3. Make selection

Question 3

Why is supplier selection important?

Answer 3

• Organisation’s ability to produce a quality product at a reasonable cost and in a timely manner is heavily influenced by its suppliers’ capabilities.
• Supplier selection is one of the key issues of SCM because the cost of raw materials and component parts constitutes the main cost of a product

Question 4

What are ‘hard’ and ‘soft’ factors to take into consideration?

Answer 4

Hard:

• cost
• quality
• delivery…

Soft:

• capability
• complementarity
• culture

Question 5

What to look for in suppliers when sourcing non-critical (routine)/leverage items?

Answer 5

Due to having strong power relative to supplier:

• Global sourcing
• Volume concentration
• Best price evaluation

Question 6

What to look for in suppliers when sourcing bottleneck/strategic items?

Answer 6

Due to having weak power relative to supplier:

• product spec improvement
• joint process improvement
• relationship restructuring

Question 7

What is the 1. initial supplier selection qualification step?

Answer 7

Limited resources reduce possibility of in-depth analysis of all suppliers so use measures below to make first cuts:

• Manufacturing Capabilities:
  Use of standards (such as ISO 9001 and 14001), techniques (such as continuous improvement, statistical process control and vendor managed inventory), and systems (such as EDI or MRP) ,
  e.g. there are over one million companies and organizations in over 170 countries certified to ISO 9001. The standards provide guidance and tools for companies and organizations who want to ensure that their products and services consistently meet customer’s requirements, and that quality is consistently improved.
• Financial Viability (e.g. Dun and Bradstreet ‘Supplier Qualifier Report’ gives a failure and delinquency score. Supplier Qualifier Report helps companies facilitate the evaluation of suppliers according to risk, financial stability and credit information)

Question 8

What is done in 2a. agree measurement stage?

Answer 8

Decide which factors are most important in sourcing the product and decide how to measure them.

e.g. cost, delivery, flexibility, quality.

Question 9

what is done in 2b. operationalise measurement?

Answer 9

Define what they want specifically from each factor.

Question 10

Examples of cost operationalised?

Answer 10

Cost

• Unit price
• Pricing terms
• Exchange rates, taxes and duties

Question 11

Examples of quality operationalised?

Answer 11

Quality

• Quality system certification
• Continuous Improvement
• ISO 9000 series

Question 12

Examples of delivery operationalised?

Answer 12

Delivery

• Location
• Lead time
• On time performance (JIT)
• Delivery frequency
• Inbound delivery cost

Question 13

Examples of flexibility operationalised?

Answer 13

Flexibility

• Volume flexibility
• Mix flexibility

Question 14

Other examples operationalised?

Answer 14

Others

• Financial risk analysis
• Ethical analysis
• Environmental analysis
• Reputation
• Innovation capability

Question 15

What is 3. obtain relevant information?

Answer 15

• Evaluation from supplier information: More detailed information from Requests for Quotes (RFQs) or Requests for Proposals (RFPs). Increasing levels of detail, cost structures.
• Supplier visits
• Use of preferred suppliers: Preferred supplier lists - increased volumes and/or new buys.
• Third-Party Information: E.g. Dun and Bradstreet

Question 16

What is 4. make selection?

Answer 16

• Use of multi-criteria decision-making models
• Models used to weight selection criteria and aid selection decision making process

e.g. Total Cost of Ownership (TCO) and Analytic Hierarchy Process (AHP)

Question 17

What is TCO?

Answer 17

Total Cost of Ownership

• can be defined as a holistic view of all costs, both direct and indirect, involved with an item over its useful life.
• it is a financial estimate. Its purpose is to help consumers and enterprise managers determine direct and indirect costs of a product or system.

E.g. Comparative TCO studies between various models help consumers choose a car to fit their needs and budget.

e.g. Kraft used TCO in terms of supplier service, quality, innovation, growth, inventory, processes.

Question 18

What is AHP?

Answer 18

Analytical Hierarchy Process Thomas Saaty - considers a set of evaluation criteria, and a set of alternative options among which the best decision is to be made.

• Commonly used
• Prioritises alternatives when multiple criteria are considered
• Ranks alternatives according to decision makers judgements regarding the importance of the criteria and the extent to which they are met by each alternative
• Uses pairwise comparisons to express the relative importance of each criteria versus another

Question 19

Advantages of TCO?

Answer 19

• provides a clear quantitative evaluation
• changes focus from purchase cost to total cost
• Helps identify costs that may otherwise be hidden
• provides clear message to suppliers on what is required from them

Question 20

Disadvantages of TCO?

Answer 20

• Complex as requires extensive tracking and maintenance of cost data.
• often situation specific

Question 21

Advantages of AHP?

Answer 21

• Forces manager to make trade-offs
• Simpler
• criteria can be compared as well as individual aspects within each criteria.

Question 22

Disadvantages of AHP?

Answer 22

• Requires intense management involvement

- Forces trade-offs

Question 23

When to use AHP?

Answer 23

• multiple goal conflicts
• supplier selection based on numerous factors
• when price alone is not he determining factor

Question 24

When to use TCO?

Answer 24

• provides supplier evaluation when cost is of high priority.

Question 25

What is AHP 9 point scale?

Answer 25

Importance intensity:
1 - Equal importance
3 - Moderate importance of one over another
5 - Strong importance of one over another
7 - Very strong importance of one over another
9 - Extreme importance of one over another Intermediate values
2, 4, 6, 8 - Used to represent compromise between the priorities listed above

Question 26

Business that uses AHP?

Answer 26

• British Airways used it in 1998 to choose the entertainment system vendor for its entire fleet of airplanes
• Xerox Corporation used to allocate close to a billion dollars to its research projects.
• Ford Motor Company used to establish priorities for criteria that improve customer satisfaction

Question 27

AHP process?

Answer 27

It generates a weight for each evaluation criterion according to the decision maker’s pairwise comparisons of the criteria. The higher the weight, the more important the corresponding criterion. Next, for a fixed criterion, the AHP assigns a score to each option according to the decision maker’s pairwise comparisons of the options based on that criterion. The higher the score, the better the performance of the option with respect to the considered criterion. Finally, the AHP combines the criteria weights and the options scores, thus determining a global score for each option, and a consequent ranking. The global score for a given option is a weighted sum of the scores it obtained with respect to all the criteria.