Week 3 - TCO and supplier Selection Flashcards
What is supplier selection?
Is the process of revenues, selection and evaluation of companies composing a supply chain
Why is supplier selection important?
Due to its direct impact within the configuration and operational performance of a supply chain
11 step process of sourcing
1 - Identify or reevaluate needs
2 - Define and evaluate requirements
3 - Decide to make or buy
4 - Identify type of purchase
5 - Conduct market analysis
6 - Identify possible suppliers
7 - Pre-screen possible suppliers
8 - Evaluate the remaining supply base
9 - choose supplier
10 - Product or services is delivered or performed
11 - Post purchase evaluation
4 main activities of the supplier selection process
• Initial supplier qualification
• Agree measurement criteria
• Obtain relevant information
• Make selection
What is initial supplier qualification? (Supplier selection process) (3)
• Has the aim to identify suppliers who meet the requisite product and process standards and are capable of supporting the buyer long-term objectives
• Reduces the pool of potential suppliers to a more manageable number for evaluation and eventually selection
• Manufacturing capabilities and financial capabilities are usually assessed
What is meant by ‘manufacturing capabilities’?
• Are best conceived as stocks of strategic assets that are accumulated through a pattern of investments overtime and cannot be easily imitated, acquired by trade, or substituted (Dierickx and Cool, 1989)
• Capabilities can be: low cost, quality, flexibility and delivery performance
Which manufacturing capabilities do buyers analyse? (3)
• Standards (such as ISO 9000 and 14000)
• Techniques (such as continuous improvement, statistical process control and vendor managed inventory)
• Systems (such as electronic data interchange (EDI or MRP)
Importance of assessing financial capabilities
Important for strategic items where the development of long-term relationships and investment in relationship-specific assets can make switching suppliers problematic
Explain Agree measurement criteria (2)
• Involves identifying relevant and appropriate selection
• Price v total cost (iceberg model)
Name Two quantifiable measurements in agree measurement criteria
• Key performance indicators (KPIs)
• Service level agreements (SLAs)
Sources of information that can help obtain relevant information about suppliers (4)
• Supplier websites
• Supplier information files (delivery history, quality record, overall desirability, list of materials)
• Supplier catalogues
• Trade registers and directories
Name selection methods (4)
• Fuzzy set theory (highly quantitative)
• Categorical methods (highly qualitative)
• Eyeballing RFQ data (simple)
• Artificial intelligence based models (Very complex)
Selection methods best suited for low-value products
Comparing information contained within responses to the RFQ and RFP
Selection method best suited for high value strategic products
More complex involving the use of multi-criteria decision-making models
Selection method best suited for products with few alternative sources of supply
Selection should be comprehensive because the possibility of substitution is low
Selection method best suited for products with many alternative sources of supply
Selection can be less comprehensive
What is Analytic hierarchy process (AHP)?
Enables decision makers to weight criteria according to their importance to the decision and the extent to which each alternative meets the criteria using a hierarchical structure
Analytic hierarchy process (AHP) method (2)
• Provide judgements about the relative importance of each criterion and then specifying a preference for each alternative with respect to each criterion
• Prioritised ranking which indicates the overall preference for each of the alternatives (though comparing the the different criterion)
Importance of Analytic hierarchy process (3)
• Designed to handle tangible as well as intangible criteria especially subjective decisions where individual opinions make an important part of the decision making
• Forces supply strategists to think seriously about the criteria used to select suppliers
• Cross functional teams can be used to bring together the disparate views of individuals within the team
Benefits of Analytic hierarchy process (AHP) (3)
• Allows multi criteria decision making
• Applicable when it’s difficult to formulate criteria evaluations (allows qualitative and quantitative evaluations)
• Applicable for group decision making environments
Cons of Analytic hierarchy process (AHP) (3)
• There are hidden assumptions like consistency - repeating the evaluation is cumbersome
• Difficult to use when the number of criteria is high, I.e over 7
• Difficult to add a new criteria or alternative
What is total cost ownership (TCO)
Is an estimation of the expenses associated with purchasing, deploying, using and retiring a product or piece of equipment
What is the benefit of total cost ownership analysis?
Helps businesses to determine the difference between short-term (purchase price) and long term (TCO) costs of a product or system
What decision can TCO help with? (2)
• If we should buy or make
• Selecting the right vendor from multiple alternatives
