Purchasing and Supply Management
by W. C. Benton
Chapter Eight
Supplier Selection and
Evaluation
McGraw-Hill/Irwin
Copyright ©2007 The McGraw-Hill Companies, All Rights Reserved
Learning Objectives
1.
To identify the qualifications a good supplier.
2.
To learn about the key elements of the make-versus-buy
decision.
3.
To identify appropriate supplier selection techniques.
4.
To identify potential disadvantages of single sourcing.
5.
To analyze how to reduce the number of suppliers.
6.
To understand how supplier evaluation is accomplished in a
variety of industrial environments
8-2
Suppliers Must be Carefully Evaluated
 In today’s competitive environment, progressive firms must be
able to produce quality products at reasonable prices. Product
quality is a direct result of the production workforce and the
suppliers.
 Buying firms
_________________________________________________
_________________________________________________
____________________.
 In order to select
_________________________________________________
_________________________________________________
______________________________________.
8-3
A New Role for Purchasing
 Traditional purchasing professionals who act as
little more than order placers are giving way to
_________ involved _________ managers who
control vital __________________________.
 More and more power is being placed in the hands
of professional purchasing managers
________________________________________
________________________________________
______________________________________.
8-4
MAKE VERSUS BUY
 The use of outsourcing has quickly become a competitive
weapon for an increasing number of businesses.
 _________________________________________________
______________________________________
 The decision to outsource has l-ed to a need for strategic
partnerships.
8-5
Key Make-or-Buy Mistakes
 In most cases, businesses are not proficient at
identifying their core capabilities .
_________________________________________
______________________.
 Buying organizations wait too late to assess the
value of consultants or strategic partners.
 ________________________________________.
 There are always new competitors with new
technology attacking the market.
8-6
Key Make-or-Buy Success Factors
 Perform a realistic assessment of the capabilities
and expertise of each member of the in-house team.
If the core competencies exist, what happens if a key
member leaves the team. Can the member be easily
replaced?
 __________________________________________
____________________________________.
 __________________________________________
____________________________________.
8-7
BENEFITS OF OUTSOURCING
 Outsourcing can produce many benefits for a firm that
would normally produce a part internally.
 Vertical integration gives a firm more control over the
part in question.
___________________________________________
___________________________________________
__________________________________.
 It is very difficult for a manufacturer such as
___________________________________________
___________________________________________.
 Therefore, ________________________________.
8-8
The Make or Buy Decision
 When a firm has answered the make-or-buy
question with a decision to buy , the question
then becomes to whom to “delegate” this
responsibility.
• Thus, the firm must select a supplier or suppliers
for the part (s) in question.
• The buying firm must be highly skilled at
(1) ___________________________,
(2) ___________________________,
(3) ___________________________.
8-9
SOURCES OF SUPPLIER INFORMATION
 Searching for the appropriate
supplier for a specific material
or component part is becoming
a strategic issue in itself.
 In the new fast-paced and
volatile buying environment,
the purchasing firm must know
where to look for each item.
 ___________________________
___________________________
________.
 There are many sources
available for the buyer to
consider when seeking out
potential suppliers.
 The traditional buying source is
the well-known Thomas
Register.
 ___________________________
___________________________
______________.
 Trade journals are also a
valuable source of information
regarding potential suppliers.
 Two such journals are
Purchasing World and
Purchasing. Salespersons are
not only important resources
about materials, they can also
be an excellent source of free
consulting information.
 ___________________________
___________________________
__________________.
8-10
STRATEGIC SELECTION
 Each business unit and department should have a
clear understanding of the strategy of the whole
firm and have a departmental strategy that
complements and aids the overall strategy
execution of the firm.
 ________________________________________
________________________________________
________________________________________
________________________________________
________________.
8-11
STRATEGIC SELECTION
 These functions must work as a cohesive strategic
where each complements the other.
__________________________________________
_____________________________________.
 In order for good communication to exist between
buyer and supplier,
__________________________________________
__________________________________________
___________________________________
8-12
Strategy and Outsourcing
• Since outsourcing is a delegation of
responsibilities, it should be viewed as an
extension of the OEM’s strategy.
8-13
Criteria for Supplier Evaluation
 There are two main categories of supplier
evaluations: process-based evaluations and
performance-based evaluations.
 The process-based evaluation
________________________________________
________________________________________
_______________.
 Typically,
________________________________________
________________________________________
_____________________________________.
8-14
Criteria for Supplier Evaluation
 In addition, large buying organizations
increasingly are demanding that their
suppliers become certified through third-party
organizations, such as ISO 9000 certification
or Malcolm Baldrige National Quality Awards.
8-15
Three Common Supplier Performance Based
Evaluation Systems
 The three general types of supplier evaluation
systems in use today are the _______, the
________ method, and the _________ method.
 In general,
__________________________________________
_____________________________.
 It must be pointed out the interpretation of the results
from any of these three systems is a matter of the
buyer’s judgment.
8-16
Categorical Method
 The categorical method involves categorizing each
supplier’s performance in specific areas defined by a list
of relevant performance variables.
 The buyer develops a list of performance factors for each
supplier and keeps track of each area by assigning a
“grade” in simple terms, such as “______,” “_______,”
and “_____________.”
 At frequent meetings between the buying organization
and the supplier, the buyer will then inform the supplier of
its performance.
8-17
Advantages and Disadvantaged of the
Categorical Method
 The advantages associated with implementing
__________________________________________
______________________________________.
 The method’s major disadvantage is its dependence
on the judgment of its users.
 The system is largely dependent on the memories of
personnel to explain what “unsatisfactory” or “good”
means.
__________________________________________
___________________________________.
8-18
Cost-Ratio Method
 The cost-ratio method evaluates supplier performance by
using standard cost analysis.
 The total cost
______________________________________________
______________________________________________
___________.
 Calculations involve a four-step approach
 A hybrid of the cost-ratio method is the “total cost-ofownership rating,
______________________________________________
______________________________________________
______________________.
8-19
Cost-Ratio Method
 It includes five performance factors: quality (maximum of 30
points), delivery (25), technology (20), price (15), and service
(10). A perfect supplier would receive a score of 1.00.
 _________________________________________________
________________________________________________.
 The idea is to give a simple numeric rating to the so-called
hidden cost of ownership—the additional product-lifetime cost
to Sun.
 A score of 1.20, for instance, means that for every dollar Sun
spends with that supplier, it spends another 20 cents on
everything from line downtime to added service costs.
8-20
8-21
Linear Averaging
 The linear averaging method is probably the
most commonly used evaluation method.
 Specific quantitative performance factors are
used to evaluate supplier performance.
 ______________________________________
______________________________________
______________________________________
________________________________.
8-22
Linear Averaging Method
1. The first step is to assign appropriate weights to each
performance factor, such that the total weights of each
factor add up to 100.
•
For example, quality might be assigned a weight of 50,
service a weight of 35, and price a weight of 15.
________________________________________________
___________________________.
•
The weights are subsequently used as multipliers for
individual ratings on each of the three performance factors.
8-23
Linear Averaging Method
1.
After the weights have been assigned, the individual
performance factor ratings are determined.
___________________________________________
2.
The third step is to multiply each performance factor
rating by its respective weight as a percentage.
Continuing the example, a quality rating of 95 would be
multiplied by .50, if quality had a weight of 50
3.
Finally,
_______________________________________________
______________________________________________.
8-24
Example
8-25
Single versus Multiple Sources

Much debate has taken place concerning the
number of suppliers a firm should use.
1. ________________________________________
________________________________________
________________________________________
________________________________________.
2. The other side of the debate is the ___________,
in which only one supplier is used to supply a
particular part.
8-26
Advantages of Multiple Sourcing
 The main arguments for multiple sourcing are competition and
assured supply.
___________________________________________________________
___________________________________________________________
____________________________.
 This sense of competition is in the very root of American thought as
competition is the basis for capitalism and is the backbone of Western
economic theory.
 Multiple sources also can guarantee an undisrupted supply of parts.
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________.
8-27
Advantages of Single Sourcing
 The major arguments in favor of single sourcing are
that with the certainty of large volumes that the
supplier can enjoy lower costs per unit and
increased cooperation and communication to
produce win-win relationships between buyer and
seller.
 Naming a certain supplier
_________________________________________
_________________________________________
_________________________________________
_______________________ .
8-28
Advantages of Single Sourcing
 With this contract guarantee, the supplier is more
willing to invest in new equipment, or change its
business/operating methods to accommodate the
buyer.
 Single sources
__________________________________________
__________________________________________
_____________________________.
 Spreading fixed costs across a larger volume should
also result in an accelerated learning curve.
8-29
Advantages of Dual Sourcing

The advantages of multiple sourcing can be viewed as
the disadvantages of single sourcing and vice versa.

The best scenario would be one that can obtain the
advantages of both.
1.
_______________________________________________
_______________________________________________
______________________________________________.
2.
_______________________________________________
_______________________________________________
_______________________________________________
_______________________________________.
8-30
Long-Term Issues

Single sourcing advocates may want to
address the following issues regarding
long-term impacts of single sourcing.
1.
In the long-run, if everyone reduces their
supplier base, there will be fewer suppliers to
deal with and overall competition will decrease
as there are fewer suppliers.
_______________________________________________
_______________________________________________
__________________________.
8-31
Long-Term Issues
2. Also, a supplier may be able to forward integrate
and
________________________________________
__________________________________.
3.
________________________________________
________________________________________
________________________.
4. The single-source movement became popular
during the 1990s. The 1980s were a period of
labor stability as strikes were not a major issue.
8-32
Long-Term Issues
 What is to prevent future labor unrest that could
unravel single-source relationships and bring
assembly lines to a halt?
– This was the case as strikes crippled Ford and
– Renault plants in Europe.
 __________________________________________
__________________________________________
__________________________________________
________________________.
8-33
Japanese Reality
 Many “pop” management techniques have emerged over
the last decade by
________________________________________________
__________________________________.
 Many managers believe that “if it works in Japan, it can work
here.”
________________________________________________
________________________________________________
______________________.
 Therefore, the common American response has been:
Japan uses one source; we should too. In fact, over 98
percent of Ford’s outsourced parts are supplied by singlesource suppliers.
8-34
Cross-Sourcing
 The single-sourcing/multiple-sourcing issue does
not have to be viewed as a “black or white” type of
a decision.
 A hybrid approach can be used that is known as
cross-sourcing.
_________________________________________
_________________________________________
__________________.
8-35
Cross-Sourcing
 Cross-sourcing works this way. If supplier A can produce
parts 1, 2, 3, 4, and 5 and so can supplier B, the
advantages of both single and multiple sourcing can be
achieved if supplier A produces all of parts 1, 3, and 5
and supplier B produces all of 2 and 4. If anything would
happen to supplier A, supplier B can pick up the slack as
it has the capability to produce 1, 3, and 5 as well.
 In sum,
_____________________________________________
_____________________________________________
_____________________________________________
_________________________________________.
8-36
Supplier Reduction
 Regardless of one’s final analysis of the single/multiple
debate, it is recommended to reduce the supply base.
 _________________________________________________
_________________________________________________
___________________________________.
 However, for operations that would be financially damaged
when a supply stoppage occurs,
______________________________________
 Assume that it is desirable to reduce the number of
suppliers.
_________________________________________________
_______________________________________.
8-37
Grade
 “Grade” methods are those that are based on a score or
grade given to the supplier by the buyer for some attribute.
 ______________________________________________
_____________.
 ______________________________________________
______________________________________________
______________________________________.
 Many additional attributes an be added to the most
common three such as frequency of delivery, but the
method remains the same—for each attribute and
purchase transaction, the supplier is given a grade.
8-38
Hurdle
 _______________________________________
_______________________________________
_______________________________.
 In this type of situation, suppliers are required to
“jump” over higher and higher hurdles to win the
buyer’s business.
 _______________________________________
_______________________________________
____________________________________.
8-39
Certification
 _______________________________________
________________________________.
 _______________________________________
_______________________________________
________.
 Basically, certification involves the setting of
criteria regarding quality levels as demonstrated
through the use of SPC and such things as
process capability studies of a supplier’s
equipment, record-keeping abilities, and so forth.
8-40
Certification
 The certification criteria can be changed and
updated as recertification may be required.
_____________________________________
_____________________________________
_______________________.
 In combination with certification are
_______________________. OEMs can add
these criteria to make it more difficult to be a
“select” supplier.
8-41
Certification Example
 Certification programs are usually only as good as
their designers make them.
 __________________________________________
______________________________________.
 For example, requiring a 5 percent decrease in price
annually may force suppliers to look for short-term
cost reductions that may hurt long-term investments,
which would make a partnership with a single source
stronger.
8-42
Designing Certification Programs
 When designing a certification program, careful
attention should be paid to the selection of criteria.
 Good certification should include issues regarding
equipment capability, quality assurance, financial
health.____________________________________
__________________________________________
__________________________________________
________________________________
8-43
INDUSTRY EXAMPLES
 Consider the apparel, chemical, electronics, and
construction industries.
____________________________________________________
___________________________________________________.
 The particular selection strategy may be acceptable in the
apparel industry, where the highest emphasis is placed on price
or price markup, but would be unacceptable in the chemical
industry, where the highest priority is purity of the chemicals (i.e.,
quality).
________________________________________________________________
__________________________________________________________.
8-44
Apparel Industry
 Organizational buying can be broken down into two
categories: retail buying and industrial buying.
 There are distinct differences between retail and
industrial buying.
 ________________________________________
________________________________________
_____________________.
 Successful retail buying depends on
________________________________________
________________________________________
_____________________________________.
8-45
Apparel Industry
 The most important difference between industrial buying and
retail buying is in the buyer’s responsibility for meeting the
profit objectives of the firm.
 While industrial buyers
_________________________________________________
_________________________________________________
____________________________________.
 While industrial buyers purchase raw materials and
component parts for use in production, retail buyers purchase
finished goods for resale to the consumer.
 Consequently, the right goods for industrial buyers are those
necessary to support the production process,
_________________________________________________
______________________________________.
8-46
Chemical Industry
 Industrial buying in the chemical industry
mostly_________________________________________
_______________________________________________
_____________________________________________
 Overall, in ranking which criterion is considered most
important in supplier selection, quality was number one.
Reliability and dependability of the delivery ranked second,
while price considerations ranked third.
 Purchasing managers send requests for quotes (RFQs) to
prequalified suppliers.
 Maintaining quality
_______________________________________________
_______________________________________________
_____________________________.
8-47
Electronics Industry
 Industrial buying within the electronics industry is
_____________.
 Some
________________________________________________
_____________________________________.
 For example, Dynalab prefers to deal with a single source,
while Tandy uses many suppliers to meet their needs.
 Supplier selection at Tandy Corporation is based solely on
price. When Tandy sends out an RFQ, suppliers that lack a
good reputation are ignored.
 Thus,
________________________________________________
_____________________________________________.
8-48
Electronics Industry
 Delivery time is not a major factor due to the fact that the firm
does not operate on a just-in-time basis.
_________________________________________________
_________________.
 _________________________________________________
_________________________________________________
____________________________________________.
 On the few occasions that samples do not conform to quality
standards, the entire lot is sent back to the supplier.
 However, the likelihood of this happening is very minimal.
_________________________________________________
_______________________________________________.
8-49
Electronics Industry
•
In today’s market, an electronics supplier must have
a quality product to survive.
• Thus, electronics firms do not test the quality of the
electronics suppliers.
• Two decades ago, electronics firms tested each
electronics product due to such poor quality,
__________________________________________
__________________________________________
_______________________________.
8-50
Construction Industry
 In the construction industry, material quality, delivery
dependability, and price appear to be the most critical criteria.

However, the degree of importance that various construction
firms place on the four criteria varies.
 The supplier selection process
___________________________________________________
_________________________________________.
 The selection process is usually based solely on past
performance.

Once a pool of potential sources is formed,
___________________________________________________
______.
8-51
Construction Industry
 High-quality materials are expected from every
potential supplier.
 __________________________________________
_______________________________________.
 __________________________________________
__________________________________________
____________________.
 Visual material inspection is used and any piece of
material that is not visibly damaged is accepted and
used.
8-52
Construction Industry
 However, materials such as steel beams or concrete
require a more formal inspection to ensure that they
conform to specifications.
 Quality is rarely
__________________________________________
__________________________________________
__________________________________________
________.
 If a supplier cannot provide adequate quality,
__________________________________________
____________________________________.
8-53
Construction Industry
 Delivery dependability is obviously vital in today’s
fast-track construction industry, where construction is
often begun before the architects’ final designs are
completed.
 __________________________________________
__________________________________________
_______
 __________________________________________
__________________________________________
__________________________.
8-54
Construction Industry
 If a project is not completed by its deadline, the loss of
potential profits increases with each day past the due date.
 In this industry,
_______________________________________________
____________________________________________.
 If one company can supply a contractor (buyer)
considerably faster than another supplier, the faster
company will have an advantage.
 _______________________________________________
_______________________________________________
____________________________________.
8-55
Construction Industry
 While quality, delivery dependability, and price may play the
most vital role in selecting a supplier,
______________________________________.
 Depending on the project, and the specific types of materials,
________________________________________________
_________________.
 As an example,
________________________________________________
___________________________________.
 Also, warranties may play an important role when buying
roofing materials, wooden doors, and cabinets.
8-56
Supplier Evaluations
 As firms increasingly emphasize cooperative
relationships with critical suppliers, executives of
buyer firms are using supplier evaluations to
ensure that their performance objectives are met.
 Supplier evaluations,
_________________________________________
_________________________________________
_________________________________________
________________________________.
8-57
Supplier Evaluations
 When a supplier is unable to conform to the buying
firm’s expectations,
__________________________________________
_________.
 To maintain the working relationship,
__________________________________________
___________.
 The buying firm must develop supplier evaluation, or
report card,
__________________________________________
____________________________________.
8-58
Supplier Evaluations
1 . For the buying firm manager, specific communication strategies
should be designed into their SDP efforts.
_____________________________________________________
_____________________________________________________
_____________________________________________________
_________________________________.
2. Buying firm managers
_____________________________________________________
_____________________________________________________
___________________________________________.
3. As the recipient of their customer's SDP efforts, the supply firm
manager has the opportunity to improve the relationship with the
customer. Improved relationships can result in increased market
share, growth opportunities and other benefits.
8-59