WCSM Supplier Evaluation & Selection Chapter 07

Purchasing and Supply Chain Management
Supplier Evaluation and

Selection
Chapter
Chapter 77
Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

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Chapter Overview
One of the most important processes
performed in organizations today is the
evaluation, selection and continuous
measurement of suppliers.
Enlightened purchasers commit major
resources to this process.

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Chapter Overview
This chapter provides an overview of the
evaluation and selection process.
Critical issues in supplier selection are
discussed.

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Chapter Overview
A sound supplier selection decision today
can reduce or prevent a host of problems
tomorrow.

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The Sourcing Process

Supplier
Evaluation and
Selection
What criteria and methods will we

use to evaluate and select suppliers?
Supplier
Management
What must we do to manage

suppliers effectively and
efficiently?
Supplier
Development
What efforts should we put forth

to improve supplier performance?
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Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield Thomson Learning
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Supplier Evaluation
and Selection Process
1. Recognize the need or supplier selection
2. Identify key sourcing requirements
3. Determine sourcing strategy
4. Identify potential supply sources
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Supplier Evaluation
and Selection Process
5. Limit suppliers in the pool
6. Determine method of supplier evaluation and selection
7. Select supplier and reach agreement

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Selection Process
Steps in selection Process
1. Recognize need for supplier selection.
Discussion Question: How or when do we know that a
need exists to evaluate and select a supplier?

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Selection Process
2. Identify key sourcing requirements.
(What are you looking for in a supplier?)
Quality
Cost
Delivery Performance
Technological Capabilities

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Selection Process
3. Determining sourcing strategy.
(The sourcing will differ from requirement to
requirement.)
Single source vs. multiple sources.

Short-term vs. long-term contracts.
Domestic vs. foreign supplier.

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Selection Process
4. Identify potential supply sources.
(Intensity of search differs from requirement to
requirement based on capability of current supplier
and strategic importance of the requirement.)

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Supplier Evaluation and Selection Process

Guidelines for Intensity of Search
STRATEGIC IMPORTANCE
HIGH
CAPABILITY
HIGH
Hi capability/
Hi strategic importance
Hi capability/
Lo strategic importance
MINOR to MODERATE
INFORMATION SEARCH
MINOR INFORMATION
SEARCH
Lo capability/
Hi strategic importance
LOW
LOW
MAJOR INFORMATION
SEARCH
Lo capability/
Lo strategic importance
MINOR to MODERATE
INFORMATION SEARCH
Purchasing and Supply Chain Management, 3e Monczka/Trent/HandfieldThomson Learning
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Selection Process
4. Identify potential supply sources (contd.)
Discussion Question: What are the various
sources of information available when
identifying supplier candidates?

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Selection Process
5. Limit suppliers in selection pool.
Purchasers often perform a first cut or preliminary

evaluation of potential suppliers to narrow the list
Time and resources prohibit in-depth evaluation of all

suppliers
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Selection Process
5. Limit suppliers in selection pool.
Methods to reduce suppliers in the pool-
Financial risk analysis (discussed later)

Evaluation of previous performance
Evaluation of supplier provided information
What kind of information should we ask suppliers
to provide?

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Selection Process
6. Determine Method of Supplier Evaluation and
Selection. (Once the pool is reduced you must
decide how to evaluate remaining suppliers.)
Review supplier provided information:

RFPs
Detailed cost breakdown information.

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Selection Process
6. Determine Method of Supplier Evaluation
and Selection (contd).
Supplier visits
Use of Preferred suppliers
External or Third-party information

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Selection Process
6. Determine Method of Supplier Evaluation
and Selection (contd).
Cross-functional teams often evaluate suppliers
directly through on-site visits

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Selection
Step 6: Determine method of supplier
evaluation (contd)
Possible areas to evaluate during a supplier visit- Cost structure
Delivery performance
Quality systems and performance
Management capability

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Selection
evaluation (contd)
Possible areas to evaluate during a supplier
visit- Workforce capability
Supplier agility and flexibility
Suppliers supply chain management capabilities

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Selection
evaluation (contd)
visit (contd)
Process and technological capability

Environmental compliance
Financial capability and stability
Information systems capability

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Selection
evaluation (contd)
visit (contd)
Production scheduling and control systems

Longer-term relationship potential
Capacity
Other?

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Selection Process
7. Select supplier and reach agreement
Competitive Bid
Negotiations
Weighted factor approach

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Key Supplier Evaluation Criteria

Various Performance Categories Considered
During Supplier Evaluation and Selection
Criteria most evaluations rate suppliers:

Cost/price
Quality
Delivery
Is this effective criteria? Why or Why not?
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Other criteria that should be considered when

evaluating suppliers:
Management Capability
Employee Capabilities

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evaluating suppliers:
Suppliers Cost Structure
Total Quality Performance, Systems, and
Philosophy

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evaluating suppliers (contd):
Process and Technological Capability
Environmental Regulation Compliance
Financial Stability
Production Scheduling and Control Systems
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Financial Ratio Analysis

Supplier Financial Analysis
Do it when?
Why do it?
For new suppliers

For purchase requirements
involving significant dollars
For critical items
When pursuing longer-term
agreements
To manage business risk
To eliminate marginal suppliers
early in the evaluation process

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Sources of Supplier Financial
Information
Company-published annual reports
Company-supplied 10-K and 10-Q reports
Dun and Bradstreet reports
TRW credit reports
Trade and business journals
Supplier provided data
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Liquidity
Ratios
Leverage
Ratios
How capable is the supplier of

meeting short-term cash needs?
Current ratio
Quick ratio
Is the supplier over-leveraged and

capable of paying long-term
obligations?
Debt to assets
Time interest earned
Fixed charge coverage

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How effectively is the supplier managing

assets?
Inventory turnover
Average collection period
Return on net assets
How profitable is the supplier? What rate

of return is the supplier earning?
Gross and net profit margin
Return on equity
Return on investment
Activity Ratios
Profitability
Ratios
31


evaluating suppliers (contd):
E-commerce Capabilities
Suppliers Sourcing Strategies, Policies, and
Techniques
Long-Term Relationship Potential
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Selection
Straightforward:
Easy to calculate
Reliable: Measures are well
understood by evaluators
Comprehensive: Considers
important categories or
criteria
Effective Supplier
Assessment
Survey or Audit
Flexible: Can be used with

different purchase categories
Objective: Uses a quantitative
scoring system
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How to Develop a Tool for Supplier

Evaluations
STEP 1
Identify key supplier evaluation categories
STEP 2
Weight each evaluation category
STEP 3
STEP 4
Identify and weigh subcategories
DEVELOP
THE
SURVEY
Define scoring system for categories &subcategories

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How to Develop a Tool for Supplier

Evaluations
STEP 5
Evaluate supplier directly
STEP 6
Review results and make selection decision.
STEP 7
Review supplier performance continuously

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ASSESS/
SELECT
SUPPLIER
REVIEW
PERFORMANCE
35
Critical Supplier Selection Issues

Issues to consider:
Size Relationship
-Not big enough to make an impact
Use of International Suppliers

-JIT may be an issue

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Issues to consider:
Competitors as Suppliers
-Limits
information shared and relationships

formed.

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Issues to consider:
Countertrade Requirements
-Boeing purchases portion of requirements in
markets where it hopes to do business or where
it must satisfy countertrade requirements of
international government

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Reducing Time Required to Select

and Evaluate Suppliers
From 1980s to 2003, product development time
for the automobile industry has changed from
60 months to 24 months with the new goal
being 18 months!
Processes supporting this development time, such
as supplier selection, must also be shortened.
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Selection Conclusions
Supplier evaluation and selection is one of the
most important processes performed by firms
today
Companies should develop standard tools to
support the assessment
Successful selection can prevent later supplierrelated problems
Teams are often used to evaluate and select
suppliers
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Copyright 2005
40

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Purchasing and Supply Chain Management

Supplier Evaluation and

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

The Sourcing Process

What criteria and methods will we

What must we do to manage

What efforts should we put forth

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield Thomson Learning

6. Determine method of supplier evaluation and selection

7. Select supplier and reach agreement

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Supplier Evaluation and

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Supplier Evaluation and

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Supplier Evaluation and

Single source vs. multiple sources.

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Supplier Evaluation and

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Supplier Evaluation and Selection Process

Purchasing and Supply Chain Management, 3e Monczka/Trent/HandfieldThomson Learning

Supplier Evaluation and

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Supplier Evaluation and

Purchasers often perform a first cut or preliminary

Time and resources prohibit in-depth evaluation of all

Supplier Evaluation and

Financial risk analysis (discussed later)

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Supplier Evaluation and

Review supplier provided information:

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Supplier Evaluation and

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Supplier Evaluation and

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Supplier Evaluation and

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Supplier Evaluation and

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Supplier Evaluation and

Process and technological capability

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Supplier Evaluation and

Production scheduling and control systems

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Supplier Evaluation and

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Key Supplier Evaluation Criteria

Criteria most evaluations rate suppliers:

Key Supplier Evaluation Criteria

Other criteria that should be considered when

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Key Supplier Evaluation Criteria

Other criteria that should be considered when

Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield

Key Supplier Evaluation Criteria

Other criteria that should be considered when

Financial Ratio Analysis

For new suppliers

WCSM Supplier Evaluation & Selection Chapter 07

WCSM Supplier Evaluation & Selection Chapter 07