Supplier Selection Criteria- An Overview

A Major Project Report By IRSS-2012

Contents
1.1

INTRODUCTION ..................................................................................................................................2

1.2

SELECTION OF CRITERIA IN RESEARCH ...............................................................................................2

1.3

QUANTIFICATION OF CRITERIA FOR SUPPLIER SELECTION ..................................................................3

1.4

SYSTEMS AT MAJOR MANUFACTURERS .............................................................................................6

1.4.1

BHEL- Bharat Heavy Electricals Limited ...............................................................................6

1.4.2

ABB........................................................................................................................................ 11

1.4.3

VOLVO .................................................................................................................................. 12

1.4.4

ALCOA HOWMET ................................................................................................................ 14

1.4.5

General Dynamics Land Systems .......................................................................................... 17

1.4.6

Ordnance Factories Board (OFB)......................................................................................... 18

1.4.7

RAIL COACH FACTORY - INDIAN RAILWAYS .................................................................. 21

1.4.8

COAL INDIA LIMITED ........................................................................................................ 23

1.4.9

STEEL AUTHORITY OF INDIA LTD (SAIL) ........................................................................ 26

1.4.10

LOCKHEED MARTIN AERONAUTICS ........................................................................... 29

1.4.11

UNITED TECHNOLOGIES CORPORATION ................................................................. 30

1.4.12

SCHAEFFLER TECHNOLOGIES AG & CO. KG ........................................................... 31

1.4.13

BUREAU OF INDIAN STANDARDS, IS 12040:2001 ...................................................... 36

1.5

REFERENCES .................................................................................................................................... 40

1.1 Introduction
The dynamics of market has forced all manufacturers to resort to large scale outsourcing.
Traditional manufacturers have been forced to outsource major activities. Selecting a
supplier is a very complex and risky process since the factors responsible for selection are
difficult to be quantified. It is not possible to quantify all factors and predicting suppliers
behaviour is quite difficult. For a public procurement agency it is all the more difficult as
it has to maintain the image of a fair, transparent and just decision maker. The
manufacturers and companies have evolved several methods for supplier evaluation. Few
of the systems followed in major companies were analyzed for finding patterns of
similarity and also their closeness to models in research. Generally quality is considered
the most important criteria for selection of supplier. But quality is not the factor which is
decisive, in most cases it is the purchase price. Thus an integrated approach is must for
qualifying the suppliers. The paper has analyzed a few of the major manufacturers
systems to get a fair idea of prevalent practices in industry. The research done on this
topic of supplier selection has been compiled to find the gaps and similarities. The aim of
the work is to reconcile the practice with research.

1.2 Selection of criteria in research

Bureau of Indian Standards has published a standard IS: 12040-2001 which provides the
broad guidelines for development of Vendor Rating System. The standard stipulates
Quality, Price, Delivery, Service and System as five key factors to work out rating
system.
Factors for supplier evaluation which have evolved over the years have been compiled as
listed in Table I.

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Table I Factors/criteria for supplier selection

FACTOR/CRITERION

FACTOR/CRITERION

Quality systems in operation at the

suppliers place/quality philosophy

Production facilities and capacity

Communication openness

Financial capability of the supplier

Technological
capability

capability/R&D

Reputation for integrity/believability

and honesty/Vendors image

Labour problems at the suppliers

place
Business volume/amount of past
business
Price

Existence
of
IT
standards/communication system

Quality/Reliability of the product

Performance
history

Ability to meet delivery promise/

Delivery lead time/ Consistent
Delivery

awards/performance

Bidding procedural compliance

Profitability of suppliers

Management sensitivity to buyers

requirements/ Attitude

Breadth of product line/ability of a

supplier to supply a number of items

After Sales Support/

support available

Suppliers
location

Positive
complaints

proximity/geographic

attitudes

Technical
towards

Management and organization

Contribution to productivity
Conflict resolution

1.3 Quantification of criteria for supplier selection

The important point in the selection of criteria is that they it must be possible to quantify
them and the data also be available. Each such criterion, therefore has been analyzed
(Table II) for its feasibility to be included in the list of selection criteria.

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Table II Feasibility of selection criteria

CRITERION
Quality systems in
operation at the
suppliers place/quality
philosophy

Financial capability of
the supplier

Technological
capability/R&D
capability

Reputation for
integrity/believability
and honesty/Vendors
image

FEASIBILITY
For existing suppliers, only certificate can be asked,
cannot be quantified. This will automatically reflect in the
quality of supply. But for assessing capability of
potential supplier, this is an important basis.
For new bidders this can be factor, but no discrimination
can be done on this basis and it is difficult to assign
ranking to a prospective or current supplier. This can
also have the effect of restricting competition and allow
only established players to bid/supply. But even with this
drawback, it is a very important factor while determining
potential suppliers.
For regular well established items, this may not be a
important criterion. Moreover, there is no scale possible
for this subjective opinion. This can have a similar effect
as financial capability criterion. When new suppliers are
invited, this again is very important. Independent expert
opinion may be required for assigning ranking/marks for
this criterion.
This is a very important. However, to assign ranking is a
very difficult problem. And in the present condition, the
onus of ranking the integrity lies with the purchasing
organization. This therefore, cannot form the part of
selection criteria.

This is an important for increasing the efficiency of the

supplier; however, the purchasing organization should
be more concerned about delivery and quality than the
internal
arrangements
of
the
supplier.
The
Existence of IT
professionalism of the supplier is best reflected in the
standards/communicati
ensuing supplies. This criterion also cannot be
on system
quantified to a satisfactory level with reduced
subjectivity. For potential suppliers some credit has to
be given for their systems.
Performance
awards/performance
history

This is an important criterion, but is covered in quality of

product and delivery history. It can be a basis for a
potential supplier. Credit can be given for market
reputation and delivery performance for other supplies.
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Without this in public procurement no supplier can

qualify so it is a redundant criterion in case of public
procurement.
It may not be possible to assess this factor completely;
moreover the focus of organization is on quality and
timely delivery. If these are achieved this criteria
becomes redundant. If the supplier cannot breakeven
Profitability of suppliers
then it may no longer supply and which is surely a
matter for concern. But in public procurement
quantifying is must which only can lead to objectivity,
but for this factor it will not be possible.
This item is not quantifiable. Since the aim is to reduce
Breadth of product
subjectivity it will not qualify to be in the criteria list.
line/ability of a supplier Moreover, when the judgement has to be on several
to supply a number of
items this will play an important role but as long as the
items
supplier is being evaluated for a single item, it does not
matter.
This is an important factor in reducing cost of
Suppliers
transportation and ease in case of crisis. But in a
proximity/geographic
globalization era, this may not be right way to assess
location
suppliers.
Management and
Cannot be quantified
organization
Contribution to
This will automatically reflect in price of product and
productivity
cannot be quantified.
This also cannot be quantified and any opinion will be
Conflict resolution
subject of dispute.
This is an important criterion for first time registration of
Production facilities
suppliers, once the track record of supply is there, it may
and capacity
not be useful
Communication
Cannot be quantified
openness
Labour problems at
Similarly, this criterion also cannot be quantified.
the suppliers place
Business
This criterion is important for assessment of new
volume/amount of past
suppliers.
business
Price
This is a very important criterion and can be quantified
Quality/Reliability of
This is a very important factor and methods to quantify
the product
this are available.
Ability to meet delivery This can be quantified and one of the most important
promise/ Delivery lead criterion for a supplier to qualify.
time/ Consistent
Delivery
Bidding procedural
compliance

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Management
sensitivity to buyers
requirements/ Attitude
After Sales Support/
Technical support
available
Positive attitudes
towards complaints

Difficult to quantify but is covered in warranty obligations

etc.
This is an important factor and can be quantified on
basis of history of problem resolution for old suppliers
and industry feedback for new suppliers.
This can be factored in a common criterion service
which includes a few of the above mentioned criteria.

Based on past research, and evaluation of criteria applicable and manageable in present
context, the four salient criteria which may be identified as most relevant in supplier
evaluation and selection are,
a. Quality
b. Delivery
c . Price
d. Service
The principle to be adopted is You cant manage what you dont measure.

1.4 Systems at Major Manufacturers

Few important and famous companies whose supplier evaluation and rating system could
be found have been detailed to find out the which are the most relevant and practical
criteria for supplier evaluation and selection.

1.4.1 BHEL- Bharat Heavy Electricals Limited

Bharat Heavy Electricals Limited (BHEL) is a Public Sector Enterprise manufacturing
integrated power plant equipments It is based in New Delhi, India. BHEL was established
in 1964, ushering in the indigenous Heavy Electrical Equipment industry in India. It is
engaged in the design, engineering, manufacture, construction, testing, commissioning
and servicing of a wide range of products and services for the core sectors of the
economy, viz. Power, Transmission, Industry, Transportation, Renewable Energy, Oil &
Gas and Defence. It has 15 manufacturing divisions, two repair units, four regional
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offices, eight service centres, eight overseas offices and 15 regional centres and currently
operates at more than 150 project sites across India and abroad. Most of its manufacturing
units and other entities have been accredited to Quality Management Systems (ISO
9001:2008), Environmental Management Systems (ISO 14001:2004) and Occupational
Health & Safety Management Systems (OHSAS 18001:2007).
It is the 7th largest power equipment manufacturer in the world. It has a workforce of
about 50,000.
BHEL has a scientific method of Supplier Performance monitoring and rating system.
Supplier Performance Rating (SPR):
Supplier performance is assessed with respect to the following main factors and it is
calculated for each consignment/ purchase order:
Rating

Weightage

Quality

60

Delivery

30

Service

10

Total

100

Quality Rating (QR) is given 60% weightage.

Quality rating is based on acceptable quantity of material offered for inspection or
delivered by supplier
=

(1 + 0.75 2 + 0 3) 60

where,
Q

=Quantity inspected

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Q1

=Quantity accepted

Q2

=Quantity accepted with concession / deviation/ rectification

Q3

=Quantity rejected

The pre-inspection report (at suppliers works) includes the quantity accepted after
rework in Q2 category.
Delivery Rating (DR) is given 30% weightage
Supplier is rated on delivery parameters as follows.
Adherence to P.O delivery date

30

One mark is deducted for each days delay.

Service Rating (SR) is given 10% weightage
Service Rating is given on the basis of the following criteria.
SR
Cooperation and readiness to help in emergency, submission of 5
Support documents such as GA Drawings, TC,GC etc. as
applicable, submission of final technical documents, O&M
Manuals and as built drawings complete and in time.
Promptness in reply/attending quality problems at site/shop

Thus, the Supplier Performance Rating (SPR) = QR+DR+SR

The period for calculation of SPR is previous year plus elapsed period of current year or
period for last three executed purchase orders whichever is more.
There is a system of FEEDBACK FROM SHOP FLOOR at BHEL. If nonconformance/defects in components are noted while processing at shop floor overall
Page 8 of 42

performance rating will be multiplied by demerit factor (DF). The demerit factor is
calculated in the following manner:
DF
Components used after rectification

0.9

Components replaced by supplier

0.8

Supplier does not rectify/ replace/respond

0.0

Supplier Rating
Now based on total score the supplier performance is rated.

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Total Score

Rating

Action

98-100

A1

Supplier can be considered as Preferred

Supplier for self certification and long term
contract.

90 to less than 98

Supplier can be considered for self certification

100% Quality Rating consistently.
Supplier can be considered for reduced witness
points during inspection. Supplier can be
considered for long-term contracts.

75 to less than 90

Supplier to be informed about deficiency for

immediate corrective and preventive action.
Supplier can be considered for long-term
contracts.

60 to less than 75

Supplier to be informed about deficiency for

immediate corrective and preventive action.
Response to be obtained from supplier.
Necessary technical help may be provided to the
supplier.
Inspection stages may be reviewed for tightened
inspection.
Enquiry to be sent only after approval at higher
level.

Less than 60

Supplier to be put under hold and informed.

In order to provide motivation to A1 and A category rating supplier, BHEL has suggested
the following steps,
a) May be considered for self-certification
b) May be preferred for long term contracts
c) In tenders, where quantity is to be split amongst suppliers, 10% quantity may
be reserved for A1 category supplier in addition to normal distribution of
remaining 90% quantity as per normal practice.
d) Appreciation/commendation in structured get-together/suppliers meets.
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The feed back to the supplier is given annually in a prescribed format. The system at
BHEL is very structured, and has transparency inbuilt. It is done so as it is a Public
Sector Unit subjected to various statutory audits, investigations etc.

1.4.2 ABB
ABB is a multinational corporation headquartered in Zurich, Switzerland, operating in
robotics and mainly in the power and automation technology areas. It ranked 143rd in
Forbes Ranking (2010). ABB is one of the largest engineering companies as well as one
of the largest conglomerates in the world. ABB has operations in around 100 countries,
with approximately 145,000 employees in June 2012, and reported global revenue of $40
billion for 2011. The supplier evaluation at ABB has both formal and informal methods.
Purchase items are classified according to Kraljics model. They have a fairly simple
supplier qualification and assessment system.
Supplier Qualification Status
Suppliers can determine their potential qualification status by looking at the Summary
Sheet of the Supplier Qualification Questionnaire. According to the qualification level
achieved they can see below the actions that need to be taken.
Rejected: Their score is under 20%: Their Company is too far from ABB requirements.
If and when they have implemented corrective actions which permit them to reach a score
of more than 20%, they can get in touch with ABB again.
Under Development: Their score is between 20% and 50%: they can be part of the ABB
Supplier List, provided their Quality, Costs and Delivery (QCD) performance is best in
class and they have a plan to reach 50% within one year.
Qualified: Their score is above 50%: they can be part of the ABB Supplier List, provided
their Quality, Costs and Delivery (QCD) performance is best in class. The decision to

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include a supplier on the ABB supplier list will be based on the combination of the score
and the action plan to address weak areas.
Supplier Scorecard
Suppliers overall performance is measured on quality, on-time delivery and cooperation.
The relative importance depends on division to division. In general most important is ontime delivery in which supplier receives 40-60% of the points, quality as second most
important with 20-40% points and cooperation is last. The suppliers objective is:
Measurement

Suppliers Objective

On-Time Delivery

100% on-time

As-Received Quality

Zero defects

1.4.3 VOLVO
The Volvo Group is one of the worlds leading manufacturers of trucks, buses,
construction equipment and marine and industrial engines. The Group also provides
complete solutions for financing and service. The Volvo Group, which employs about
115,000 people, has production facilities in 19 countries and sells its products in more
than 190 markets. In 2012 the Volvo Groups sales amounted to about USD 45 billion.
The Volvo Group is a publicly-held company headquartered in Gteborg, Sweden.
In their Supplier Quality Assurance Manual Edition 06-2010, Volvo has stated their goal
as PREMIUM SUPPLIERS FOR PREMIUM BRAND, our effort is directed towards
selecting the best suppliers based on capability and performance. Once selected, our
goal is to work with these suppliers to develop a strong, long-term, structured
relationship with them.
The objectives are well defined for the suppliers. The targets are mentioned in the table
below:
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Measurement

GENERAL TARGET

PPM- Rejected Part Per Million

(Safety critical characteristics excluded)

Explanation: The PPM value is defined as the

number of rejected parts divided by the total
quantity delivered multiplied by 1000000.

10 PPM

QPM- Quality Performance Measurement

Calculated at Supplier manufacturing Parma
level

30

Explanation: Compound quality grading from 0

point (Outstanding) to 100 (worst case)
Fault Frequency

0 % for safety features

Explanation: The number of Warranty Claims

per vehicle within the first 12 months of use
(after zero Km/miles)

Unless otherwise specified in the

technical specifications, fault frequency
targets shall be:

Below 0.0005% for fasteners ,

brackets and similar parts

Below 0.005% for other

components

Service campaign
0
Explanation: The number of vehicle recalled
after zero KM/miles due to a reliability/warranty
problem
Safety recall

Explanation; The number of trucks recalled

after zero km/miles due to a safety problem

This is a MUST (non-negotiable)

Delivery precision

98% as minimum requirement.

Explanation: A percentage: The quantity of

parts delivered on time divided by the total
delivered.

100% For delivery in sequence.

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For managing performance, the following performance parameters are monitored,

Quality Performance Measurement Level, Field Failure, Delivery Precision, Rejected
Parts Per Million Level, Breakdown Failure, Unplanned Stop, Production Feedback,
Warranty Claims and Safety Problem.
The scorecard for suppliers is used for monitoring the quality trends and acts as alert for
low performing supplier. A low performing supplier (LPS) is identified and quality
improvement activities are initiated. There is a unique system of exit criteria of a four
stage performance improvement elevation process.

1.4.4 ALCOA HOWMET

Headquartered in Cleveland, Ohio, Alcoa Howmet is a world leader in the investment
casting of superalloys, aluminum and titanium primarily for jet aircraft engines and
airframes as well as Industrial Gas Turbine (IGT) engine components. Alcoa Howmet
also provides hot isostatic pressing, precision machining and protective coating services.
An important supplier of superalloy metals, titanium ingots, ceramic products and
advanced tooling, Alcoa Howmet conducts extensive research to aid development of its
material, product and process technologies.
Alcoa Howmet and affiliates operate 27 manufacturing facilities in the United States,
Canada, France, the United Kingdom and Japan.
Howmet uses a computer database to evaluate suppliers performance in the areas of:

Quality

Delivery

Service

Total Cost

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A combination of data from each category determines total overall performance. The
Supplier Price Index (SPI) factors rework and other quality and delivery issues to
calculate the real cost of a purchase to Howmet. The information is used for negotiating
contracts and awarding new business.
The company has the following Performance Categories for suppliers
Preferred
Suppliers that sustain composite performance levels of 94% to 100% will receive
preference for new and follow-on business.
Certified
Suppliers that sustain composite performance levels of 90% to 93.9% will be awarded
business based on the suppliers ability to provide products, materials or services in
accordance with the Supplier Certification Control plan.
Acceptable
Suppliers that sustain composite performance levels of 75% to 89.9% will be awarded
business before those in lesser performance categories.
Marginal
Suppliers that sustain composite performance levels of 65% to 74.9% will be awarded
business that has not already gone to preferred and acceptable suppliers.
Measurement Criteria
Quality = 55% of Performance Measurement
Formula
(Receipt Rejected / Total Monthly Receipts) (Reason Code weight + Point of Location
weight / Total Monthly Receipts) = Point Loss
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The result is subtracted from the available suppliers quality percentage points.
Quality ratings for high volume components are different, for a specific month the
following formula is used, based on parts per million (PPM):
PPM Criteria

Quality
Performance
Measurement Score

000-800

100 Points

800-1600

95 Points

1600-1800

90 Points

1800-2400

85 Points

2400 or greater

0 Points

Delivery = 35% of Performance Measurement

Suppliers are penalized for deviations in delivery dates and quantities. Within 6-day
delivery window, 100 points are credited and late beyond 5 days as 0.
Service = 10% of Performance Measurement
The service rating reflects a few factors: like how well the suppliers carry out the
purchase order; their support systems and ethical conduct.
Rating

Service Performance Level

Good

Competent, meets expectations

90.0 100.0

Acceptable

Tolerable but below expectations

80.0 89.9

Unacceptable

Results are not adequate

70.0 79.9

Rating

Ethics Performance Level

Acceptable

Has an Ethics program

Unacceptable

Does not have an Ethics program

Page 16 of 42

Credit (% Points)

Credit (% Points)
100.0
0.0

1.4.5 General Dynamics Land Systems

General Dynamics is a market leader in business aviation; combat vehicles, weapons
systems and munitions; shipbuilding and marine systems; and mission-critical
information systems and technology. It has integrated more than 60 businesses, including
six in 2011. The gross revenue was approximately $32 billion in 2011 and the workforce
is about 95,000 employees. The company is organized into four business groups:
Aerospace, Combat Systems, Information Systems and Technology and Marine Systems.
General Dynamic Land Systems is one of its divisions. It rates suppliers in relation to
various performance factors. The company strives to identify problem areas and work
with the supply base to improve their performance ratings with the various General
Dynamics Land Systems locations. The Monthly Supplier Performance Report includes
the following performance ratings.
Metric

Delivery

Definition

Goal

100% of score based on:

Weight
Factor

Performance Ranges

Red

Yellow

Green

100%

40%

<85%

85%95%

>95%

100%

30%

98%

98%99.9%

100%

100%

10%

<=25%

75%

100%

On-Time Delivery of Shipments to the

Promise Date /Need by Date
Quality

100% of score based on;

Quality Acceptance Percentage of parts
Received

Financial
stability

100% of score based on:

Current Dun and Bradstreet (D&B)
Supplier Evaluation of Risk (SER) Score
SER of 1, 2 or 3 = 100%
SER of 4, 5,or 6 = 75%
SER of 7 or 8 = 25%
SER of 9 = 0%

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Compliance

50% of score based on:

100%

20%

0%

50%

100%

100%

<71.5%

71.593.5%

>93.5%

Supplier adherence to iSupplier Activity

Requirements
50% of Score based on:
Supplier
adherence
Requirements

Overall

to

Barcode

Combination of Delivery, Quality

Financial Stability, and Compliance

, 100%

The key attributes of performance are

1. Delivery
2. Cost
3. Quality
They have a structured supplier development process.

1.4.6 Ordnance Factories Board (OFB)

Ordnance Factories Board (OFB), consisting of the Indian Ordnance Factories is an
industrial setup functioning under the Department of Defence Production, Ministry of
Defence, Government of India. It is engaged in production, testing, logistics, research,
development and marketing of a comprehensive product range in the areas of land, air
and sea systems. The Headquarter is at Kolkata, it consists of forty-one Factories, nine
Training Institutes, three Regional Marketing Centres and four Regional Controllerates of
Safety. OFB is the world's largest government operated production organization. It has a
total workforce of about 164,000. Its total sales were at $2.6 billion.
OFB has issued a detailed procedure for vendor registration and monitoring called
VENDOR REGISTRATION SOP Ver 2.2. The suppliers are short-listed by a Capacity
Verification Team. The performance of successful established suppliers is monitored
regularly against every completed order based on Vendor Rating System. Following
parameters are used for Vendor Rating System:
1. Quality Rating
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2. Delivery Rating
3. Price Rating
4. Service Rating.
There are formulae suggested for the different parameters.
QUALITY RATING
= {(1 + (0.7 2) + (0.3 3) + (0 4)}/
where
Q1 = Quantity Accepted Conforming to Specification,
Q2 = Quantity accepted with deviation
Q3 = Quantity accepted after rectification
Q4 = Quantity rejected and
Q = Total quantity offered for inspection (Q1 + Q2 + Q3 + Q4 )
DELIVERY RATING
= ( / ) + { /} { /} 0.5
where
Qa = Quantity Supplied on Time,
Qc = Quantity Ordered,
Qb = Quantity supplied late beyond delivery period
Tc = Delivery period as per supply order in days,
Ta = Total Time taken to complete the supplies, including late deliveries in
number of days.
PRICE RATING

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 = /
where,
PL = Lowest price quoted by any Supplier against that tender
PQ = Price quoted by the Supplier.
SERVICE RATING
The Index/Score for performance with respect to service is determined jointly by the
production/user and the materials management department. They use the service rating
break-up as per IS 12040:2001,
PARAMETER

MAXIMUM SCORE

Co-cooperativeness and readiness to help in emergencies

30

Readiness to replace rejected material

20

Providing support documents in time

10

Promptness in reply

10

Co-operation in delivering and implementing measures or

30

avoiding recurrence of defects/complaints

TOTAL

100

COMPOSITE INDEX FOR PERFORMANCE OR OVERALL RATING.

= + + +
where,
A, B, C, D are the weightage for parameters of quality, delivery, price and service
respectively. The values of which are given in succeeding paragraph.
In case an established source fails to secure any order in the last three years, it shall
continue to be an established supplier subject to its renewal of registration.
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Following weightage factor have been suggested for different parameters,

Weightage for Quality

60%

Weightage for Delivery

25%

Weightage for Price

10%

Weightage for Service

05%

The overall rating of selected established suppliers is worked out using the above
formulae against the orders placed on the firm. The firms getting average overall rating
of less than 70% against orders completed in last three years shall not be considered for
issue of LTE thereafter for a period of one year. After the reinstatement, their rating will
be monitored afresh as above. Second such occasion of rating falling below 70% will
permanently disqualify a firm from the status of established suppliers.
OFB has a system for INSPECTION CATEGORIZATION of firms, Self-Certification
category inspection status is be awarded to Firms securing more than 95% vendor rating
apart from other requirements mentioned in SOP for input material Inspection. This
categorization is valid for a period of one year. After the expiry of validity period it is
reviewed again.
For Inspection at Firm premises category inspection status, Firm should secure more
than 85% marks in vendor rating apart from other requirements mentioned in SOP for
input material Inspection. Inspection on receipt category inspection shall be applied to
the firms securing 70% to 85% marks in vendor rating apart from other requirements
mentioned in SOP for input material Inspection.

1.4.7 RAIL COACH FACTORY - INDIAN RAILWAYS

Established in 1986, Rail Coach Factory (RCF) is a coach manufacturing unit of Indian
Railways. It has manufactured around 16000 passenger coaches of 51 different types
including Self Propelled passenger vehicles which constitute over 35% of the total
population of coaches on Indian Railways. It is located in near Jalandhar, Punjab, India.
Page 21 of 42

The overall SUPPLIER RATING (Sr) has been defined as

= 0.6 + 0.4
Where Sr = Suppliers rating for a Purchase Order.
Dr = Delivery rating and Qr = Quality rating.
Delivery rating (Dr) is computed for each Purchase Order as under:

+ (1 )
=

where,

Q = Qty ordered.
T = Promised delivery time
Qt = Qty supplied in time
Qd = Qty delayed
Td = time delay for quantity delayed.
K = Constant with value as 2.

Quality rating (Qr) is computed for each PO as under:

= /
where, Qs= Total quantity supplied/ offered for inspection = (Qa+Qrr+Qcr)
Qa = Quantity accepted
Qrr = Quantity rejected during RITES(Third Party) inspection
Qcr = Quantity rejected during consignee inspection

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Some other conditions have also been specified by RCF,

1. If quantity accepted is < 50% of the PO quantity and original Delivery Period has
expired, then Quality Rating (Qr) is taken as zero for that PO.
2. When a lot is accepted with improvement advice to the vendor, Qr for that lot is
considered as 75% only.
3. When a rejected lot is used in distress, the use is condoned by the competent
authority, but such a lot is assigned zero quality rating (Qr).
4. En-route detachment of a coach from a train due to failure of a component/
assembly is a serious failure. If it happens within the warranty period, a severe
penalty is imposed by way of reduction in quality rating of the vendor for that
group of items. The overall supplier rating (Sr) is reduced by 15% for every
instance reported during the period of review.
5. In case of delays in executing warranty claims, the Quality rating is reduced with
the following scheme.
Days taken to attend the
failure

11-20

21-30

31-40

41-50

51-60

>60

Reduction in Qr

10

20

40

60

100

6. For two consecutive rejections of the same item at consignees end, a vendor is
delisted for that item/group of items. However in case there are three or less
approved vendors left (Part-I and Part-II combined), for that item/ group of items,
he can be considered for retention as a Part-II vendor only.

Page 23 of 42

1.4.13 BUREAU OF INDIAN STANDARDS, IS 12040:2001

The Bureau of Indian Standards, New Delhi has issued a comprehensive standard IS
12040:2001 on Guidelines for development of Supplier Rating System. The purpose
was to give guidelines to organizations in India on methodology for supplier rating.
The overall supplier rating system comprises of
1. Supplier rating
2. Supplier grading
3. Supplier preferences
4. Rewards system
As per the standards, the suppliers can be rated based on any or all of the following
factors:
a) Quality
b) Delivery
c) Price
d) Service
e) System
For Quality Rating, a standard formula has been devised; it also defines Quality rating for
variable parameter of the product. It has also given table of the calculated values of
tolerance for various clauses.
For Price Rating ( ), the formula is,
=

100

Where,
PL = lowest of the price quoted by suppliers
PU = highest price quoted

Page 36 of 42

P = price quoted by the supplier being rated

The standard also defines rating using life cycle costs.
The delivery rating ( ) for a consignment depends upon the quantity supplied within
delivery time and some other factors, the standard has defined.
=

1 + (1 1 )
1

Where,
Q

= quantity agreed to be supplied within the stipulated delivery time

Q1

= actual quantity supplied

= agreed delivery time for full consignment

T1

= actual delivery time for full consignment

The Service rating has been recommended based on following parameters,

Cooperativeness and readiness in help in emergencies

S1

Readiness to replace rejected material

S2

Providing support documents in time

S3

Cooperation in delivering and implementing measures or

avoiding recurrence of defects/complaints

S4

The System Rating is based on several criteria which are judgement based, and the
standard mentions the ISO 9004 to be referred for guidance.
The composite supplier rating is obtained by giving weightages for the individual ratings.
Rating

Weightage

Quality, QR

W1

Page 37 of 42

Delivery, DR

W2

Price, PR

W3

Service, SR

W4

System, SY

W5

Total

100

1 + 2 + 3 + 4 + 5
100

The standard has mentioned that weights of the factors are to be decided by the
management based on experience and opinion. It may be based on criticality of the
product with respect to quality and delivery. It has recommended that W5 may be kept 30.
It has also given a table indicating weights of individual factors based on criticality.
The standard has illustrated a classification scheme.
Rating

Class

Remarks

Above 90

Efforts must be made for long term relationship.

75-90

If price of A is higher then, limited order on B must be given

50-75

This class must be provided help to upgrade.

Upto 50

Not to be considered.

The standard also emphasizes the role of reward systems. It has also published annexure
as proforma for supplier capability report and appraisal report.

Page 38 of 42

The study of various systems at national and international companies brings out the fact
that criteria for supplier evaluation are more or less common. Some companies have
exhaustive and very scientific methods to assess the performance. They have formal
feedback systems also. The four factors namely, quality, delivery, price and service are
the criteria for assessing supplier performance by all organizations.

Page 39 of 42

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Dec 2013
Vadodara

Page 42 of 42