Value of Process Capability Information and Supplier Selection
by
Corinne Frasson
B.S. Industrial Engineering
Ecole Polytechnique de Montr6al, 1998
SUBMITTED TO THE DEPARTMENT OF MECHANICAL ENGINEERING IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF SCIENCE
AT THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
JUNE 2000
©2000 Massachusetts Institute of Technology
All rights reserved
Signature of Author
Department of Mechanical Engineering
May 5, 2000
Certified by
Anna C. Thornton
Assistant Professor of Mechanical Engineering
Thesis Supervisor
Accepted by
Ain A. Sonin,
Chairman, Committee of the Graduate Committee
MA SSA CHUSETT S INSTITUTE
OF TECHNOLOGY
"W-f
SEP 2 0 2000
LIBRARIES
Value of Process Capability Information and
Supplier Selection
by
Corinne Frasson
Submitted to the Department of Mechanical Engineering
on May 5, 2000 in Partial Fulfillment of the
Requirements for the Degree of Master of Science in
Mechanical Engineering
ABSTRACT
Supplier selection becomes a concern as companies focus their business on their core
competencies and give more responsibilities to their suppliers. Those companies have to make
supplier selection decision under information uncertainty. Therefore, companies need tools to
make supplier selection under uncertainty as well as a better supplier selection process. This
thesis's goal was to provide help in both of those areas.
This thesis uses game theory, Bayesian theory and industry case studies to address supplier
selection issues. First, is showed why customer can get "locked" into relationships where, due to
the existing supplier selection process, suppliers are not cooperative. Second, a mathematical
framework is provided to help decision-makers in their supplier selection, under process
capability information uncertainty. This mathematical framework estimates the quality cost of
potential suppliers, as well as the reliability of the suppliers' manufacturing processes and
suppliers' process capability information: it gives an updated product expected cost to the
customer. Third, the current supplier selection process used by two companies is described and
the product characteristics that influence the supplier selection, the different types of relationship
and the key criteria for supplier selection are highlighted. The third part shows the links between
those items and compiles some supplier selection good practices and points out areas of
improvement. A list of tradeoffs made during the selection processes is described.
Thesis supervisor:
Anna C. Thornton
Assistant Professor, Mechanical Engineering
3
4
ACKNOWLEDGEMENT
For me, this research has been a rich and rewarding experience. I owe a debt of gratitude to all
those who have given me guidance and support.
First of all, I would like to thank my research and thesis advisor Anna Thornton, for her constant
encouragement, motivation, patience and support. I will never forget her kindness and
consideration for her students.
Thanks also to the other professors who inspired me through these past years: Daniel Leblanc,
Anne Leluel, Gordon F. Kaufman.
I would like to acknowledge the National Science Foundation and the Center for Innovation in
Product Development for funding my research.
I would also like to recognize Walt Sargent from industry for being my manager during my
summer internship. This summer internship was a rich and unforgettable experience. Everyone
else at the company had also enriched my experience in some way.
Special thanks to the individuals who worked with me on my case studies: Brian, Ron, Charles,
Kent, Dominique, Ken, Katherine, Rob, Joseph, Tom and Dale. Special thanks to Dominique and
Charles for their system view and insights from which I learned a lot.
I would also like to thank my fellow members at the office: Yu-Feng Wei, Melissa Tata, Jamie
Hanson, and Daniel Kern. Their friendship, support and advice helped me quite a bit during these
past two years.
Thanks are also due to all my friends who help me having such a great graduate student life:
Franck Calzada, Eleonore Couve, Qi Dong, Waleed Farahat, Maria Kamvysselis, Loo Kwang,
Sebastien Katch, Elizabeth Sbaglia, Richard Sefler, Thibaud Allix and other friends at Boston,
Montreal and Rochester. Special thanks to Jamie, Maria and Shelley for proofreading part of this
thesis.
Finally, I would like to thank my parents and sister for their love, support, and encouragement
that they have provided through these years. I would not be in such fortunate place without them.
5
6
TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION.............................................................................................................15
1.1
15
PROBLEM STATEMENT ...................................................................................................................
1.2 T HESIS O BJECTIVES ...........................................................................................
.........
---------..............
17
1.2.1 Importance of the Supplier Selection Process.........................................................................
17
1.2.2 Mathematical Frameworkfor Supplier Selection ...................................................................
17
1.2.3 Supplier Selection Processesin Industry .................................................................................
18
1.3
....................
R ESEARCH A PPROACH ..................................................................................................
18
1.3.1 Importanceof the Supplier Selection Process.........................................................................
18
1.3.2 Mathematical Frameworkfor Supplier Selection ...................................................................
18
1.3.3 Supplier Selection Processesin Industry .................................................................................
19
1.4
THESIS
OUTLINE
..
..................................................................................................
-----.................
CHAPTER 2: IMPORTANCE OF THE SUPPLIER SELECTION PROCESS..............................
......
2.1 INTRODUCTION ................................................................................................
--.. --................
19
21
21
2.2 OBSERVED BEHAVIORS IN EACH PRODUCTION SYSTEM ..................................................................
22
2.2.1 Observed Behaviors in a Mass ProductionSystems ...............................................................
23
2.2.2 Observed Behaviors in a Lean ProductionSystem.................................................................
25
2.2.3 Summa ry .....................................................................................................................................
25
2.3 INTRODUCTION TO GAME THEORY ...................................................................................................
26
2.4 BEHAVIOR EXPLANATION USING GAME THEORY ...........................................................................
28
2.4.1 Behaviors in Mass Production Systems ...................................................................................
28
2.4.2 Behaviors in the Lean ProductionSystem ..............................................................................
35
............................
41
CHAPTER 3: VALUE AND IMPACT OF PROCESS CAPACITY INFORMATION ..................
43
2.5 C ONCLUSION ................................................................................................
.....
.
3.1 INTRO D UCTIO N ................................................................................................
43.....................
- 43
44
3.2 ELEMENTS OF THE STUDY ........................................................................................
3.2.1 Elements of the Expected Product Cost ...................................................................................
44
3.2.2 Knowledge about PartLength and Distribution......................................................................
46
3.2.3 Quality loss for a product distribution....................................................................................
48
3.3 TOOL USED FOR THE STUDY: THE BAYSIAN UPDATE PROCESS .......................................................
49
3.4 BAYESIAN UPDATING PROCESS: STEPS AND EXAMPLE....................................................................
52
3.4.1 Scenario of the Example ..........................................................................................
7
............ 52
3.4.2 JointPriorDistributionFunctionof p and
2 ......................................................................
55
3.4.3 Example: JointPriorDistributionFunction.............................................................................
56
3.4.4 DistributionFunctionof the Sample ........................................................................................
57
3.4.5 Example: Sample DistributionFunction.................................................................................
57
3.4.6 Joint PosteriorDistributionFunction......................................................................................
58
3.4.7 Example: Joint PosteriorDistributionFunction .....................................................................
59
3.4.8 PosteriorDistributionFunctionof T ....................................................................................
60
3.4.9 Example: PosteriorDistributionFunction..............................................................................
60
3.4.10 PosteriorDistributionFunction of
....................................................................................
61
3.4.11 Example: PosteriorDistributionFunction ............................................................................
62
3.4.12 UpdatedDistribution a ........................................................................................................
62
3.4.13 IllustrationUsing the Example: Updated Distribution a of the Suppliers ..........................
63
3.5 IMPACT
2
OF THE UPDATED PROCESS CAPABILITY INFORMATION ON THE EXPECTED PRODUCT COST..
66
3.5.1 One-PartSensitive Product.....................................................................................................
66
3.5.2 Multiple-partSensitive Product...............................................................................................
66
3.5.3 Example: Impact of the Updated Process CapabilityInformation on the Expected ProductCost
.............................................................................................................................................................
67
3.6 CON CLU SIO N .......................................................................................................................................
70
CHAPTER 4: SUPPLIER SELECTION IN INDUSTRY
...............................
71
4.1 INTRO D UCTIO N ...................................................................................................................................
71
4.2 RESEARCH METHOD ...........................................................................................................................
71
4.3 DESCRIPTION OF THE BROADER SYSTEM ............................................................................................
72
4.4 DESCRIPTION OF THE STUDIED SYSTEM ............................................................................................
75
4.5 RESU LTS .............................................................................................................................................
77
4.6 LITERATURE REVIEW..........................................................................................................................
77
CHAPTER 5: CASE STUDY - COMPANY A
.......................................
79
5.1 TERMS EXPLANATIONS .......................................................................................................................
79
5.1.1 Types of Relationship..................................................................................................................
80
5.1.2 Partand ProductCharacteristics............................................................................................
83
5.1.3 Set of Key Criteriafor Supplier Selection...............................................................................
87
5.2
LINKS BETWEEN THE PRODUCT, RELATIONSHIP AND CRITERIA CHARACTERISTICS ...........................
5.2.1 Links Between Productand Relationship Characteristics........................................................
96
96
5.2.2 Links Between Types of Relationship and Key Criteria in Supplier Selection..........................
102
5.2.3 Links Between Product Characteristicsand Key Criteriain Supplier Selection......................
105
5.3 TRADEOFFS MADE IN INDUSTRY .......................................................................................................
8
109
5.3.1 M ake or Buy Decision...............................................................................................................
109
5.3.2 ProductDesign Tradeoffs .........................................................................................................
110
5.3.3 System Integration-Vs- Supplier Availability / Existence........................................................
110
5.3.4 Vertical Integration and Horizontal Integration.......................................................................
110
5.3.5 Relative Weighting of Quality and Cost....................................................................................
I1
5.3.6 Internal Suppliers and External Suppliers................................................................................
I1
5.3.7 Cost and Reliability...................................................................................................................
I11
5.3.8 Ease of Working with a Supplier and Supplier's Cost ..............................................................
112
5.3.9 Saving in Design -Vs. - Saving in Manufacturing....................................................................
113
5.4 GOOD PRACTICES OF THE SUPPLIER SELECTION PROCESS IN INDUSTRY ...........................................
114
5.4.1 Goal Congruence and M arket Based Transfer Price................................................................
115
5.4.2 Having Early Conflicts..............................................................................................................
116
5.4.3 Co-location of the Supplier.......................................................................................................
116
5.5 AREAS OF IMPROVEMENT OF CURRENT SUPPLIER SELECTION PROCESS ...........................................
116
1...
17
5.5.1 Lega l Bindings ......................................................................................................................
5.5.2 Option in Contracts...................................................................................................................
117
5.5.3 Total Cost Analysis ...................................................................................................................
118
5.5.4 Internal Suppliers Preferred.....................................................................................................
121
5.5.5 Different Incentives Within the Customer/ CorporateGoals Alignment..................................
121
5.5.6 Non Fact-BasedEvaluation of the Supplier.............................................................................
121
5.5.7 Bonus Structure.........................................................................................................................
122
5.5.8 Data..........................................................................................................................................
122
5.5.9 Quality of the Assessment Teams ..............................................................................................
122
5.5.10 Supplier Selection PreparationWork and Customization of the Selection Process............... 122
5.5.11 Follow up of the Supplier........................................................................................................
123
5.5.12 Supplier Selection Process Concurrent with the Product Development Process....................
123
5.5.13 Packaging & Full Service Partner..........................................................................................
123
5.6 CONCLUSION................................................................................................................
........... 124
...
CHAPTER 6 CASE STUDY - COM PANY B.......................................................................................
127
6.1 TERMS EXPLANATIONS.....................................................................................................................
127
6.1.1 Types of Relationship................................................................................................................
127
6.1.2 Product Characteristics............................................................................................................
128
6.1.3 Set of Key Variablesfor Supplier Selection ..............................................................................
129
6.2 LINKS BETWEEN THE PRODUCT, RELATIONSHIP AND CRITERIA CHARACTERISTICS .........................
130
6.2.1 Links Between Productand Relationship Characteristics........................................................
130
6.2.2 Mapping Between Types of Relationship and PotentialKey Variables in SSP.........................
132
6.2.3 Mapping Between Product Characteristicsand Key Criteriain Supplier Selection ................ 135
9
6.3 TRADEOFFS M ADE IN INDUSTRY .......................................................................................................
139
6.3.1 Tradeoff in the Weighting FactorsAccording to the end Customer Needs...............................
139
6.3.2 Tradeoff Between the Location of the Customer and the Cost..................................................
139
6.3.3 TradeoffBetween the Quality and the Cost ..............................................................................
140
6.3.4 TradeoffBetween Schedule, Quality and Cost..........................................................................
140
6.3.5 TradeoffBetween Technology and Supplier ManufacturingCapability/ Cost ........................
140
6.3.6 TradeoffBetween Time Savings and 3D Drawings ..................................................................
141
6.4 GOOD PRACTICES OF THE SUPPLIER SELECTION PROCESS IN INDUSTRY ...........................................
141
6.4.1 Evaluation of the Supplier's Quality System.............................................................................
141
6.4.2 Long-Term Agreements even for Commodity Suppliers............................................................
142
6.4.3 Co-Location of the PurchasingPeople.....................................................................................
142
6.4.4 Subjective / Objective Selection ................................................................................................
142
6.4.5 Summary ...................................................................................................................................
143
6.5 AREAS OF IMPROVEMENT OF THE CURRENT SUPPLIER SELECTION PROCESS ....................................
143
6.5.1 Length of the Supplier Selection Process..................................................................................
143
6.5.2 Qualificationof the Buyers .......................................................................................................
143
6.6 CONCLUSION.....................................................................................................................................
144
CHAPTER 7 : CO NCLUSION ...............................................................................................................
147
BIBLIO GRAPHY.....................................................................................................................................
151
10
LIST OF FIGURES
FIGURE 2.1: QUALITY-COST CURVE ...............................................................................................................
22
FIGURE 2.2: SUPPLIER'S STRATEGY IN THE MASS PRODUCTION SYSTEM ......................................................
24
FIGURE 2.3: NORMAL FORM OF A GAME .....................................................................................................
27
FIGURE 2.4: OPTIMAL N ASH EQUILIBRIUM .................................................................................................
27
FIGURE 2.5: NON-OPTIMAL NASH EQUILIBRIUM .........................................................................................
28
FIGURE 2.6: OUTCOMES OF THE GAME BETWEEN TWO POTENTIAL SUPPLIERS.............................................
30
FIGURE 2.7: GAME BETWEEN TWO POTENTIAL SUPPLIERS.............................................................................
31
FIGURE 2.8: OUTCOMES OF THE GAME BETWEEN THE CUSTOMER AND ONE OF THE POTENTIAL SUPPLIERS.... 33
FIGURE 2.9: GAME BETWEEN THE CUSTOMER AND ONE OF THE POTENTIAL SUPPLIERS ..............................
34
FIGURE 2.10: OUTCOME OF A SINGLE GAME BETWEEN THE CUSTOMER AND THE SUPPLIER.......................
36
FIGURE 2.11: GAME BETWEEN THE CUSTOMER AND THE SUPPLIER .............................................................
37
FIGURE 2.12: OUTCOME OF A REPEATED GAME BETWEEN THE CUSTOMER AND THE SUPPLIER ...................
40
FIGURE 2.13: REPEATED GAME BETWEEN THE CUSTOMER AND THE SUPPLIER ...........................................
41
FIGURE 3.1: TAGUCHI LOSS FUNCTION ........................................................................................................
46
FIGURE 3.2: DISTRIBUTION OF PART LENGTH .............................................................................................
48
FIGURE 3.3: BAYESIAN UPDATE PROCESS...................................................................................................
50
FIGURE 3.4: CRITICAL DIMENSION: TOTAL LENGTH ....................................................................................
53
FIGURE 3.5: PRIOR AND POSTERIOR DISTRIBUTIONS..................................................................................
63
FIGURE 3.6: PRIOR AND POSTERIOR DISTRIBUTIONS OF SUPPLIER A ..........................................................
64
FIGURE 3.7: PRIOR AND POSTERIOR DISTRIBUTIONS OF SUPPLIER B ..........................................................
65
FIGURE 3.8: PRIOR DISTRIBUTIONS OF SUPPLIERS A AND B........................................................................
68
FIGURE 3.9: POSTERIOR DISTRIBUTIONS OF SUPPLIERS A AND B...............................................................
69
FIGURE 4.1: BROADER SYSTEM OF SUPPLIER SELECTION PROCESS ............................................................
75
FIGURE 4.2: SIMPLIFICATION MODEL OF THE SUPPLIER SELECTION PROCESS...............................................
76
FIGURE 5.1: TOTAL FIT BETWEEN THE CUSTOMER AND THE SUPPLIER........................................................
87
FIGURE 5.2: TYPES OF FIT AND TYPES OF RELATIONSHIP .............................................................................
88
FIGURE 5.3: POSSIBLE ALIGNMENT BETWEEN TWO COMPANIES ..................................................................
93
FIGURE 5.4: VIEW OF THE SUPPLIER BY THE CUSTOMER ................................................................................
95
FIGURE 5.5: DETAIL VIEW OF THE TOTAL FIT BETWEEN THE CUSTOMER AND THE SUPPLIER .......................
96
FIGURE 5.6: LINK BETWEEN THE PRODUCT CHARACTERISTICS AND THE TYPES OF RELATIONSHIP ................ 97
FIGURE 5.7: LINKS BETWEEN PRODUCT CHARACTERISTICS AND TYPES OF RELATIONSHIP FOUND IN COMPANY
A .......................................................................................................................................--
11
...... ..... 10 1
FIGURE 5.8: LINK BETWEEN THE TYPES OF RELATIONSHIP AND THE KEY VARIABLES USED IN SUPPLIER
SELECT ION ..........................................................................................................................................
102
FIGURE 5.9: LINKS BETWEEN THE TYPES OF RELATIONSHIP AND THE KEY VARIABLES USED FOR SUPPLIER
SELECTION FOUND IN COM PANY A ......................................................................................................
104
FIGURE 5.10: LINK BETWEEN PRODUCT CHARACTERISTICS AND KEY VARIABLES USED FOR SUPPLIER
SELECTIO N ..........................................................................................................................................
105
FIGURE 5.11: INITIAL SITUATION DURING THE BIDDING PROCESS................................................................
106
FIGURE 5.12: CUSTOMER GOAL DURING THE BIDDING PROCESS..................................................................
107
FIGURE 5.13: LINKS BETWEEN THE PRODUCT CHARACTERISTICS AND THE KEY VARIABLES USED FOR
SUPPLIER SELECTION FOUND IN COMPANY A ......................................................................................
109
FIGURE 5.14: PRODUCT COST VARIABILITY DEPENDING ON DESIGN FLEXIBILITY ........................................
113
FIGURE 5.16: M ARKET BASED TRANSFER PRICE ..........................................................................................
115
FIGURE 5.17: COST FOR A SINGLE SUPPLIER IN THE SUPPLY CHAIN .............................................................
119
FIGURE 5.18: COST FOR MULTIPLE SUPPLIERS IN THE SUPPLY CHAIN ..........................................................
120
FIGURE 6.1: LINK BETWEEN THE PRODUCT CHARACTERISTICS AND THE TYPES OF RELATIONSHIP ..............
131
FIGURE 6.2: LINKS BETWEEN PRODUCT CHARACTERISTICS AND TYPES OF RELATIONSHIP FOUND IN COMPANY
B .........................................................................................................................................................
13 2
FIGURE 6.3: LINK BETWEEN THE TYPES OF RELATIONSHIP AND THE KEY VARIABLES USED IN SUPPLIER
SELECT ION ..........................................................................................................................................
133
FIGURE 6.4: LINKS BETWEEN THE TYPES OF RELATIONSHIP AND THE KEY VARIABLES USED FOR SUPPLIER
SELECTION FOUND IN COMPANY B ......................................................................................................
135
FIGURE 6.5: LINK BETWEEN PRODUCT CHARACTERISTICS AND KEY VARIABLES USED FOR SUPPLIER
SELECTION ..........................................................................................................................................
136
FIGURE 6.6: LINKS BETWEEN THE PRODUCT CHARACTERISTICS AND THE KEY VARIABLES USED FOR SUPPLIER
SELECTION FOUND IN COM PANY B ......................................................................................................
12
138
LIST OF TABLES
TABLE 3.1: POTENTIAL SUPPLIERS FOR PART 2 .........................................................................................
54
TABLE 3.2: SAMPLE FROM SUPPLIER A .....................................................................................................
55
TABLE 3.3: SAMPLE FROM SUPPLIER B.....................................................................................................
55
TABLE 3.4: SUMMARY OF THE UPDATED DISTRIBUTION PARAMETERS.......................................................
63
TABLE 4.1: COMPANY'S CAPABILITY ............................................................................................................
74
TABLE 4.2: INFORMATION AND DECISION...................................................................................................
76
TABLE 5.1: RELATIONSHIP FOR DEPENDENT/CRITICAL PARTS........................................................................
98
13
14
CHAPTER 1: INTRODUCTION
1.1 Problem Statement
In today's business world characterized by intense global competition, cost management is an
important strategic weapon. External purchases of products and services generally account for
more than 50% of total costs. Significant cost savings can be realized by effectively selecting
suppliers (Degraeve Z. and Roodhooft F. 1999). Therefore, the supplier selection and supplier
selection processes used by companies have an important impact on the companies' profit.
An extensive literature addresses supplier selection. A number of articles have described the
supplier selection process (Verma and Pullman 1998, Maltz A. 1995) and selection criteria used
in industry (Vonderembse and Tracey 1999; Lambert, Adams and Emmelhainz 1997; Katsikeas
and Leonidou 1996). Customers often use a bidding process as a way of selecting suppliers. A
customer asks all potential suppliers for bids on given numbers of parts of a given quality,
delivered at a given time. From among all outside firms and internal divisions that are asked to
bid, the low bidder receives a contract to supply the parts (Womack, Jones and Roos 1990).
Although other criteria might also be taken into consideration, according to Womack, Jones
and Roos in The machine that changed the world (Womack, Jones and Roos 1990) and Verma
and Pullman (Verma and Pullman 1998), the most important criterion for supplier selection is the
cost of the supplier. However, suppliers often claim to have low manufacturing cost in order to
win contracts, and then raise their cost to increase their profit: "implausible bids win contracts,
followed by adjustments, which may make the cost higher than those of realistic but losing
bidders." (Womack, Jones and Roos 1990). This attitude leads to a higher product cost than
initially expected by the customer.
On the other hand, suppliers may also deliver low quality parts or parts with high variation that
will lead to a higher product cost for the customer. This quality cost or quality loss (Taguchi and
Clausing 1990) has been studied extensively. Many contemporary quality cost systems are based
on the research of Crosby, Deming, Feigenbaum, Juran and Taguchi (Crosby 1982,1983; Deming
15
1981; Feigenbaum; 1990 Taguchi 1990;). These authors developed the basics of quality cost
measurements by classifying quality cost into prevention, appraisal, internal failure cost and
external failure cost. Prevention and appraisal costs are the costs of conformance to quality
control standard, while failure costs are the costs of non-conformance (scrap, rework, cost of
downtime, reduce yield, cost of warranty, field service, product recall, product liability, loss of
sale due to customer dissatisfaction, etc) (Taguchi and Clausing 1990). This quality loss leads to a
higher product cost than initially expected by the customer. Therefore, the selection of suppliers
is important to avoid unexpected increases in the product expected cost.
In order to address the issues of unexpected costs, comprehensive cost models have been
developed (Degraeve Z. and Roodhooft F. 1999; Harding 1998; Bennett 1996). Although those
models try to provide a comprehensive calculation of the total cost, they either assume some
certainty about the information coming from suppliers or they don't include any method to
decrease the uncertainty about the suppliers' information. Thus, these models don't take
uncertainty about suppliers' information into consideration. Furthermore, the cost of quality
involved in those cost models is calculated based on the process capability information of the
suppliers. However, this process capability information is mostly uncertain in most of the
companies. In fact, a survey conducted in industry shows that process capability databases are
poorly populated, and that there exists a lack of trust in the process capability data (Tata and
Thornton 1999). Customers then have to make supplier selection decisions when there is
uncertainty about process capability information. However, there is a distinct lack of research on
decision making when there is uncertainty about process capability (Thornton 1999). In summary,
when the supplier selection is mostly based on the supplier's cost, there is a lack of tools for
accurately evaluating the cost associated with the supplier's quality and process capability.
On the other hand, as the world becomes more and more competitive and as companies try to
optimize value for the money they invest in their businesses, companies want to focus more and
more on their core capabilities (Gallon, Stillman and Coates 1995; Prahalad, 1990, 1993, Nadji
1996). The companies tend to concentrate more on their core competencies and as a consequence,
they have to select suppliers based on criteria other than simply the supplier's cost. Therefore,
other criteria have to be taken into consideration for supplier selection. The questions are now:
-
What are the important supplier selection criteria (other than cost)?
"
In which situations or products are they important?
16
In summary, there is a trend for customers to have types of relationships beyond the traditional
buyer-supplier type of relationship, where cost is the predominant selection criteria. Those other
types of relationships require the customer to base his supplier selection decision on criteria other
than the cost of the potential suppliers. However, the traditional buyer-supplier type of
relationship still exists, and a method for decreasing supplier's information uncertainty is needed.
1.2 Thesis Objectives
This thesis has three main objectives: to show the importance of the supplier selection process, to
provide a mathematical framework for supplier selection and to understand how the supplier
selection is currently done in industry.
1.2.1 Importance of the Supplier Selection Process
The first objective of this thesis is to demonstrate the importance of the supplier selection process.
We will also show the existence of links between the supplier selection process used by the
customers, the quality of the information exchanged between customers and suppliers, and the
types of relationship between customers and suppliers. We will demonstrate that the customer can
get locked into a non-cooperative type of relationship with its suppliers when his supplier
selection process is not appropriate.
This objective is also to show the importance of having an appropriate supplier selection process.
This appropriate supplier selection process would lead the customer to select the right supplier,
using the right type of relationship, to outsource the right part.
1.2.2 Mathematical Frame work for Supplier Selection
The second objective of this thesis is to provide a mathematical framework for a better selection
of suppliers when that selection is mostly based on the supplier's cost and when there is
uncertainty about the supplier's process capability. This mathematical framework will be useful
for comparing suppliers when cost is the most important criterion in supplier selection. This
mathematical framework evaluates longer-term cost, like quality cost, that buyers would usually
not consider.
17
1.2.3 Supplier Selection Processes in Industry
The third objective of this thesis is to find other criteria for supplier selection when the selection
is not only based on the supplier's cost. This last objective is also to understand the different
possible types of relationships between a customer and a supplier, as well as the reasons for such
relationships, and the situations in which those relationships are required. Also, another objective
is to find some industry best practices and areas for improvement within the supplier selection
processes currently used in industry.
1.3 Research Approach
A different research approach has been taken for each of the three objectives. First, we used game
theory to show the importance of the supplier selection process. Second, we used a Bayesian
updating process to show the impact of the supplier selection on the product expected cost. Third,
we did two industry case studies to understand what supplier selection processes were currently
used in industry. We also looked at literature for existing researches in those fields.
1.3.1 Importance of the Supplier Selection Process
The first part of this thesis is theoretical. This part takes into account observed behaviors of
customers and suppliers in two different production systems where the supplier selection
processes and relationships are different: the mass production system and the lean production
system. This part uses game theory to demonstrate why such behaviors exist and why customers
and suppliers are find themselves in different supplier/customer relationship.
1.3.2 Mathematical Framework for Supplier Selection
The second objective of this thesis is to provide a mathematical framework that shows the
relations between process capability uncertainty, supplier selection and expected product cost.
This mathematical framework uses a Bayesian updating approach in order to merge initial
information given by the supplier with additional information obtained by the customer. This
mathematical framework provides the customer with an updated knowledge of the supplier's real
capability and its impact on the expected product cost. This mathematical framework is useful
when the customer has to select a supplier based on the bid each potential supplier has submitted.
18
1.3.3 Supplier Selection Processes in Industry
Comprehension of current supplier selection processes in industry has been achieved through
industry case studies. We conducted interviews in two companies from different types of industry
and we analyzed documents from the supplier selection processes currently used in those
companies. We interviewed a range of people who deal with suppliers and supplier selection.
These people have positions such as buyer, buyer manager, product manager, engineer, and
platform manager.
For each of the companies, we identified the different types of relationship currently used with
their suppliers. We
then found relations between those types of relationship and the
characteristics of each of the products for which those relationships were used. We also
determined the key selection criteria used by the customers to pick their suppliers, and we related
them to each type of relationship and each important product characteristics.
In summary, these interviews led to:
"
The different types of relationships used between customers and their suppliers
-
The product characteristics that influence supplier selection processes
"
The important criteria used for supplier selection
"
The links between these three items
Also, through these industry case studies, we compiled a list of industry weaknesses and best
practices in the current supplier selection processes. We also compiled a list of tradeoffs that the
companies were making while selecting suppliers. To simplify the analysis of the current supplier
selection in industry, we made some assumptions and employed a simplified model of the reality.
1.4 Thesis Outline
This thesis is divided into seven chapters. This chapter provides a background of related work and
the work of this thesis.
Chapter 2 demonstrates the importance of the supplier selection process and the existence of links
between the supplier selection process, the supplier's behavior and the quality of the information
exchanged between the supplier and the customer.
19
Chapter 3 quantifies one of those links. It quantifies the value of the quality of process capability
information given by supplier, and its impact on the expected product cost of the customer. This
chapter describes the mathematical framework developed for supplier selection under process
capability uncertainty when cost is the most important selection criteria. This chapter also follows
an example that illustrates how the mathematical framework would help a customer in his
supplier selection decision.
Chapters 4, 5 and 6 are the industry case studies. These chapters aim to identify the possible
relationships between customers and suppliers, and to understand the reasons for those
relationships and why a customer prefers to have them. Chapter 4 introduces the research method
and assumptions we used, as well as the simplified section of the supplier selection process upon
which we concentrated the case studies. Chapters 5 and 6 are the two industry case studies,
conducted respectively in company A and company B.
Chapter 7 is the conclusion of the thesis.
20
CHAPTER 2: IMPORTANCE OF THE SUPPLIER
SELECTION PROCESS
2.1 Introduction
This first chapter aims to emphasize the importance of the supplier selection process and its
impact on the customer-supplier relationship. We demonstrate that the customer can get
locked into a non-cooperative' type of relationship by using an inappropriate selection
process or criteria for selection.
In order to demonstrate the importance and impact of the supplier selection process and
criteria, we will explain the behaviors of suppliers and customer in two types of
environments: the mass production system and the lean production system.
Mass production system, or "Fordism", separated intellectual and manual work and broke down
the latter into easily learned, repetitive steps. Based on a continuously moving assembly line,
Fordist manufacturing could mass-produce a limited number of models at very low cost and
therefore came to dominate most of the world's manufacturing from the mid-1950s through about
1980.
Lean manufacturing, by contrast, emphasizes quality and a speedy response to market conditions,
using technologically advanced equipment and a flexible organization of the production process.
By all accounts, lean manufacturing is a more efficient system of production. Aoki (1988)
suggests this is because its methods of organizing and coordinating production allow a speedier
that context, cooperative means that the supplier and the customer would join their effort to increase
quality, reduce cost, problem solve together, etc.
1In
21
and more timely horizontal coordination between different manufacturing operations and a
subsequent reduction in costly inventory.
We will show, using game theory, that while partnership between suppliers and customers is
ideally the best for both production systems, it is not the stable solution in a mass production
system; rather, it is only a stable solution in a lean production system. We will also show that the
selection process of suppliers in both systems has an influence on the behavior and reliability of
the supplier.
First, we will describe the selection process and the observed behaviors of customers and
suppliers in each production system. Second, we will use game theory to illustrate why suppliers
and customers exhibit such behaviors, and why cooperation between the two of them is, or is not,
possible.
2.2 Observed Behavio rs in Each Production System
In each production system, i.e. the mass production system and the lean production system,
we can relate the manufacturing process capability to the cost of producing a part. This
relation may be represented by the following quality-cost curve:
$
Part cost
Expected costo.
obtain thepas
.......
Quality-cost curve
aPams
Parts variation
Figure 2. 1: quality-cost curve
Thus, for any given manufacturing process, higher quality, i.e. less variation among the parts, will
lead to a higher part cost (Deming 1986; Taguchi and Clausing 1990). Then, when a
supplier has to make a part of a given quality, he will use this relation curve to evaluate the
22
expected product cost in his production system. The supplier also has to consider other
variables (possible future contracts, profit, etc.) while evaluating his expected cost. In order
to simplify his decision making process to decide his overall price, we will assume that the
supplier will bid for the part by supplying a figure corresponding to his cost for producing the
part plus his profit margin:
Supplier's Bid = Supplier's Production Cost + Profit Margin
On the customer side, there are two strategies for decreasing the supplier's price. The
customer can either decrease the profit margin of the supplier, or help him improve his
process capability, i.e. decrease his cost for the part. The first strategy leads to a noncooperative type of relationship, whereas the second strategy leads the relationship toward a
cooperative kind of relationship.
Once the customer asks for bid, all potential suppliers have to submit a bid, knowing that they are
competing against other suppliers. Every supplier will then adopt a strategy to win the bid and
gain the contract. The customer also has a strategy regarding the contract. In the next two
sections, the strategies used by both the customer and the potential suppliers are described, in a
mass production system environment (section 2.2.1) as well as in a lean production system
environment (section 2.2.2).
2.2.1 Observed Behaviors in a Mass Production Systems
The supplier selection process in a mass production system is well explained in "The machine
that changed the world". Customers, like GM or Ford, design most of the 10,000 parts in a
vehicle and the component systems they comprise. The customers then give drawings to their
potential suppliers and ask them for bids on
given numbers of parts of given quality
delivered at a given time. Among all the outside firms and the internal divisions that are
asked to bid, the low bidder gets the business (Womack, Jones and Roos 1990).
Hence, the lower bid wins the contract. Therefore, each potential supplier will try to achieve
the highest probability of obtaining the contract, while achieving the maximum profit. The
supplier has to make a tradeoff between having a higher probability of winning the bid (i.e.
by submitting a low bid) and achieving maximum profit from the contract.
23
The supplier strategy is usually to decrease profit margin in order to bid a lower amount than
what they would have bid in the absence of competition. Thus, they over-estimate their
process capability, i.e. their quality-cost relation, in order to offer a better bid.
We can show this supplier strategy by using the quality-cost relations represented in figure
2.2.
Cost
Expected cost
Lowbi
(Optimistic bid)
Realistic Quality-Cost relation of the supplier
w-..
Overestimation of the Quality-Cost
..................
c
GAsked
relation of the supplier
Figure 2.2: supplier's strategy in the mass production system
In this strategy, the real cost of the supplier corresponds to the "expected cost" in the quality-cost
curve, but the supplier will bid the "low bid", or optimistic cost. The supplier might lose profit by
doing so, but its primary goal is to get the contract from the customer. Once the contract is won,
the supplier will employ other strategies to raise his profit, such as to raising cost for any required
design change.
On the other hand, the customer is aware of this bidding process and knows that he might
hire a supplier who overestimates his process capability, or quality-cost relation. Then, he
expects this hired supplier to try to increase his profit margin during the contract duration by
increasing his price, taking any opportunity to do so. Thus, the customer will reduce that
possibility by offering only short-term contracts. Therefore, the contract obtained by the hired
supplier will be a short-term contract.
Typically, a car assembler using the mass production system deals with 1,000 to 2,500
suppliers directly. Contracts with independent suppliers usually run no longer than a year.
The assembler relies on hierarchical coordination of information and control over technology
in order to solve the complex task of manufacturing cars In mass production systems, the
customers typically have short-term, arms-length relationships with multiple suppliers; the
24
relationships are not designed to reward commitment and do not encourage cooperation
(Klier 1994).
2.2.2 Observed Behaviors in a Lean Production System
In the lean production system, there is a different bidding process when a customer needs to
supply a part. The customer has fewer suppliers, employing long-term contracts with each of
them. Those long-term contracts represent long-term commitments between them that induce a
deeper and more complete relationship. Successfully implemented lean manufacturing sourcing
relationships enable both parties to benefit from the incentive advantages of longer-term
contracts. The customer can save monitoring costs and cut down on inventory; the supplier is no
longer exposed to the risks and costs of annual contract bidding (Klier 1994).
One feature of those long-term contracts is that the supplier has to constantly improve his
processes and process capability in order to improve its quality and cost. The supplier is
forced to improving his processes and quality-cost relation because:
-
The contract stipulates that the price for a supplied part has to decrease through time
" The customer is willing to help the supplier improve the supplier's process capability
"
By the structure of the contract, if the supplier doesn't improve his process or quality-cost
relation, the supplier will have a punishment that might hurt him drastically since the
customer is usually the major client of the supplier in lean production systems.
In summary, in lean production systems, we have a relationship between supplier and customer
that leads to long-term contracts with constant improvement of the supplier's processes. This
kind of relationship is a cooperative one and leads toward a partnership.
2.2.3 Summary
In these two systems of production, the supplier selection process and the relationships between
the customers and their suppliers are completely different. Cooperation between the customer and
the supplier is possible in the lean production system, whereas it is not in the mass production
system.
The behaviors of customers and suppliers in both the mass production system and the lean
production system can be explained by using game theory. First, we will explain the basics of
25
game theory. Second, we will see how we can explain the behaviors observed in each production
system.
2.3 Introduction to Ga me Theory
Let's first introduce some basic explanations about game theory. This theory is originated in the
1940s with the work of two mathematicians, John Von Neumann and Oskar Morgenstern. Game
theory concerns predicting the outcome of interactions between individuals or groups whose
actions affect each other. The idea is to set up a scenario representing the choices facing the
players, and predict their actions based on information about them and the rewards they receive
(Ivey Business Quarterly 1998).
To understand to basic of game theory, we have first to define the following terms (Acemoglu
1998):
-
Players: Players are parties whose actions affect each other - whether as competitors or
as partners.
-
Actions and Events: What happens in the game, and what choices face the players.
"
Information: The information players have about each other and each other's moves can
vary. Thus, players may or may not know their opponents' preferences or previous
moves.
-
Payoffs: Payoffs are the rewards earned by players. It is usually assumed that players will
choose strategies that maximize their payoffs.
-
Strategy: A complete description of how to play a game. It indicates what the player in
question will do in all possible eventualities; therefore, it assigns an action to each
information set.
-
Dominant strategy: A dominant strategy is a strategy that a player will take,
independently from the other player's strategy. The dominant strategy will always bring
the player a maximal outcome for each of the other player's possible strategies.
Games can be represented in many ways. However, it is usually convenient to represent a game in
its normal form. This form is a mathematical representation that assigns a payoff to each player,
for each strategy combination. The normal form of a two-player game can be represented as a
matrix as shown in figure 2.3.
26
PLAYER 1
Strategy B
Strategy A
Strategy
1
Player
l's payoff
Player
Player 2's payoff
Player 2's payoff
PLAYER 2
Player
Strategy 2
l's payoff
l's payoff
Player
l's payoff
Player 2's payoff
Player 2's payoff
Figure 2.3: Normal form of a game
For each possible game, different scenarios or combinations of strategies may appear. Some
scenarios lead to no particular kind of situation, whereas others may lead to special situations,
like an equilibrium, or stable situation. An equilibrium, or stable situation, is a combination of
strategies wherein every player has more incentive to keep his own strategy than to change it.
This equilibrium is called a "Nash equilibrium". For example, the game represented in figure 2.4
has a Nash equilibrium.
PLAYER 1
Strategy B
Strategy A
2
10
Strategy 1
48
PLAYER2
6
0
5
Strategy 2
..
......
4
6
Figure 2.4: Optimal Nash equilibrium
The arrows in the matrix represent the incentive of each player. Each arrow represents which
strategy is the optimal for the player, depending on which strategy the other player is taking. For
instance, the combination of strategies (A, 1) is a Nash equilibrium because Player 1 doesn't have
any incentive to use strategy B and Player 2 doesn't have any incentive to take his strategy 2.
Thus, both of the players will choose to stay with the strategy combination leading to a respective
outcome of 10 for player 1 and 8 for player 2. This combination of strategies is a Nash
equilibrium.
27
A Nash equilibrium can either be optimal or sub-optimal. The Nash equilibrium is optimal when
the stable solution is the ideal combination of strategies for every player. In that case, the
situation is a win-win situation where every player obtains his optimal outcome. The former
example illustrated in figure 2.4 is a Nash equilibrium optimal for both players.
However, the Nash equilibrium is sub-optimal when the stable solution leads to a combination of
strategies whose outcome is less than the optimal one for each of the players. This kind of
situation is called a prisoner's dilemma, when the dominant strategy of each player leads to a
situation of non-cooperation, while the optimal outcome for each player would be obtained with
their cooperation. An example of this situation is illustrated in figure 2.5. In this situation, the
stable solution gives an outcome of 5 for each player whereas the optimal solution would give an
outcome of 10 for each player. However, as soon as a player decides to use Strategy 2 or B, the
other player would use Strategy 1 or A. In that case, the outcome for the first player would be
reduced to 0, whereas the outcome for the second player would raise to 20. Thus, such a situation
is not stable since the players are not encouraged to cooperate with each other.
PLAYER 1
I
Strategy A
5
Strategy 1
PLAYER2
Strategy B
.5
20
0
Strategy 2
0
4 ........
20
10
10
Figure 2.5: non-optimal Nash equilibrium
2.4 Behavior Explana tion Using Game Theory
2.4.1 Behaviors in Mass Production Systems
Now, using game theory, we can explain the behaviors of the customer and the potential suppliers
in a mass production system during the contract bidding process. These behaviors can be
represented as two simultaneous games. The first game takes place among the different suppliers
28
who want to obtain the contract and the second game takes place between the suppliers and the
customer.
Game Among the Suppliers
This game represents the situation in which every potential supplier has to compete against each
other in order to get the contract. The game parameters are the following:
"
Players: all potential suppliers that could supply the part designed by the customer.
-
Information: The players (i.e. all the potential suppliers) don't have any information
about other players' moves, since they all submit their bids simultaneously. However,
they know other players' willingness to get the contract.
*
Payoffs: in this game the payoff for each player is binary, i.e. they either do or do not get
the contract. This type of payoff is also called "winner takes all": one player will get the
contract and the others will not.
=
Strategies: The possible strategies for the players are to make an honest bid or not. A
supplier makes an honest bid when he is evaluating his bid amount by using his realistic
quality-cost relation. A supplier makes a dishonest bid when he is not using his realistic
quality-cost relation, but rather a more optimistic one, leading to a lower bid as seen in
the previous section.
This game among the suppliers can first be analyzed as a two-player game, and then be
generalized to a multiple-player game. The two-player game can include, for example, the two
suppliers with the highest probabilities of winning the contract.
Each supplier has two strategies. The supplier can either submit a realistic bid or a low bid: the
lower the bid, the higher the probability of getting the contract. Also, we assume that none of the
suppliers knows about the other supplier's bid, but they assess each other's quality-cost relation
to be close to their own. In that situation, the outcome of each supplier's strategy depending upon
the other player's strategy are shown in the following game, represented in normal form:
29
SUPPLIER
Submit a low bid
1
Submit a realistic bid
May get the contract
Doesn't get the contract
Submit a low bid
May get the contract
SUPPLIER 2
Submit a realistic
bid
Gets the contract
May get the contract
Gets the contract
Doesn't get the contract
May get the contract
Figure 2.6: Outcomes of the game between two potential suppliers
The outcomes of each supplier are found with the following reasoning:
"
If both suppliers submit a realistic bid, the supplier who will get the contract is the one
who has the lowest quality cost relation. In the case of similar quality-cost relation for
each supplier (as assumed), the suppliers have about the same chance of obtaining the
contract, so they both have an outcome of "may get the contract".
-
If a supplier submits a low bid while the other submits a realistic bid, then the former
supplier has a higher probability of getting the contract since we assumed that both
suppliers have similar quality-cost relation. We can then assume that the former supplier
will get the contract and that his outcome is "gets the contract".
"
If both suppliers submit a low bid, we assume they have the same chance of obtaining the
contract, so they both have an outcome of "may get the contract".
Now that the game and its possible outcomes are defined, we can analyze the reasoning of each of
the two suppliers and find which strategy they will choose to take. The arrows on the following
matrices show the best responses from a supplier to the other supplier's strategy.
Reasoning of Supplier 1
In order to have the outcome "gets the contract", the best responses of Supplier 1 to the Supplier
2's strategies are to:
"
Take the strategy "Submit a low bid", if the Supplier 2 takes the strategy "Submits a
realistic bid"
"
Take the strategy "Submit a low bid", if the Supplier 2 takes the strategy "Submits a low
bid"
Thus, the Supplier 1 has a dominant strategy of always submitting a low bid, whatever Supplier
2's strategy is.
30
Reasoning of Supplier 2
The same reasoning can be applied to Supplier 2. In order to have the outcome "gets the
contract", the best responses of Supplier 2 to the Supplier l's strategies are to:
"
Take the strategy "Submit a low bid", if the supplier 1 takes the strategy "Submit a
realistic bid"
"
Take the strategy "Submit a low bid", if the supplier 1 takes the strategy "Submit a low
bid"
Thus, the Supplier 2 has also a dominant strategy of always submitting a low bid, whatever
Supplier l's strategy is.
Game
In the bidding process, both suppliers have to submit their bid at the same time. According to the
previous deductions, we know that both suppliers will take the same strategy, which is to "submit
a low bid". The game will be as follows:
SUPPLIER 1
Submit a low bid
Submit a realistic bid
I
Doesn't get the contract
Submit a low bid
A
Gets the contract
SUPPLIER 2
Submit a realisticcontract
bid
Doesn't get the contract
May get the contract
May get the contract
Figure 2.7: Game between two potential suppliers
Thus, in a two-player game, each supplier will overestimate his quality-cost relation and make a
low bid in order to get the contract. We can generalize this two-player game to a multiple-player
game by pairing up the suppliers two-by-two with each other. We can then predict that on a larger
scale, every supplier will make a low bid in order to get the contract. (1)
The next step is to analyze the game happening between the customer and the potential suppliers,
knowing that the suppliers will probably take the strategy of submitting low bids by
overestimating their quality-cost relation.
31
Game Between the Customer and the Potential Suppliers
This game represents the situation where the customer has to create and propose a contract to the
suppliers. The game parameters are the following:
"
Players: One player is the customer who offers a contract and the other player is one of
the potential suppliers who wants to get that contract.
"
Information: The players don't have any information about the other players' moves.
=
Payoffs: For the customer it will be the smallest amount of money he can give to his
supplier: the smaller it is, the greater payoff he gets. For the supplier, the possible payoffs
are either to get the contract or not get the contract.
-
Strategies: The assembler has the choice between offering a long-term or a short-term
contract. The suppliers have the choice of whether to make an realistic bid (i.e. to make a
bid according to their real process capability) or not (i.e. to overestimate their process
capability).
This game among the customer and the potential suppliers can be first analyzed as a two-player
game and then be generalized afterward to a multiple-player game. The two-player game is a
game between the customer and one of the potential suppliers. The multiple-players game is a
game between the customer and all potential suppliers.
Each supplier has two strategies. Like in the previous section, the potential supplier can either
submit a realistic bid or a low bid: the lower the bid, the higher the probability of getting the
contract. The customer has also two strategies: to offer a long-term or a short-term contract. The
outcomes for each player are found with the following reasoning:
Payoffs for the supplier
"
If the supplier submits a realistic bid, we can assume, from section 2.4.1.1, that he won't
get the contract. We know that the other suppliers, or at least most of them, will make a
low bid, so that a supplier making a realistic bid will be automatically higher than the
other low bids and thus won't be selected by the customer.
"
If the supplier submits a low bid, he will get the contract, or may get it depending on the
bids of the other suppliers.
Payoffs for the customer
The customer evaluates his expected product cost based on the bids submitted by the suppliers.
The bid represents the supplier's price for the duration of the contract with the customer.
Therefore, any increase in the supplier's price directly decreases the customer's profit.
Furthermore, the bidder who wins the contract will adjust his cost during the contract duration,
32
which may make the cost higher than those of realistic but losing bidders (Womack, Jones and
Roos 1990).
The payoff of the customer is then harder to evaluate and is linked to:
=
The strategy of the supplier
"
The duration of the contract
In every case, the longer the duration of the contract, the higher the price of the supplier will get
and thus, the lower the profit of the customer will be.
Thus, the payoffs of the customer are:
"
Equivalent to his expected gain if the contract duration is short, because the price of the
supplier won't have time to increase much.
=
Below his expected gain if the contract duration is long, because the supplier will raise
his cost through the contract duration.
This game is represented in figure 2.8.
CUSTOMER
Offer a short-term contract
Submit a low bid
Expected gain
Will get the contract
SUPPLIER
Submit a realistic
bid
Expected gain
Won't get the contract
Offer a long-term contract
Below expected gain
Will get the contract
Below expected gain
Won't get the contract
Figure 2.8: outcomes of the game between the customer and one of the potential suppliers
Now that the game and its possible outcomes are defined, we can analyze the reasoning of the
supplier and the customer and find which strategies they will choose to take. The arrows on the
following matrices show the best responses from a player to the other player's strategy.
Reasoning of the customer
In order to have the higher payoff, the best response of the customer to the supplier's strategies is
to always offer a short-term contract. Thus, the customer has a dominant strategy of always
offering a short-term contract, whatever the supplier strategy is.
33
Reasoning of the supplier
The best response of the supplier, in order to get the contract is to always submit a low bid (with
the same reasoning as before). Thus, Supplier 2 also has a dominant strategy of always submitting
a low bid, whatever the customer contract duration is.
Game
Both the customer and the supplier have a dominant strategy. The game will be as follow:
CUSTOMER
ffra short-term contract
Submit a low bid
Offer a long-term contract
-----------a Below expected gain
Will get the contract
SUPPLIER
Submit a realistic
bid
Expected gain
Won't get the contract 4-.-.
Below expected gain
Won't get the contract
Figure 2.9: Game between the customer and one of the potential suppliers
Thus, in a two-player game each supplier will overestimate hsi quality-cost relation and make a
low bid in order to get the contract and the customer will always offer short-term contract. We
can generalize this two-player game to a multiple-players game by pairing up each supplier to the
customer. This later game will be exactly like the two-player game, with low-bidder suppliers
getting short-term contracts. We can then predict that on a larger scale, every supplier will make a
low bid in order to get a short-term contract.
Conclusion
In conclusion, the bidding process for selecting suppliers in a mass production system leads to a
situation in which there is no cooperation between the suppliers and the customer at the beginning
of the relationship. In this situation, the quality of information exchanged between the supplier
and the customer is poor since the supplier starts the relationship by hiding his true quality-cost
relation, i.e. by hiding his true process capability. Afterward, the supplier can hardly share his
true process capability with the customer, so the relationship will still be a non-cooperative one.
This non-cooperative situation is not optima, but it is the only stable situation in a mass
production system.
34
Using game theory, the links between the supplier selection process, the quality of the
information exchanged and the type of relationship were explained in a mass production system.
Now, we will see how it can be explained in a lean production system.
2.4.2 Behaviors in the Lean Production System
Again using game theory, we can demonstrate the nature of the relationship between the suppliers
and the customer and it link with the selection process and the quality of information exchanged
between the supplier and the customer.
These behaviors can be represented as a single game. However, the situation in a lean production
system is very different from the situation in the mass production system, since the relationship
between suppliers and customers are repeated relationships, dependent upon each other.
Therefore, the game and its outcome will have to be repeated many times in order to represent a
realistic game.
In a first time, we will see an interaction between the supplier and the customer as a single,
isolated one. Then, we will repeat the situation many times to see how the outcomes are altered
by the repeated situation.
Single Game
This corresponds to the mass production system where there is no cooperation between suppliers
and customer, since each relationship is independent from all others.
This first game represents the type of relationship between a customer and a supplier during a
contract. The supplier selection process in this game is not considered, but it will be considered in
the next section "multiple games".
The game parameters are the following:
"
Players: There are two players. The first player is the customer who offers a contract and
the second player is the supplier who has been selected by the customer.
-
Information: The players don't have any information about the other players' moves.
However, they both know that this game, i.e. relationship is a single, independent one.
"
Payoffs: The payoff of the supplier is his profit margin. The payoff of the customer is
proportional to the gap between his expected product cost and his effective product cost.
35
-
Strategies: The customer and the supplier have the same two strategies. They can either
cooperate with each other or not cooperate. If the supplier cooperates with the customer,
he will have to improve his process capability and if the supplier doesn't cooperate, he
might overestimate his process capability or never improve it. If the customer cooperates
with the supplier, he will have to help and support the supplier in his process capability
improvement, and he will also have to be willing to wait until the supplier becomes the
benchmark of the industry.
The outcomes of each supplier's strategy, depending on the customer's strategy are shown in the
following game, represented in its normal form (Hollard 1994).
CUSTOMER
Do not cooperate
Cooperate
NC=1
0
Do not cooperate
SUPPLIER
NC = 1
T= 5
T=5
P=3
Cooperate
0
P=3
Figure 2.10: Outcome of a single game between the customer and the supplier
There are three possible outcomes for this game, corresponding to the three following values:
-
The non-cooperation value (NC) - obtained when none of the players are cooperating
"
The temptation value (T) - obtained when one player is cooperating while the other is not
"
The partnership value (P) - obtained when both players are cooperating
Now that the game and its possible outcomes are defined, we can analyze the reasoning of each of
the two suppliers and find which strategy they will choose to take. The arrows on the following
matrices show the best responses from a player to the other player's strategy.
Reasoning of the supplier
In order to have the higher outcome, the best responses of the supplier to the customer's strategies
are to:
36
"
Take the strategy "Do not cooperate", if the customer takes the strategy "Cooperate",
which will bring an outcome of "5" instead of "3". For example, this strategy would be to
let the customer invest in the supplier's quality system, but not to decrease its price.
"
Take the strategy "Do not cooperate", if the customer takes the strategy "Do not
cooperate", which will bring an outcome of "1" instead of "0".
Thus, the supplier has a dominant strategy of never cooperating, whatever the customer's strategy
is.
Reasoning of the customer
The same reasoning can be applied to the customer's strategies. In order to have the higher
outcome, the best responses of the customer to the supplier's strategies are to:
"
Take the strategy "Do not cooperate", if the supplier takes the strategy "Cooperate",
which will bring an outcome of "5" instead of "3". For example, this strategy would be to
ask the supplier to increase its quality, without helping him.
"
Take the strategy "Do not cooperate", if the supplier takes the strategy "Do not
cooperate", which will bring an outcome of "1" instead of "0".
Thus, the customer has also a dominant strategy of never cooperating, whatever the supplier's
strategy is.
Game
According to the dominant strategy of each player, the game will be as follow:
CUSTOMER
Cooperate
Do not cooperate
0
Do not cooperate
T= 5
SUPPLIER
T=5
- ..........
4 .......
Cooperate
0
A
:
*
P=3
P=3
Figure 2.11: game between the customer and the supplier
The customer has a dominant strategy, which is to "Do not cooperate", whatever supplier might
do and the supplier has the same dominant strategy of non-cooperation. This combination of
dominant strategies is a stable solution since none of the player has an incentive to move away
37
from that solution. However, this solution is not optimal. In fact, the optimal combination of
strategies is the cooperation of both players. This solution is very unstable since if one player
cooperates, the other can decide to not cooperate and then increase his own outcome from "4" to
"5", while the other player would have an outcome going from "4" to "0". Thus, none of the
players has any incentive to change his strategy "Do not cooperate" to a strategy "Cooperate"
one. Thus, given this game and in order to maximize their own outcome, the supplier and the
customer will choose to not cooperate. The relationship between the two of them will be a noncooperative one, with no possible partnership. In fact, this situation represents a mass production
system where a customer and a supplier interact only once with each other in the frame of a
contract. Any subsequent contract is assume to be independent from the former one.
In conclusion, we can say that in a "one-time-only" type of relationship, like in a mass production
system, none of the player has an incentive to start cooperating with the other, while this situation
is the best for both, it's not stable to encourage a drift of behavior. The only stable solution is a
non-cooperative one.
In this situation, the supplier and the customer have to interact only once with each other. In a
lean production system, the supplier and the customer have long-term agreement and relationship.
In the next section, we are going to see how this long-term relationship can force each party of
cooperating with each other.
Lean Production System - Multiple Games
Yet, we may notice that the choice of the player to choose the non-cooperation strategy depends
on the temptation value "T". This value "T" is considered to be greater than the partnership value
"P" because it allows one of the players to take advantage on the other player. Thus, the first
player expects to have a higher outcome than the later one if he doesn't cooperate while the other
does. Thus, cooperation would be possible if we manage to reverse the importance of those
values, i.e. in order to make both of the players to cooperate, we have to make the "P" value
greater than the "T" value.
Furthermore, one major difference that occurs in a lean production system is the repeated
relationship between the supplier and the customer. In game theory, that repeated relationship
corresponds to a repeated game with a "memory" or "reputation" effect. The supplier and the
customer will then play a large number of games together and at each stage they will know what
the other player had played before. The history of the moves is preserved. Also, the total outcome
38
for each player through those repeated games will be the accumulation of all the outcomes made
at each stage of the total game. The goal of each player being to maximized this total outcome.
Thus, the parameters of the game are the following:
=
Players: One player is the customer who offers the long term contract and who wants
cooperation and the other player is the supplier who has gotten the long-term contract.
"
Information: The players don't have any information about the other players' moves at
the first stage of the game. In the following stages of the game, they know what the other
player played and they can base their future decision on that.
-
Payoffs: The payoff of this game for each player is the sum of all the payoffs obtained at
each stages of the game.
-
Strategies: The customer has the choice between taking a forgiving strategy or a nonforgiving strategy. Those strategies are to play "cooperate" until one of the players plays
"don't cooperate". If that happens, the punishment will be that the players will continue
the game by playing "don't cooperate", which imply they will both have smaller
outcomes. The difference between the two type of strategy is that in the forgiving
strategy, you punish the other player for N period and then revert back to cooperation. In
the non-forgiven strategy, you will never revert back to the cooperation strategy.
The outcomes of each supplier strategies depending on the customer's strategy are same one as
on the single-game shown in the figure 2.10.
Now that the game and its possible outcomes are defined, we can analyze the reasoning of each of
the two suppliers and find which strategy they will choose to take. To do so, we have to calculate
the final outcome of the repeated game for each of the players.
Total outcome in a non-forgiving 2 strategy
If the players are using the non-forgiving strategy, the total payoff of the game after an infinite
number of stages is calculated as follow:
*
Payoff of the player who chooses to cooperate at all stages of the game:
Payoff = 3 + 38 + 382 + 38384+... = 3/(1-8)
With 8 = discount factor: today utility of the payoff that we will get at the next stage
2
A non-forgiving strategy is when the customer or the supplier decide to not cooperate ever again when
one of them doesn't cooperate once.
39
a Payoff of the player who choose to not cooperate after the first stage of the game, i.e.
after "game 1":
Payoff = 5 + 18+ 182 + 183+... = 5 + /(1-8)
Thus, both players will play "cooperate" if their total payoff is greater than the one they will
obtain with the other strategy:
3/(1-8) > 5 + 8/(1-8)
+4
8 > 1/2
With a discount factor greater than 1/2, the players have greater advantage to cooperate. Thus, the
greater the discount factor is (nearest to 1), the more important the payoff of each player will be
by using a cooperative strategy.
Now, the P value is "3/(1-8)" and the T value is "5 + 8/(1-8)".
The final outcome for each player in a repeated game is represented in the following normal form
game:
CUSTOMER
Do not cooperate
Cooperate
NC=1
0
Do not cooperate
SUPPLIER
NC= 1
T= 5 +8/(1-6)
T = 5 + 8/(1-8)
P = 3/(1-6)
Cooperate
0
P =3/(1-8)
Figure 2.12: outcome of a repeated game between the customer and the supplier
In the lean production system, the value of 6 is such that:
3/(1-8) > 5 + 8/(1-8)
In that case, the optimal strategies of each player to the other player's strategies is:
40
CUSTOMER
Do not cooperate
Do not cooperate
0
NC=1
.".."""...'.""....
A
NC = 1
SUPPLIER
Cooperate
T = 5 +6/(1-8)
T = 5 +8/(1-8)
Cooperate0"
0
P = 3/(1-S
P = 3/(1-S)
Figure 2.13: repeated game between the customer and the supplier
In such a situation, there are two stable solutions. If the players start to cooperate with each other,
than the stable solution is to continue the cooperation. If one of the players stops cooperating,
then the other would use the "non-forgiving" strategy, which is to stop cooperation. In that case,
the outcome of the players would be much lower than expected in a cooperative environment.
This decrease in expected outcome could hurt drastically the players, especially if one of them is
more dependent from the other. In the lean production environment, especially in Japan, this
situation occurs. The suppliers are in general dependent from the customer. If the latest stops a
contract with the supplier, the supplier gets damaged and could run out of business. The nonforgiving strategy is then more than a threat of low outcome.
Thus, the structure of the lean production system is made so that the P value is now greater than
the T value and cooperation between the supplier and the customer is encouraged. Then, the
stable situation of this game is "cooperate-cooperate" and it is also the optimal one for both of the
players.
2.5 Conclusion
We have seen that in mass production system while partnership between suppliers and assemblers
is ideally the best for both, it is not the stable solution. We have demonstrated using game theory
that there is no possible partnership and cooperation in mass production system, with their current
process to hire a supplier. Furthermore, we have seen that cooperation between supplier and
customer is possible in lean production systems. We had demonstrated that using again game
41
theory and we have seen that that kind of relationship is not only a stable solution but also it is the
optimal one.
Thus, we have seen that there was links between the supplier selection process, the type of
relationship between the supplier and the customer as well as the quality of information
exchanged between the supplier and the customer.
In the next section, we are going to explore one type of information exchanged between the
supplier and the customer and we are going to quantify its value in order to find out if a
cooperation between supplier and customer, i.e. an exchange of quality information have some
value.
42
CHAPTER 3: VALUE AND IMPACT OF PROCESS
CAPACITY INFORMATION
3.1 Introduction
The first part of this thesis showed that the supplier selection process used by a customer, the
supplier behavior and the quality of information given by the supplier to the customer are all
linked. Although, we don't know exactly the nature of those links, we can intuitively state that for
example the better the relationship between the customer and the supplier will be, the better the
quality of the information exchanged between those two will be.
Also, in the first chapter, we saw that supplier selection was often based a bidding process. Thus,
the cost of the supplier is an important factor in the supplier selection. As a matter of fact,
although managers say that quality is the most important attribute for a supplier, they actually
chose suppliers based largely on cost and delivery performance (Verma and Pullman 1998). Thus,
the suppliers seem to be mostly selected based on the cost they submit during the bidding process.
The cost of the supplier directly affects the product expected cost of the customer. Therefore, this
supplier's cost is an important determinant of the customer product expected cost. However, as
we saw in chapter 1, the supplier with implausible bid wins contracts, followed by adjustments,
which may make the cost higher than those of realistic but loosing bidders (Womack, et al 1990).
Thus, the customer can partly believe the information given by the supplier, but he also has to get
extra information in order to evaluate his real product expected cost with more precision.
The customer needs to find an additional source of information and has to include this additional
information with the information coming directly from the supplier in order to have more
precision on his real future expected cost.
This chapter proposes a way to integrate those two sources of information: initial information
given by the supplier and additional information obtained by the customer. The integration of
43
those two sources of information will be done by a Bayesian updating process. This process takes
an initial input, here the information given by the supplier, integrates an additional source of
information, here a sample of parts coming from the supplier, and outputs a posterior information,
here it will be the updated belief f the customer about the supplier's initial information. We will
then evaluates the impact of that updated information on the product expected cost, which is one
of the most important criteria for supplier selection The updating process described in this chapter
will lead the customer to a wiser supplier selection.
In summary, this second part of this thesis aims to quantify the value of one of those information
exchanged between the customer and the supplier. The information that we will quantify is the
process capability information of the supplier. We will see how to get more precise process
capability information and we will see its impact on the expected product cost.
First, we will first describe the main elements of this study, which are the components of the
product cost and the knowledge we have about part length and distribution. Second, we will
describe the tool we used to quantify the value of the process capability information, which is the
Baysian update process. Third, we will derive the impact of the process capability information on
the expected product cost. Finally, we will give an example of the value of process capability
information using a simple 2-parts product and we will see how the customer can use that
information in supplier selection.
3.2 Elements of the Study
In this chapter, we will analyze the impact of the information given by the supplier on the
expected product cost. In this section, we will describe the main elements of the study, i.e. the
information given by the potential suppliers and the elements of the product expected cost. First,
we define the different elements of the expected product cost. Second, we explain the knowledge
of the customer of the part length produced by the supplier.
3.2.1 Elements of the Expec ted Product Cost
The cost of a product is composed by not only the manufacturing cots of the product (i.e. the raw
material cost, manufacturing processes utilization cost, labor cost, transportation cost, assembly
cost, etc.), but also some hidden costs that appear when the quality of the product is not as
expected, and that we will call here "quality cost". Those costs could be the warranty cost, the
44
repair cost, the bad reputation effect, etc. Most of those second types of cost are hard to quantify.
To simplify the reality, we will assume that the product expected cost is the sum of the
manufacturing cost and the quality cost.
Product Expected Cost = Manufacturing Cost + Quality Cost
(1)
The manufacturing cost is usually fixed and equivalent to the quote given by the supplier during
the bidding process. It could also include the costs for transportation, assembly, etc.
The quality cost is harder to evaluate, but can be assessed by many possible cost functions. We
can use traditional quality concepts or contemporary ones (Diallo, Khan, CMA and Vail 1995). In
this framework, we will use a contemporary concept called the Taguchi loss function. Taguchi
states that a company gains virtually nothing by shipping a product that barely meets the quality
control specifications over a product that just fails. He exhorts manufacturers to get on target
rather than trying to stay just within specifications (Taguchi and Clausing 1990).
Taguchi philosophy is that the quality improves as the variability decreases. He links improved
quality through variation reduction to costs using his "Quality Loss Function". Based on his
experience, Taguchi proposed a quadratic quality loss function as an approximation of the
external failure cost. The quality loss is minimal when the products/parts have their important
characteristics equal to the target value (design intent). The quality loss increases by the square of
the deviation of the product's or part's important characteristics from design intent.
Therefore, we can calculate the quality cost of a part as follow:
Quality Cost = k * D 2 where k
=
2
(2)
SUL -LL
2
where k is a cost constant, D is the of the part deviation from its nominal or design intent, C is
the cost of failure and UL and LL are the upper and lower specification limits of the part.
This quality loss can be represented as follow:
45
12-
10-
8-
6-
4-
2-
0
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
Figure 3.1: Taguchi loss function
The quality loss for a product is proportional to the square of the deviation from target.
Hence, the quality loss is zero if the important characteristic of the product hits the target
value, otherwise it would be greater than zero.
We now have to determine how we can calculate the product deviation from nominal. We
will assume here that the important product characteristic which deviation has an impact
on the quality cost of the product is a physical dimension of the parts composing the
product. We will assume here that the deviation from nominal of the length of the parts
has an impact on the product quality cost. Thus, the customer wants to know the part's
length and distribution in order to evaluate the product quality cost. The part length and
distribution is the initial information given by the supplier to the customer. We describe
that information in the next section.
3.2.2 Knowledge about Pa rt Length and Distribution
The different possible values of the part length can be modeled by a probability distribution
function, like the Gaussian distribution function. Other possible probability distribution function
can be used, but we have chosen the Gaussian distribution function because it reflects the reality
in most of the cases.
46
The issue is now to obtain the data that enable us to determine the Gaussian distribution
parameters. Two methods can be used to predict those data: the process capability databases and
the manufacturing knowledge (Thornton 1998).
The process capability databases can be useful to determine internal process capability, but can
become very uncertain for external processes. Moreover, companies don't always have process
capability databases or if they do, they are not always reliable.
The manufacturing knowledge is an educated guess about variation. Those guesses are based on
experience and are often communicated as a range rather than a specific value. From this range,
we can obtain the distribution of the part length.
The communicated range is expressed as [or,, qj,
where there is 95 % probability that the
standard deviation will fall in that range (corresponding to 2o,). This range is translated into a
probability distribution (Thornton 1998): process capability uncertainty can be modeled as a
Gaussian distribution with mean u, and a standard deviation a, where:
i
=-
+ Oul
2
=
(3)
ul - alI
4
From those process capability knowledge, we can extrapolate the distribution of the part
lengths.
O7ength =
1 or =
U11 +
2
u
(4)
(4)
2
/length
= P process
Ideally, plength is the target length as specified by the design intent.
L ~ N( 9 process , alength2
)
Thus, the length of the produced parts will follow the following Gaussian distribution:
Which can be represented as follow:
47
1.04
0 035 -------------
---
-
0
0 025
-
--------------
1.02 -
0. 015 -
-
-
-
-
-
-
0.01
-
--
*--
-
- -
-
----
-
-
- -
-
I
-
0. 00
10
9.5
10.5
Figure 3.2: Distribution of part length
3.2.3 Quality loss for a product distribution
We can evaluate the loss of a product by using Taguchi Loss function and the product variation.
The loss, L, for a product sensitive only to one part variation, is a function of its standard
deviation, or, its bias, b, cost constant, ki, the cost of failure, Ci, and the upper and lower
specification limits, ULi and LLi (Thornton 1998).
L = k(b2
+
o2)where k =
C
SUL-LL
(5)
2
However, a product is usually sensitive to more than one part only. Thus, we need a model to link
every sensitive parts of the product, called key characteristics, to the overall product key
characteristic variation. A variation model was created to quantitatively relate product level
variation (characterized by o- and bi) to part variation (characterized by
%ji
and
bjl) using the
linear model (Thornton 1998):
b1 =
D,, b,, ando1
=
jTo-
The two constants, Dij and Tij are the product-KC, i, to part-KC,
48
(6)
j
variation sensitivities.
The overall loss of the whole product is the sum of the nf individual product key characteristic
losses.
LT =
i=1
(7)
2 +or2)
L = Jk(b+
i=1
In this section, we studied the main element of our study: the product expected cost components
and the knowledge we have about part length and distribution.
3.3 Tool Used for the S tudy: The Baysian Update Process
The main tool we use for this study is the Baysian update process. This Bayesian process, or
Bayesian inference, is based on the Bayes theorem and requires a different interpretation of
probability, called the subjective viewpoint. A subjective viewpoint, or statement, measures a
person's "degree of belief' concerning some event. The updating process helps a decision-maker
to update his belief about an event or a distribution by incorporating new information in his initial
beliefs. In our case, this tool will enable the customer to merge the initial information given by
the supplier with the information obtained afterward by the customer (in this case, the additional
information is obtained via a sample of parts made by the supplier). The customer will then
obtain a more precise idea about the distribution of the supplier manufacturing processes as well
as an idea about the reliability of the supplier. We decided to choose this tool because of its
ability to merge two distributions and its ability to deal with bivariate distributions (in this case
p and
a2, mean and variance of a manufacturing process distribution).
This tool updates the distribution of the part length we have from the manufacturing knowledge
or other sources of information, usually coming from the supplier. The distribution is updated
when we have new information about part length. This new information can come from parts
received from the supplier, quality control data, process capability databases, etc.
The distribution update reflects the update of the customer beliefs about the supplier's process
capability. At first, the supplier claims that its manufacturing processes output parts following a
distribution a. Then, the customer receives the sample from the supplier and the sample follows
a distribution fl. We obtain the updated a, i.e. distribution
process.
49
, by using the Baysian update
The Baysian update enable finding that third distribution
by incorporating the two former
distributions a and /P. In our case, we have:
"
Distribution a = distributions of the distribution parameters = N(p, o2)
-
Distribution
-
Distribution
#
= distribution of the part sample
=
N(M', S' 2 )
= updated distribution = N(p', or)
Figure 3.3 describes the steps of the Baysian update process.
Part length - N( gp,,o c
Choose a theoretical
distribution for the physical
process of interest
2
),,,
Information
Part length - N( g process
'p
...
s2
Distribution assessed by the
customer based on the
supplier's information
f (0i)
-1
Sample received by the
customer
Observe data:
I
esample
Updated dis tribution of the initial
distribution assessed by the
customer on the supplier's
information
Update prior distributions using
Bayes' theorem. Those are
posterior distributions of
parameters9i : f(, x, )
i
given by the
supplier
Assess uncertainty about
parameters . Those are the prior
distributions: f(
)
,~
Customer/supplier case
Illustration
Theory
f
posxei
/Uproress
N(,u,,
,
)
Oprocess
ora)
Updated belief of the customer
about the su pplier's
manufacturi ng processes
distribution
Marginal distribution of posterior
distribution parameters
Figure 3.3: Bayesian update process
In the customer -supplier case, we can apply the Baysian update process as follows
50
Distribution a : initial information given by the supplier about his manufacturing process
capability
The distribution a is the initial knowledge that the customer has about the distribution of the
parts made by the supplier. We assume it to be N(u,
2),
however, there is an uncertainty about
this distribution since the customer doesn't know for sure the exact distribution parameters of the
supplier. Therefore, the uncertainty about the parameters can be modeled by two Gaussian
distributions:
*
p follows a distribution N(p,,, o,)
2
follows a distribution N(p a)
Distribution 8 : Distribution of the part sample received by the customer from the supplier
The distribution 8 represents the new information that the customer has about the supplier's
distribution. In this study, we assume that the new information we have about the supplier's part
distribution comes from a sample of parts delivered by the supplier. Therefore, the distribution
#8 is the distribution of the part
sample. We assume the sample has n parts and its distribution is
N(M', S' 2 ) , where M' is the sample mean and S' 2 is the sample variation:
M'
1n
s''/2
Distribution (:
=
1
1fl
n-
1 =
(8)
i=1
(Li -M')
2
(9)
distribution of the updated belief of the customer about the supplier
process capability
Distribution
is the updated distribution of the distribution a using the new information
coming from the distribution fl. This updated distribution
is N(u', (F'2). The parameters of
this distribution are calculated using the following Baysian update process. This final distribution
represents the updated belief of the customer about the supplier's part distribution. The customer
51
will now be able to use this new distribution to compute his new expected product cost and make
a wiser decision in term of supplier selection.
3.4 Bayesian Updating Process: Steps and Example
In order to obtain the updated distribution function of the part lengths (distribution
), we first
have to assign a joint prior distribution function to U and a. Then, we have to obtain the joint
posterior distribution function of pI and a by applying a bivariate analogue of Bayes' formula.
Finally, we have to compute the marginal (posterior) distribution function of p and of a from
the joint distribution function by applying a procedure on paired random variables.
In our study, we use a specific updating result for a sampling from a Normal process. This result
states that if the joint distribution (p , o ) is given a Normal-Inverted-Gamma prior distribution
function (to be defined by the decision-maker), then the joint posterior distribution function of
(Ap,
or) is also Normal-Inverted-Gamma, and there is a simple algebraic formula connecting the
prior parameters (m', n', v', v'), the sufficient statistics (in,v) of the sample, and the posterior
parameters (m", n", v", V'). We can then derive the distribution parameters of the marginal
distribution functions of pi and of a.
To illustrate this process, we will do an example where the customer has to select a supplier based
on initial information given by the potential suppliers and a sample of parts given by those
potential suppliers. The scenario of the example is given in section 4.1.
3.4.1 Scenario of the Example
A company (the customer) wants to build a product composed with 2 parts: Part 1 and Part 2. The
2 parts are assembled one at the end of the other to form the product. The key characteristic of the
product have been determined to be the total length of the assembly, i.e. in order for the assembly
to be satisfactory, the sum of the lengths must meet a priori tolerance.
In that case, just one dimension is critical, i.e. the total length, but further cases could include
more than one critical dimension or other types of key characteristics (force, voltage, etc). The
target length of the product is L* and L*=25.
52
Product
Part
1
Part 2
Drawing of the Total Assembly
I
I
I1
Upper length (L-)
Target length (L*)
I ~-
I
L
Lower length (L+)
Allow~ed 'variability
Figure 3.4: critical dimension: total length
The customer outsources both parts of the product, part 1 and part 2. In the next sections,
we see how the customer makes his supplier selection using the Bayesian update process.
Supplier for Part 1
The customer outsources part 1 to a supplier with who he had already had previous
contracts. The customer assumes that there is no uncertainty on the supplied part
distribution. The parts coming from that supplier follow a Normal distribution function.
The distribution parameters of the supplier l's manufacturing process are:
pU'
=15
-A= 0.03
53
Supplier for Part 2
The customer has now to select a supplier to manufacture part 2. He considers two
potential suppliers: supplier A and supplier B. The customer asks some information to
each of the potential suppliers. During the bidding process, he asks each supplier about
their manufacturing cost, as well as the distribution parameters of their manufacturing
processes. Each of the potential suppliers gives the following information to the
customer:
Supplier A
Supplier B
Manufacturing Cost
$ 1.10
$ 1.00
Mean of the process p
10.03
10.04
Variance of the process
0.022
0.052
Table 3.1: potential suppliers for part 2
Supplier A is more expensive than supplier B, but he claims that his manufacturing
process is more accurate and that the quality and variation of his parts are very good.
Now, we will see how the customer can make a wiser supplier selection by obtaining a
part sample and using the Bayesian updating process.
Samples from Each Supplier
The customer then asks each supplier for a sample of 20 parts that will be analyzed using
the Bayesian update process described in section 1.3.1 through 1.3.7 in order to update
the information given by each supplier to the customer.
54
The sample of supplier A is the following:
Part nb
Length
Part nb
Length
Part nb
Length
Part nb
Length
1
10.01
6
10.03
11
10.02
16
10.02
2
10.00
7
10.01
12
10.01
17
9.99
3
9.98
8
9.98
13
9.98
18
9.98
4
9.99
9
10.06
14
10.03
19
10.01
5
10.00
10
9.99
15
9.99
20
9.99
Table 3.2: sample from supplier A
The sample of supplier B is the following:
Part n,
Length
Part nb
Length
Part nb
Length
Part nb
Length
1
10.07
6
10.07
11
10.08
16
10.11
2
10.08
7
10.07
12
10.07
17
10.05
3
9.93
8
9.94
13
9.98
18
10.05
4
9.92
9
10.07
14
10.07
19
10.11
5
9.92
10
9.92
15
9.93
20
10.09
Table 3.3: Sample from supplier B
The customer can now update each prior distribution function given by the supplier using
the new information coming from the part sample.
3.4.2 Joint Prior Distribution Function of u and a 2
When both parameters of an independent Normal process are unknown, the most convenient joint
distribution of the two variables is a Normal-inverted-Gamma distribution defined by:
f'(p, a)= f',
a(~olm',n', v',V')
(10),
Where the parameters are assessed by the decision-maker. For example, the decision maker can
assess that:
55
M
V
I
(11)
0
The two other parameters of the distribution (n'andV') are information about the number of
observations we used to calculate m and v. Since the prior distribution is based by the
knowledge the customer has from the supplier, we can give those parameters any value that could
reflect the trust the customer has for the supplier's values. For example, if the customer receives a
sample of 20 parts and he assumes that the information he had from the supplier was equivalent
to 3 sample, then we will have:
n=60
V'=59
Once we have the joint prior distribution function, we need to have the sample distribution
function in order to obtain the joint posterior distribution function.
3.4.3 Example: Joint Prior Distribution Function
Joint Prior Distribution Function of p and
The joint prior distribution of U and
U
2
f'(p, a) =
U2
of Supplier A
is:
f,'i, (u,
alm',n', v',V'),
With:
m
=10.01
n'=60
v'
0.022
V'=59
Joint Prior Distribution Function of p and
U2
of Supplier B
The joint prior distribution of p and a2 is:
f'(u, a) =
fr,, (p, alm', n', v',V'),
56
With:
m'10.02
v'=0.04
n'=60
V' =59
2
3.4.4 Distribution Function of the Sample
The sample received from the supplier is a series of observations (zI ,...,
Zn).
The distribution
function associated with this sample is:
fNiy
(uOirn,v,n - i)
(12),
Where the parameters are:
n
m = mean of the sample =
v
n
n
=
variance of the sample=
n
-1
(z -rM) 2
(13)
i=I
n = number of observations in the sample
The prior distribution and the sample distributions are then used to calculate the parameters of the
joint posterior distribution function.
3.4.5 Example: Sample Distribution Function
Distribution Function of the Sample Given by Supplier A
The distribution function of the sample is:
fNiriOUlmfnvfn
With
57
-
n
m = mean of the sample ==
= 10.0055
n
v = variance of the sample =
n
in
I
(z,
-
M)
2
= 0.0206 2
i=1
-1
n = number of observations in the sample = 20
Distribution Function of the Sample Given by Supplier B
The distribution function of the sample is:
fNir
)
,v
P rm
With
n
m = mean of the sample =-
= 10.0265
n
n
v = variance of the sample
(z
I
-rm) 2 = 0.072 2
n = number of observations in the sample = 20
3.4.6 Joint Posterior Distribution Function
If the prior distribution of the mean p and variance
U2
of an independent normal process
is normal-inverted-gamma then the posterior distribution of (pu,02) is also normalinverted-gamma. This posterior distribution is given by:
f(h e2eNiy
2
Where the parameters are:
58
m,n",ve,Vs)
t
(4)
,
n'm'+nm
n +n
n =n'+ n,
V ,=
2
[v'V' + n'm' 2) ]+ [vV + nm ]- n#m "
Iv' + 1(n' )]+ [V +,(n)]- 9(n')
2
(15)
V= V'+8(n' )]+ [V +,8(n)]- 8(n"),
n = 0,
i5(n) ={0 if
1 if n > 0.
Now, we can obtain the posterior marginal distribution functions of p and of or from the
joint posterior distribution
3.4.7 Example: Joint Posterior Distribution Function
Joint Posterior Distribution Function of Supplier A
The joint posterior distribution function is:
f(pU ,2)
= fNiy(p
U 2 1m#,n",v',V#)
Where the parameters are:
,
n'm'+ nm
n' + n
-
60*10.01+20*10.0055
60+ 20
=10.0088,
n"= n'+ n = 60+ 20 = 80,
2
[v'V'+ n'm'02 ]+ [vV + nm2 ]- n-mIv '+S(n')
+ [V +,S(n)]-.S(n')
,
=
-
[0.022 *59+60
* 10.012 ]+
[0.02062 *19 + 20 *10.00552 ]-80*10.00882
[59+1]+ [19+1]-l
0.02012,
V-=
[V'+ S(n')]+ [V
_
+.S(n)]- S(n") =
[59+1]+ [19+1]-1 = 79,
0 if n=0,
1 if n>0.
Joint Posterior Distribution Function of Supplier B
The joint posterior distribution function is:
f(pU
, .2
59
fNiy
',(
2 1 m#,n#,
v#,V")
Where the parameters are:
=n'm'+nm
M~~
n' +n
60 *10.02+20 *10.0265
60+20
10.0216,
==-
n"=n'+n=60+20=80,
,
n-m"2
[v'V'+ n'm'2 + vyV + nM2]-
[0.042 *59 +60 *10.022
v=V'+8(n') +[V +S5(n)]-.(n")
=
]+
[0.0722 *19 +20 *10.02652 ]-80*10.02162
[59+1]+[19 +1]-l
0.04952,
V-= [V'+8(n')]+[V + S(n)]-
S(n') = [59 +1+
[19 +11-1 = 79,
0 if n = 0,
I ifn
>0.
3.4.8 Posterior Distribution Function of U
If the joint distribution of (p, o-) is Normal-Inverted-Gamma, then the marginal
distribution of P is the student distribution:
D(u Im',n',v',V,) = fs (um",
,V)
,
(16)
Where the mean and variance are given by:
___M
op =E(#ImI,n,v',V )=
o.r
p
= VO
V"
2V"
I m", n#, v",)V2) =
92
=-
,#V#
3.4.9 Example: Posterior Distribution Function
Posterior Distribution Function of f!, Supplier A
The posterior distribution function of
#
from the joint distribution function is:
D(u Im',n",v",V#)
With:
60
n1
(17)
p, =E(j m'",n",v,V')==m"=10.0088
a2
a2
V
=n
V"
2v"
= V (UI m",n",v", V2"=2=
Posterior Distribution Function of
The posterior distribution function of
,
='
n# V-2
0.02012 79
80 79-2
= 0.00232
P , Supplier B
g from the joint distribution function is:
D(p I m',n",v',V") = fs (P m",n
V
With:
p, = E(
Im",n,v",V")=
nv
a2 P =V(jU I m",n",v",V 2")=
= m =10.0216
2
=
v2 V"
V-,
n# V#- 2
3.4.10 Posterior Distribution Function of
If the joint distribution of (p,
distribution of
d 2 is
=
0.04952
80
79
=0.00562
79 -2
C2
a) is Normal-Inverted-Gamma, then the marginal
the Inverted-Gamma-2 distribution:
D(21
m,n"',v',V) = fi (rv",V#)
(18)
Where the mean and variance are given by:
P, =
a
2
E(d 2
2
2
21V"-1J!
| m",n",v",V")
=V(d2 I m",n",vN,V 2") =
61
v"
V
V#- 2
(20)
3.4.11 Example: Posterior Distribution Function
Posterior Distribution Function of C2, Supplier A
The posterior distribution function of
E2
from the joint distribution function is:
D(&2 1 m",n",v',V")
=
f
i(2
1 v",V')
Where the mean and variance are given by:
P, =
E(21
2_
a
I m',n', v',V ")
2
=
-
V"-2
D(&2
452
2
79
= 0.0307
d2,
2
179-1!
2
7
(2
Posterior Distribution Function of
The posterior distribution function of
= 0.02012
1 VN-1!
2
#"V"#
20
_
2
S
m,n",v",V") =
79-2
79
2
= 0.02022
-2
= 4.1.10
Supplier B
from the joint distribution function is:
1m',n",vv,V") =
2 1(2
| v",VF)
Where the mean and variance are given by:
1, f_3
,=E(&2Im",n',v",V')
2r=
2
(2
V(y2V
n"v,2
2
2
1 Vif-1
(2
-'
=
2
=
''2
1 7-3
-79--!
-V--!
,
,
"1J
VI -2
=0.04952
= 0.039222
2)
2
179
1
-1 !
(2
=
0.04972
2
792 = 0.00252
79-2
3.4.12 Updated Distribution a
The whole process described above leads to the updated distribution of the original belief of the
customer about the supplier's distribution. The customer belief about its supplier distribution is
now equivalent to the updated distribution:
62
(21)
N(p', 0./ 2) = N(p,, p,)
In summary the updated distributions parameters are the following:
/2
pY=
2
,r
2ff
I
2
2
x2
=-
V"
VO
2
o- =v
#2
n V'-2
V
V'-2
Table 3.4: summary of the updated distribution parameters
Which can be illustrated as:
Li
-
Li
N(p, a 2 )
a
a.2 ~ N(p, , a)
.0
.....
.........
I
I.
-
N(pi', U-2)
~2N(po,2 I a a
Update
\
-I-
I
Figure 3.5: Prior and posterior distributions
3.4.13 Illustration Using the Example: Updated Distribution a of the
Suppliers
Updated Distribution a, Supplier A
The whole process described above leads to the updated distribution of the original belief of the
customer about the supplier's distribution. The customer belief about its supplier distribution is
now equivalent to the updated distribution:
63
N(p',U'2 ) = N(p, , 4 ,u) = N(10.0088,0.0202 2)
The updated information about the supplier A's distribution function can be represented
graphically. The prior and posterior distribution functions of the supplier A's manufacturing
process are shown in the following graph:
20
18
16
14
--
--
-
-
--
r----
- -----
-
-
---
--
-
----
12
10
I
I
I
'
I4 I
I
0I
I
II
10.05
10.1
I
8
6
4
2
O
9.8
9.85
9.9
9.95
10
10.15
10.2
10.25
Figure 3.6: Prior and posterior distributions of supplier A
The prior distribution is in the dashed line and the posterior, or updated distribution, is in the
plain lie. The lines on these graphs are very close because the prior and the posterior distribution
are very similar. From that graph, we can deduce that supplier A has an accurate knowledge of
his processes. His judgement seems to be reliable. Also, the distribution functions are well
centered on the target length required by part 2.
64
Updated Distribution a, Supplier B
The whole process described above leads to the updated distribution of the original belief of the
customer about the supplier's distribution. The customer belief about its supplier distribution is
now equivalent to the updated distribution:
N(pa',-' 2 ) = N(flp,,u,) = N(10.0216,0.04972)
The updated information about the supplier B's distribution function can be represented
graphically. The prior and posterior distribution functions of the supplier B's manufacturing
process are shown in the following graph:
10
9
8
I
I
I
L-----I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
LI
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
g
I
I
I
I
I
I
I
I
I
7
6
5
4 -----3
2
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
4-I
I
I
4
T
I
I
I
I
I
I
--
1
VI
9.8
4----
4I
I
I
I
I
I
I
I
I--4
I
I
I
I
I
I
I
I ,
I,"
I
9.85
I
I
I
I
I
9.9
I
I
I
I
I
I
I
I
I
I
I
I
I
I
9.95
10
10.05
x
I
I
I
10.1
I
I
I
I
I
I
I
I
1-
I
I
I
10.15
10.2
10.25
Figure 3.7: Prior and posterior distributions of supplier B
The prior distribution is in the dashed line and the posterior, or updated distribution, is in the
plain line. From that graph, we can deduce that supplier B doesn't have an extremely accurate
65
knowledge of his processes. His judgement seems to be not reliable. Also, the distribution
functions are not centered on the target length of part 2.
3.5 Impact of the Upd ated Process Capability Information on
the Expected Product Cost
The Bayesian update process enables the customer to update his knowledge about the supplier
process capability and part distribution. Now, we have to calculate the impact of this updated
information on the product expected cost.
3.5.1 One-Part Sensitive Product
If the product were only sensitive to one part, the variation of that part would linearly affect the
product variation and quality cost. In that case, the update product expected cost would be:
Updated Product Expected Cost = Manufacturing Cost + Updated Quality Cost
Updated Product Expected Cost = MC + K * (b/2 +
or2)
3.5.2 Multiple-part Sensitive Product
For a product sensitive to more than one part, we have to use the model that links individual part
variation to product key characteristic variation, using the updated value of the process capability
information.
Updated Product Expected Cost = Manufacturing Cost + Updated Quality Cost (23)
With the Updated Quality Cost:
LT = ~k ((Dyb')2+
Where b" and a
2
iTo'jf)
(24)
are the update parameters of the initial distributions.
Thus, the value of the process capability is the update of the product expected cost for the
customer. For example, this can help the customer in his supplier selection process. We will now
66
demonstrate in the next section the utility of such updating process in supplier selection by using
a simple example.
3.5.3 Example: Impact of the Updated Process Capability Information
on the Expected Product Cost
Updated Expected Cost of the Potential Suppliers
Now that the customer has an update judgement, he can evaluates the update expected cost of the
product for each supplier.
The updated expected cost of the product is:
Updated Product Expected Cost = Manufacturing Cost + Updated Quality Cost
Updated Product Expected Cost = MC + K * (b'2 +
In those equations, only (b'2
+ a2)
o'2)
will change from a supplier to another. Thus, in order to
compare the two suppliers, we will only calculate the updated (b-2
+
/'2)
for each supplier.
For supplier A, this value is:
(b'2 + a'
2
)=
0.0088 2 +0.0202
2=
4.8548. 104
0.02162 +0.04972
=
29.3665.104
For supplier B, this value is:
(b/2
+
/2)=
Comparison of the Two Potential Suppliers
The original believes of the customer about the suppliers' distribution functions was:
67
20
1-16
- -12 - ---
@
- -
-
---
I
I
----
, -
-----.-108-----,-------------
0'
9.8
9.85
-
-
--
-
9.9
g I
1I
9.95
-
-
-
-
-
*
gI
I
--
--
-
----
SI
8
J___
0-
1
S*I
I
-
-
-
-----I-
10
----------------
10.05
10.1
-I---
-
-----
-
10.15
10.2
10.25
Figure 3.8: Prior distributions of suppliers A and B
The dashed curve is the distribution function of supplier A and the other curve is the distribution
function of supplier B. At that point, the distribution function of supplier A is more centered on
target than the distribution of supplier B.
After the Baysian updating process, the customer has an updated belief about those distributions.
This updated belief is represented by the following graph:
68
-1
20
18 ------I
I
-
16 - ----- --I - - -I -I
I
I
I
16
00
9.8
I
I
I
I
I
9.85
9.9
9.95
'
I
II
I
- - -
I
I
I
I
0I
I
I
'1
0I
I
I
-
-
I
I
--
- -
- *-
-
-
I
I
I
II
----- |-I -I
-------I
- - - - -
10
10.05
10.1
10.15
10.2
10.25
Figure 3.9: Posterior distributions of suppliers A and B
The dashed curve is the distribution function of supplier A and the other curve is the distribution
function of supplier B. At that point, the distribution function of supplier A is eve more centered
on target than the prior distribution of supplier A . Also, the distribution function of supplier A is
again more centered than the distribution of supplier B.
The first conclusion that the customer has while comparing the prior and posterior functions of
each supplier is that supplier A seems to know his process and be reliable. On the other hand,
supplier B seems to have high variation in his process and doesn't seem to have a deep
knowledge about his processes, or might not be willing to share it.
Second, when we analyze the relative impact of this updating process on the product expected
cost, we see that the quality cost of supplier B is 6 times greater than the quality cost of supplier
A. However, the manufacturing cost of the supplier A is higher than the manufacturing cost of
supplier B. Therefore, the customer will have to make a tradeoff between having higher variation
among parts, but lower cost, or lower variation, but higher cost.
69
Conclusion: Supplier for Part 2
The expected product cost once updated for both suppliers is six times more important for
supplier B than for supplier A. Depending on the cost of failure, this could be an important factor
in the supplier selection decision. The customer has to evaluate its cost of failure and cost of
quality and to compare it with the extra cost of the parts of supplier B. Also, the customer has to
consider that, as shown in chapter 1, the cost of each supplier can change through time, whereas
their knowledge of their process will remain. Supplier B seems to be more reliable than supplier
A, assuming that each sample coming from each supplier is relevant of their actual manufacturing
processes.
3.6 Conclusion
This study aimed to analyze the impact of more information on the expected cost of a product.
We took a simple one-part sensitive product as an illustration to see how the customer can use
this information to select a supplier.
Using Bayes theorem, we were able to refine the expert judgment about distribution parameters,
which is usually the only data used in industry. We have seen that by updating the judgment, the
impact on the expected cost of the product was important. Another interesting fact is that that
kind of analysis allows a combination of human knowledge and scientific update. This kind of
cooperation could lead to a better cooperation between areas like design and manufacturing in
industry because each party can more easily see its impact on the other one. Further models could
be developed in order to be able to deal with more complex designs.
However, the supplier selection process in industry takes into account more selection criteria than
only the quality cost. In the next chapter, we will see the other criteria for supplier selection and
how they are linked to the types of relationship a customer has with his suppliers and to the type
of product.
70
CHAPTER 4: SUPPLIER SELECTION IN
INDUSTRY
4.1 Introduction
The first part of this thesis showed that the supplier selection process used by a customer, the
supplier behavior and the quality of information given by the supplier to the customer are all
linked. Then, the second part of this thesis quantified one of those links: the impact of the quality
data given by the supplier on the expected product cost. From this relation between data given by
the supplier and its value for the customer, we can assume that many other aspects of a
relationship between a customer and his suppliers also have values. Thus its implied that there are
many different types of relationship between customers and suppliers in industry. This last part of
the thesis aims to identify possible relationships between customers and suppliers and to
understand the reasons behind those relationships as well as why a customer prefers to have them.
Through industry case studies, the supplier selection process of two companies was analyzed.
This first chapter introduces the research method and assumptions we made. A simplified section
of the supplier selection process on which we concentrated in the case studies is also included.
4.2 Research Method
Industry case studies offer an understanding of the current supplier selection in industry.
Interviews were conducted in two companies in two different industries and documents from the
supplier selection processes used in those companies were analyzed. A range of people dealing
with suppliers and supplier selection were interviewed. Those people have positions as buyers,
buyer managers, product managers, engineers and platform managers.
For each of those companies, the different types of relationship currently used with their suppliers
were identified. We then found relations between those types of relationship and the
71
characteristics of each of the products for which those relationships were used. We also
determined the key selection criteria used by the customer to pick his suppliers, and we related
them to each type of relationship and each important product characteristics.
Also, through those industry case studies, we elaborated a list of industry weaknesses and best
practices in the current supplier selection processes. We also compiled a list of tradeoffs that the
companies were doing while selecting suppliers.
To simplify the analysis of the current supplier selection done in industry, we made certain
assumptions and we modeled the reality as described in section 4.3 and 4.4.
4.3 Description of the Broader System
In this research, we assume that a company produces value for a market through a product and
that is the reason why the company wants to develop that particular product. We assumed that
there is a market for the product. To deliver that value, the company has to come up with an
architecture, or system, for the product (Ulrich 1995). There is a whole supply chain to support
the development and production of the product.
So through a system or architecture, the company is going to provide a value for the selected
market. The company has to architect the product to allow future modifications, additions or
options of the product (Ulrich 1995). The company has to know how to produce the product at
cost effective today for tomorrow's value, so the company needs to understand the technology
trends, market trends, system integration functions, etc. This architecture will then be used to
develop a set of product characteristics or product components (Ulrich 1995).
Then for each of the product component developed from the architecture, the company will
have to take make/buy decisions (Buchowicz 1991, Speir 1989, Banks 1982). What subsystems is the company going to make and which ones is the company going to buy, or
outsource. The company will have to define: what technology is content in the product? What
is the value proposition in the product? What provide the value in the product? Hopefully, the
company has a few core competencies internally and those core competencies will guide the
company in its make/buy decision (King 1991; Boath, Hess and Munch 1996).
72
The company is then going to make some parts of the product and buy the other parts. For each
outsourced part, the company will have to select a supplier. The company makes these decisions
in an intelligent and systematic way. The company needs to know how to buy, where to look,
what to look, who is the best, who is good today, who will be better tomorrow, and so on.
Also, the company needs to know how to integrate. As the world becomes more competitive and
as the companies try to optimize their value for the money they invest in their business, they want
to focus more and more on their core capabilities (Gallon, Stillman and Coates 1995; Prahalad,
1990, 1993, Nadji 1996). Some major manufacturing corporations have consistently applied core
competency thinking and have gained considerable strategic value from the coherency of this
approach. Examples of some definitive practitioners and their core competencies include:
-
3M, in developing products that creatively combine flexible substrates and functional
coatings;
-
Sharp, in manufacturing high-volume, large-area liquid crystal displays;
-
Kodak, in developing and applying efficient silver halide imaging materials;
-
US Surgical, in bringing novel, Class 11/111 medical devices to market.
A core capabilities of the company revolves around its ability to reintegrate those pieces that the
company is not longer doing itself with the pieces that the company is doing itself. That system
competency must always be a core competency of the company, for a system engineering
company. The company needs to have a system competency, and also a module competency, i.e.
how to divide a product into modules or sub-systems. So the company needs to have the ability to
architect a product, manage his development and then reintegrate it. However, the company can't
just keep that ability. If the company is just an integrator, then the real profit goes to its suppliers
because they are the ones with the real capabilities, they have core capabilities that the company
have allowed to escape. The important thing is a balance between the system integration skills
and some core modules. The company keeps the system integration and develops some core
modules of the product.
73
In summary, the company needs the following capabilities:
Parts to make
Parts to buy
Know how to make the parts
Know how/where to buy
Know how to integrate the parts (system
Know the trends (market and technology)
and module competencies)
Table 4.1: Company's capability
In this study, we concentrate on the parts that the company has to buy and we focus on the "know
how/where to buy" capability. This capability is the capability of selecting the appropriate
supplier for the customer's needs. This selection is done following a supplier selection process,
which we will analyze in our industry case studies.
The company needs to decide what are the competencies it needs to maintain and what are the
competencies it wants to give away. Afterwards, it can start to make the decision about what
capabilities are needed and what capabilities it needs its suppliers to have for each of the
outsourced parts. Thus, the capabilities the company is choosing in its suppliers actually depend
on its own capabilities (Ragatz, Handfield and Scannell 1996). So there is a link between the
internal capabilities of the company and the capabilities needed from the suppliers. It's not only
the product characteristics that define what the company needs from the customer, but it's also
the company own characteristics.
The company will then select its suppliers depending on the product characteristics and the
internal capabilities. These will also determines which type of relationship the company will use
with its suppliers. Within any particular product the company has many different types of
relationships, from where the company does all the development and manufacturing by itself to
where the company does none of the work by itself, almost like a black box design.
The following picture was developed to describe the links between the market, the product
architecture, the product characteristics, the different type of relationships, the key criteria for
supplier selection (or capabilities needed from the supplier) and the company's internal
capabilities. It is based on a synthesis of interviews, and discussions, literature.
74
Value
System Architecture--
Types of relationshi
S
Set of key criteri
or
plier Selet
Figure 4.1: Broader system of supplier selection process
Our interest is to analyze the decision made by the customer in the supplier selection process once
the product architecture is defined. We assume the customer has a set of potential suppliers to
choose from (left item on figure 4.1). Therefore, the system that we are analyzing in the industry
case studies is a sub-system of the system described above. This sub-system, which is described
in section 4, concentrates only on the process used by the companies to select suppliers. The
question we want to answer is what drives the supplier selection process in a company? What are
the internal factors that will influence the supplier selection, or more precisely, what product
characteristics will influence the supplier selection? What are the key criteria for supplier
selection and why? Which types of relationship the customer wants to have with its suppliers and
why?
4.4 Description of the Studied System
This whole system described above is a simplification of reality. To answer the question about
what drives the supplier selection in a company, we decided to simplify once again the model and
75
-1
concentrate only on the supplier selection process, once the product architecture is determined.
The simplified model is the following:
Types of relationshi
Set of key variables for
supplier selectio
Supplier Selection
Figure 4.2: Simplification model of the supplier selection process
The company has then to select suppliers based on the knowledge of the product characteristics.
The supplier will be selected out of a set of potential suppliers known or found by the company.
The company will then have to take three decisions:
"
What criteria are important for supplier selection?
-
What type of relationship is required?
"
Ultimately, which supplier to select?
For each product development cycle, we assumed that a company has some information and need
to take decisions with that information.
We have:
Decisions
Information
Product characteristics
Type of relationship to have
Set of potential suppliers
Criteria to use for supplier selection
Supplier to select
Table 4.2: Information and decision
76
These key variables in the supplier selection process were selected according to literature review,
as well as interviews and discussions with various members of industry. The process for selecting
these parameters will be described in more detail in subsequent chapters.
4.5 Results
The study of the supplier selection processes used in industry has been done according to the
simple model. We searched the links between the different items of the model. Specifically, we
were looking for the links between:
"
The product characteristics and the types of relationship
"
The types of relationship and important criteria used in supplier selection
-
The product characteristics and important criteria used in supplier selection
We didn't look for the link between the set of important criteria for supplier selection and the
supplier selection decision, nor we look for the links between the set of potential suppliers and the
supplier selection decision. We assumed those links to be straightforward and we concentrated on
the study on the three categories of links listed above.
The study of the supplier selection process in industry has been made through two case studies
(Company A and Company B) and the results are presented in the two next chapters. We present
the links found in the three categories, as well as the best practices and weakness found in
supplier selection process. We also present the tradeoff the companies have to face during the
selection process.
4.6 Literature Review
Extensive literature covers the supplier selection process (Verma and Pullman 1998, Maltz A.
1995) and selection criteria used in industry (Vonderembse and Tracey 1999; Lambert, Adams
and Emmelhainz
1997; Katsikeas and Leonidou 1996). Most of the literature describes
characteristics that the supplier must have on order to be selected. Those characteristics are
mainly the quality, cost, delivery and service performances (Lehmann and O'Shaughnessy 1982;
Dickson 1996). However, only a few articles relate these suppliers' characteristics to the product
characteristics. A study made by Lehmann and O'Shaughnessy (1982) suggests that buyers
77
typically weight product characteristics and supplier characteristics in a manner that tends to
minimize the problems associated with purchase and use. This study grouped the products into
four product categories for industrial purchases. These categories are
"
Routine order products - those having no problems associated with learning to use the
product and no questions regarding the functional capability of the product
"
Proceduralproblem products - those for which there is no question about the capability
of the product, but there may be problems in learning to use it
"
Performanceproblem products - there may be some doubt as to whether the product will
perform satisfactorily in the application for which it is being considered. In particular,
there may be a problem concerning the technical outcome of the product's use.
"
Political problem products - those that require large capital outlays, and the buying
decision will likely involve people from several different functional areas within the
organization.
These product characteristics are mostly different from the one given in the industry case studies.
We could relate the "performance problem product" with the "critical nature of the product" as
define by company A. Also, we can relate "political problem product" with "new technology in
the part" characteristic as describe by company A.
The other product characteristics described by company A and company B are not readily
available in literature. However, they came from discussion with various members of the
companies.
78
CHAPTER 5: CASE STUDY - COMPANY A
This chapter is the first case study made in industry in order to understand and analyze the current
practices in supplier selection. This company produces product involving new technologies,
targeting low and high end market. The products are low to medium complexity, and are a
combination of electrical, mechanical and chemical. First, we explain the different terms used in
the case study. Most of those terms are the company's jargon. We explain the different types of
relationship the company has with its suppliers, the different part or product characteristics that
are relevant during the supplier selection process as well as the key criteria used during the
supplier selection process. Second, we explain the links between the different types of
relationship, the different product characteristics and the different key criteria used for supplier
selection. Third, we discuss certain aspects of the supplier selection process used by the
interviewed company, like the tradeoffs made by the company in the supplier selection process,
the good practices and the areas of improvement of the current supplier selection process.
5.1 Terms Explanations
The first section of this chapter explains the terms that we use in this study. We used three
categories of term:
"
The terms for the different types of relationships used by the customer with its suppliers
"
The terms for the different product characteristics that influence the supplier selection
"
The terms for the criteria used by the customer to select his suppliers
Each term is explained in this section. Also, in the case study, the word "part" is used for any
kind of part or aggregation of parts that create any sub-system or module of the product and
which is given as a contract to a single supplier.
79
5.1.1 Types of Relationship
The customer uses a whole range of relationships with its suppliers. Within the same project, the
customer can even have all the different types of relationship with the suppliers involved in the
project. The difference among those different types of relationship is more or less accurate.
However, through the different interviews, we classified the different relationships in six
categories. Each of the categories is described in this section. The six main types of relationship
used by the customer with his suppliers are:
-
the legacy supplier
-
the tactical supplier
"
the strategic supplier
-
the full service supplier
-
the extended enterprise supplier
"
the technology alliance
Legacy Supplier
This type of relationship is used with component suppliers providing parts for existing and dying
products. Those products use old technology and their market used to be large, but is now
decreasing. The relationship with those suppliers is a relationship for survival that prevents the
production lines from shutting down. No new business requiring new tooling is given to those
suppliers and no new supplier is added to that category. However, it still needs attention from
management because the customer still sell the product and has to provide maintenance and
customer service for the end-customer even for the products that are not produced anymore.
The legacy supplier relationship is also used with suppliers who don't perform as the customer
was expecting, but the customer cannot switch for another supplier for different reasons, for
example the part cost doesn't justify the expenses of a search for another supplier. The customer
won't invest in those suppliers and won't give them any new contract. The legacy supplier
maintains a continuity of supply, cost, quality, keep the parts coming in. This relationship is hard
to manage since the supplier has his fixed costs and tries to raise its price as the demand from the
customer decreases.
80
Tactical Supplier
This type of relationship is also used with component suppliers. However, those suppliers serve a
specific tactical purpose, like a JIT, shipping savings, inventory managing, parts with quality
problem, small design iterations to create product variants, etc. The difference with the previous
type of supplier, the legacy supplier, is that those suppliers are also considered for new projects,
whereas the legacy supplier is not. Tactical suppliers are selected to fulfill any unique need and
the parts they make are only small component level part, customer specific design type of part.
The customer selects this type of supplier when it is more convenient to have them instead of
starting a longer and more expensive type of relationship, like a strategic supplier, a full service
supplier, etc. Those suppliers do get some new contract, but the relationship is mostly short-term.
There is a lot of competition among suppliers in that area because the selection is based mostly on
the supplier's cost.
A tactical supplier can be a local supplier even if a foreign one could provide parts for a
smaller cost. For example, manufacturing a part would be more economical in China, but the
shipping cost would be too high, or the delivery time would be too long. So for tactical
purposes it makes sense to have local suppliers and those suppliers are tactical suppliers.
Strategic Supplier/ Long-Term Agreement
The type of parts those suppliers manufacture is customer specific design parts. In some cases,
the strategic supplier can do a subcontract or he can even build a whole module, but he doesn't do
any design. The customer gives the drawings to the suppliers. This category of relationship
includes many different variation of relationship with the suppliers. The common characteristics
among these relationships are that the suppliers have a mature TQM capability and are capable of
providing commodity expertise. Those suppliers provide products and services on a global,
continental or local basis with long-term importance to the customer. They have an open business
relationship, competitive cost levels and an infrastructure to manage sub-tier supplier base.
Usually, the customer shares proprietary information with them.
A strategic supplier is or should be a world wide benchmark type supplier, a leader in his field.
The strategic suppliers have the capacity for handling a lot of contracts and the customer gives
them all the work they can handle. Those suppliers have international manufacturing sites.
81
They can manufacture part of a module or an entire module. For example, they can do the frame
of a module, or do the assembly. The agreements are long-term.
Full Service Supplier
This type of relationship is used with world class organizations that manage full-service design,
development and delivery of product or services with systems integration capability. Those
suppliers possess a competent infrastructure capable of managing a sub-tier supplier base. The
supply base of the supplier has to be cost competitive and the supplier has to demonstrate the
ability to manage its base of suppliers. Those suppliers are committed to maintaining their
leadership by benchmarking and pursuing advanced technologies and processes. The supplier and
the customer have a shared vision and are capable of jointly developing services and/or
manufacturing products at benchmark quality, cost, delivery and service levels. Those suppliers
provide R&D, logistics, design, etc. They are capable, they can do all the design and they can
deliver. The agreements are long-term.
Extended Enterprise Supplier
This relation is used with suppliers capable of doing design and delivering a whole module. This
relation is similar to the full service supplier. However, an extended enterprise supplier leverages
its core business and core competency to create unique value for the customer. Their core
competency has to be what is involved in the module. For example, a module for a car can be the
transmission system of the car. In that case, the selected supplier has to have his core competence
in transmission systems and ideally the supplier has a whole range of different transmission
systems from which the customer can choose which one to include in his product. Ideally, the
supplier would have to come to the customer will their portfolio of the products they have. The
customer would just choose the product he wants from the portfolio, with some changes in the
design if required. Their products, customized to the customer's need, are a whole module of the
final product.
For example, an extended enterprise supplier could be a supplier designing and delivering seats
for a car company. The seat design would be the core competency of the supplier and the supplier
would already have a portfolio of seats.
82
Joint Venture or Technology Alliance
This last type of relationship is the strongest relationship that can exist between two companies as
the two companies are considered to be partners. The sizes of both companies are similar and
their markets are different geographically. Such alliances are based on complimentary strengths
and synergies. Such relationship could be created because of geographical area covered by
different companies. This relationship might sometimes be the only way to penetrate a foreign
market. Also, it can be created for the survival of the companies, because their direct competitors
are creating similar joint ventures. It is then a win-win situation for both companies, because
instead of being competitors, the companies are partners and help each other. Those joint ventures
or technology alliances are very long-term agreements and are very costly to get out of it. An
example of such relationship would be the joint venture that Eastman Kodak Co and HewlettPackard Co (HP) have formed to develop retail photofinishing solutions to offer retail customers
a wide range of digital-imaging (Eastman Kodak Company 2000).
Summary
This first section described the different relationships used by the customer with his suppliers.
Those relationships are the legacy suppliers, the tactical supplier, the strategic supplier, the full
service supplier, the extended enterprise supplier and the joint venture types of relationship.
Now that we saw those different types of relationship, we will see in which conditions those
relationships are used, for which product characteristics and in which situations.
5.1.2 Part and Product Characteristics
The product characteristics described in this section are the characteristics that may influence the
type of relationship the customer will choose to have with his suppliers. Some characteristics
apply to the whole product and others apply only to sub-systems or components of the product.
Those characteristics are the following:
-
"
Part interaction with the rest of the product
"
Part dependency
"
Critical nature of the part
Knowledge involved in the part/sub-system
"
Core competency involvement in the part
"
New technology in the part
83
N
"
"
Risk of technology change
Part physical characteristics
"
Material of the part
"
Part dimensions
Financial dimension of the part
"
Cost of manufacturing process/tooling required
"
Price of the product
Many other characteristics might as well influence the type of relationship the customer will
choose to have with his suppliers, but those characteristics have not been studied. First, we will
refer to existing literature about the product characteristics mentioned above. Second, we will
describe each of the characteristics as explained by the company.
Part Dependency
Some parts are dependent from others and some other parts completely independent. A part is
dependent if the part specifications will be highly altered by a change in another part
specification. This characteristic of the part or module is often linked with the complexity of the
interface between that part and the others. A part can be from completely dependent to
completely not dependent.
Critical Nature of the Part
A part is critical if the success of the product or a functionality of the product is dependent upon
it. A critical part is generally a new technology involved in the product or the core of the product,
etc. For example, a critical part of a computer could be the motherboard. If that part is not
functioning, then the whole product is not functioning. It could also be defined by the number of
critical parameters involved in the interfaces between this part and the other parts or sub-systems.
For example, if the technology involved in a part is important, then the part is critical or if the
part is important for a functionality of the product then the part is critical. A part can be very
critical or not critical to a product.
Core Competency Involvement in the Part
The part is a core competency of a company when the company is a world class maker of that
part. The company has a patent in this type of parts, sub-systems, or products. The core
84
competency of the company is the core business of the company. The part can involve the core
competency of the supplier, of the customer or no core competency at all.
New Technology in the Part
A part using or manufactured by a new technology. The technology might not be new for the
world, but it is new for the customer. For example, it could be a new application for the customer.
A part can involve a new technology or not. This new technology can not only be part of the part,
but can also be the manufacturing process, the tooling or the material of the part. An example of a
new technology that could influence the supplier selection could be when the digital technology
arrived in the photocopier industry. Unlike the complex mechanical paper handling systems of
conventional analog models, digital copiers have a built-in scanner which reads the image of an
original, converts it into a digital electronic signal, then reproduces it from memory. The result is
digitally-produced text and photos with greatly improved image quality (Buchok J. 1999). The
copier/printer companies had then to select scanner suppliers because of this new digital
technology.
Risk of Technology Change
This is the risk that the technology included in the part changes through time. The key worry is
the speed at which the technology will become obsolete. If the technology involved in a product
might change, then the customer might want to select a supplier that is doing more research in the
area of the technology so they can foresee the change and adapt their technology and part to the
technology change. The customer will tend to have more a long term relationship with that type
of supplier.
Material of the Part
The material of the part is the main material used to manufacture the part. This material is
considered to be stable or unstable. An unstable material is affected by ambient temperature,
humidity, change of the seasons, exterior conditions, etc. A stable material is not affected by
exterior condition. For example, a metal is a stable material and plastic is an unstable material.
85
Part Dimensions
The part dimensions are the overall dimensions of the part. The weight and the dimension of the
part are independent from each other. The part can be large, but light, for example for a machine
cover. The part dimension can influence the supplier selection especially for transportation
purpose. For example, a part having big dimensions like the cover of a machine takes a lot of
space during transportation and thus would be very expensive to ship so a local supplier would be
preferred. The part can have small, medium or large dimensions.
Cost of Manufacturing Process / Tooling Required
Some parts don't require a very expensive manufacturing process or tool, whereas other parts
require expensive tooling and process. For example, tooling (mold, etc.) for plastic parts can
become relatively expensive. The tooling and manufacturing processes can be expensive or not.
Price of the Product
The price of the product is also considered for the supplier selection. The products are classified
in the high and low end of the market. The low end products are low cost machines. For those
products, the pricing in the market is very important and there is a lot of competition. The high
end products are high cost machines. For those products, the overall cost of the machine is not as
important because there is no competition for the customer. The profit margin of the customer is
important.
Summary
This section only describes a few characteristics of the parts or product that may influence the
supplier selection. Other characteristic might also be very important, but were not specifically
mentioned by the customer during the interview process. Also, the competition or the market
trends have not been taken in consideration for supplier selection in this study because they were
not considered to be inherent characteristics of the product and are outside the limits of this study.
Those product characteristics influence the supplier selections and types of relationship the
customer will have with its different suppliers. We will see in section 5.2.1 how those product
characteristics influence the types of relationship the customer will have with its suppliers.
Afterward, in section 5.2.2, we will see how those product characteristics influence the key
criteria used for supplier selection.
86
5.1.3 Set of Key Criteria fo r Supplier Selection
The set of criteria for the supplier selection are the important characteristics a supplier needs to
have in order to be considered by the customer. Those criteria also depend on the type of
relationship the customer wants to have with the supplier. Those criteria are evaluated by the
customer using different methods, such as rating, audits, reviews, etc. Those characteristics will
assure that the customer has found the right supplier and that both companies have a good fit
together. They can be classified in three categories according to the type of fit they fulfill:
=
Strategic fit
-
Operational fit
-
Cultural fit
The strategic fit assures that both companies have compatible goals and visions. It also measures
the support of both senior management to the relationship and project. The operational fit assures
that the customer and the supplier have similar businesses processes and practices that will allow
them to work efficiently together, as well as the technology needed by the customer, the level of
quality required and compatible engineering and design processes, etc. The chemistry fit assures
that the human resources of both companies are compatible and are able to work together in
harmony. It also measures the trust the companies have toward each other. The total fit between
the customer and the supplier is then found when those three fits are present
Total Fit
Strategic Fit
Operational Fit
Cultural Fit
Figure 5.1: Total fit between the customer and the supplier
However, the customer needs detailed criteria within those three fit categories in order to be able
to evaluate suppliers. Furthermore, for some types of relationship all the fits are not required. In
fact, it seems that the fits needed by each relationship are cumulative and are required as follow:
87
ft
Opertionl
Operational fit
Type of
relationship
Cutura fi
Cultural fit
'i
I
Strtegi
Strategic fit
Legacy supplier
Tactical supplier
Strategic supplier
Full service supplier
Extended enterprise
supplier
Technology alliance
With:
m
= Fit not required
= Fit might be required
= Fit is required
Figure 5.2: Types of fit and types of relationship
The key criteria of each within the fit categories are described in the next sections.
88
Criteria for Operational Fit
Those operational criteria aim to assess the operational capabilities of the supplier, like its
technical capabilities, its quality, cost, delivery, sourcing capabilities, and more. The customer
needs a supplier who has not only the required capabilities, but also the same mentality as the
customer. For example, the same quality mentality, the same cost and cost saving principle, as
well as continuous improvement focused, etc. The criteria for operational fit that were highlighted
during the study are described in this section.
The first set of criteria concerns the supplier capabilities, in term of:
"
Technical capabilities
-
Quality capabilities
"
Cost capabilities
"
Delivery capabilities
"
Sourcing capabilities
"
Service capabilities
"
Management capabilities & human side
Also, other criteria are use to assess the operational fit, for example:
"
The uniqueness of supplier
-
The schedule risk
"
The technical capability risk assessment
Technical Capabilities
The technical capabilities of the suppliers are their design capabilities, their manufacturing
capabilities, their product development process, etc. The customer has to understand the technical
capabilities of the potential suppliers in order to ensure the operational fit between the two
companies
The design capability of the supplier is only a concern when the supplier is asked to do design
work. The level of the design job can be from doing a DFMA to designing a whole module. The
customer has to be sure that the supplier can make a design and produce a part or module given a
list of requirements, performance specifications, inputs, outputs, size, constraints, etc.
89
Another very important technical capability of the supplier is its manufacturing capabilities. This
capability has to be proven and to match the customer's needs. The customer will assess the
technology used by supplier in term of manufacturing processes used and material used (ex:
which resin does the supplier use for injection molding? What are the capacities of its injection
presses?) The manufacturing equipment of the supplier, its facilities and their capacity will be
assessed, as well as the maintenance program, the raw material storage in and outside the plant,
the heating and cooling systems, the robotics and handling equipment, etc.
The product development process of the supplier is especially a concern when the product
development of the customer and the one of the supplier have to be matched for timing and
delivery purposes. The customer wants to know the phases of the supplier processes and how it is
possible to merge them with its own.
Quality Capabilities
The quality is the more important criterion for the customer. The quality of the manufacturing
processes and facilities and quality of the design are both considered. The customer wants to be
sure the supplier is able to give quality parts. The customer will rate the quality processes used by
the supplier. The customer will also verify that the supplier understands design of experiment,
robust design, impact of variation on a design, etc. The customer will also check if the supplier
has the 6 sigma perspective, operational quality insights, understanding of the manufacturing
variance, etc. The customer will analyze the procedure used by the supplier to understand how to
control and guarantee its output. The customer will check if the supplier knows the variance of
their processes.
The quality assessment of the supplier is used as the first downselect criteria in supplier selection.
After elimination potential suppliers incapable of delivering quality, other criteria for supplier
selection will be used to determine the best supplier.
The customer wants to be able to walk in the supplier's manufacturing lines and see how the
supplier manufactures, what are its manufacturing processes, what are the automation controls, if
there are sensors on the machines, what are the control processes, what is the metrology
equipment used, etc. The customer will also assess the process capability, the variance, the trends
in quality and the whole quality system of the supplier.
90
This quality capability assessment is widely covered in literature. Many companies have their
own quality assessment process, like the Advanced Product Quality Planning and Control Plan
(APQP/CP) released by Chrysler, Ford, GM in July 1994, or the QS-9000 published a month later
by the same three companies. This QS-9000 sets the supplier's quality system requirements and
the suppliers must use the APQP/CP reference manual for their quality planning (Thisse 1998,
Lovitt 1996).
Cost Capabilities
The cost capability of the supplier is also a very important criterion in the supplier selection
process. The customer wants to know the cost and the cost trend of the supplier. The customer
will assess the cost capability of the supplier by assessing the following items:
"
The Location of the supplier
-
The multinational manufacturing capability of the supplier (for example, which suppliers
have manufacturing plants in China, in Brazil, etc.)
"
The overhead cost of the supplier
"
The cost structure of the supplier
"
The sourcing capabilities of the supplier
The supplier has also to be willing to decrease its cost through time and to do continual
improvement. This is measured by audits and other evaluation processes. The customer evaluates
how much the supplier decreases its costs through time and also the customer compare the
supplier with other benchmark companies. The supplier has to be at a benchmark cost. Those two
methods are different ways of measuring the cost capability of the supplier.
Delivery Capabilities
The customer will also look at the delivery capability of the supplier. The supplier will need to be
able to follow the product development process and phases of the customer without causing any
delay. The customer will assess if the supplier would be an enabler or a barrier for delivering the
whole product on time.
From a design, point of view the supplier have to be able to deliver his design on time and from a
production point of view, the supplier has to be able to deliver the parts or sub-systems on time,
and with the expected quality.
91
Sourcing Capabilities
The sourcing capability of the supplier is measured by the performance of the supplier's own
supply base. The supply base of the supplier has to be cost competitive and the supplier has to
demonstrate the ability to manage its base of suppliers.
Service Capabilities of the Supplier
The service capabilities of the supplier are all the services the supplier provides during and
after the product development process. Such services can be the warranty on the supplied
parts or sub-systems, the willingness to co-locate at the customers site, responsiveness of the
supplier, (Ex: like the time to get a quote from the supplier), the support, the cooperation, the
willingness to cooperate, etc.
Criteria for Cultural Fit
The cultural fit between the two companies is also a key set of criteria to evaluate potential
suppliers. This kind of criteria only applies to certain type of relationship, so the customer doesn't
need a cultural fit with all his suppliers. The customer can evaluate the cultural fit using different
criteria like:
"
The supplier's management attitude
"
The management capabilities and human resources
"
The location of the supplier
"
Any previous contract/interaction between the two companies
"
The willingness of the supplier to improve, to help, to change, to do lessons learned
"
The management processes of the supplier
"
The product development management processes of the supplier
"
The information management processes of the supplier
"
The problem management process of the supplier
"
The design change request management of the supplier
Management Capabilities & Human Resources
The management capability of the supplier is its willingness to cooperate with the customer, to
decrease its cost through time, increase reliability, etc.
92
The human resources of the supplier are also important from an operational point of view.
Basically, what makes the relationships work is the people and the alignment between the people
in both companies. This alignment has to be at all the levels of the company. If the companies can
be represented with the following hierarchies, we have the three possible situations represented in
figure 5.3.
2
A
Az4iA
3
Figure 5.3: Possible alignment between two companies
In the first situation, the two companies A and B are aligned. The communication
between them is ideal; the people at each level can communicate with the people at the
corresponding level in the other company.
In the second situation, there is no alignment between company A and company B. The
two companies are interfacing at the wrong level. High level people in company A could
be communicating to low level people in company B. In such situation, there is no
synergy, no operational capability is being matched. Decision, communication and
operational work is harder to get done.
93
In the third situation, the companies are aligned, but at some levels there is no
correspondence between the two companies.
Some persons in one of the companies
don't have any similar persons to communicate with in the other company. For example,
a product manager won't be able to communicate to any product manager in the other
company, so communication will become harder between the two companies.
So strategically, two companies have to be aligned at all levels, this alignment is very
important for relationships. The alignment has to be done at the right levels and the
individuals in each company need to make sure that there is a good cultural fit and good
operational working at all levels. The technicians have to work well together, the middle
management has to work well together, the engineering teams have to work well
together, etc.
The companies must have the same culture and emphasis for quality management, defect
management and problem resolutions. If this synergy does not exist the companies can't work
together to problem solve.
Criteria for Strategic Fit
Those criteria ensure that the customer and the supplier have a strategic fit together. This strategic
fit is part of the long-term strategy of the customer, and it ensures that the customer and the
supplier have compatible vision and are going in the same direction. The customer can evaluate
the strategic fit using different criteria such as
=
The multi-nationality of the supplier
The core business of the supplier
" The financial strength of the supplier
The customer is looking for suppliers that have and demonstrate continuous efforts to reduce their
cost, manufacturing cost and design cost. The customer wants the supplier to have a management
for their sourcing capability, in term of component, and also in term of tooling.
94
-j
Summary
In summary, the supplier evaluation team of the customer will try to understand and assess the
potential suppliers according to the view of the supplier as shown in figure 5.4.
Management attitude
Financial performance
Company background
Supply base
Development
Internal Quality
Cost
Prourement
Design
-F0ne
Delivery
Production
Sourcing
capabilities
Workforce
Test
Figure 5.4: View of the supplier by the customer
Also, the criteria that will be assessed in order to have a total fit between the customer and the
supplier are shown in figure 5.5.
95
Total Fit
Strategic Fit
-Company profile
*Senior management support
*Performance
Operational Fit
Cultural Fit
-Supplier capabilities
*Technical
-Quality
eCost
-Overall chemistry
*Control
Influence
-Communication
-Delivery
oSourcing
*Service
*Management
-Uniqueness of supplier
*Schedule risk
*Technical capability risk assessment
Figure 5.5: Detail view of the total fit between the customer and the supplier
5.2 Links Between the Product, Relationship and Criteria
Characteristics
The mappings described in this section are based on the interviews done with the customer. The
relationships found between the product characteristics, the types of relationship and the key
criteria for supplier selection are described in the three following sections.
5.2.1 Links Between Product and Relationship Characteristics
This first mapping is between the product characteristics and the types of relationship used. We
want to know here which of the product characteristics will have an influence on the type of
relationship preferred with the supplier. For example, a product or a part involving a new
technology could require a technology alliance with the supplier developing that technology. On
the other hand, a product or part that involves no new technology and which design is simple and
well known could be bought from a commodity supplier, i.e. from a supplier with whom the
customer has a tactical type of relationship.
96
Such links between the product characteristics and the types of relationships can be visualized on
figure 5.6.. Figure 5.6 is a copy of the figure 4.2 first introduced in Chapter 4, it provides the
framework we used to map product characteristics, types of relationships and key variables.
i
Set of key variables for
supplier selectio
Set of potential suppliers
Supplier Selection
Figure 5.6: Link between the product characteristics and the types of relationship
After interviewing, we found the following relationships between some of the product
characteristics and the types of relationship used between the supplier and the customer. The
relationships described in this section are summarized in figure 5.7.
Critical Nature and Dependency of the Part & Types of Relationship
The critical nature and dependency of the part are among the most important characteristics of a
part and determine mostly which type of relationship will be used with the supplier.
In term of critical nature, a part can be critical or not critical. As for the dependency, a part can be
dependent or non-dependent. Therefore, any part of the product fulfills one of the four possible
combinations of characteristics:
"
Critical and dependant
"
Critical and non-dependent
"
Non critical and dependent
-
Non critical and non-dependent
For each combination of characteristics, the relationship with the selected supplier would be more
likely to be as described in table 5.1.
97
Dependent
Non-dependent
Critical
In house / Technology alliance
Full service supplier
Non-critical
In house
Full service supplier
Table 5.1: relationship for dependent/critical parts
For a part that is critical and dependent, the customer will usually keep the design in house,
except if he does not possess the technology involved in the part. In that later case, the customer
will start a technology-alliance type of relationship with a supplier having the required
technology. The technology alliance could also be called a joint venture. This type of part is
crucial to the product and the customer will give more weight to the quality of the part than on its
price.
For a part that is critical, but non-dependent, the customer will usually have a full service
supplier. For such part, the specifications can be determined in an early stage of the product
development cycle. The customer needs a supplier for the design and manufacturing of the part
and would prefer a relationship of partnership type like the full system supplier or the extended
enterprise supplier in some cases.
For a part that is non-critical, but dependent, the customer will usually have an internal supplier
or division to do the design and manufacture of the part. This type of part is usually not
expensive, but its specifications and design is susceptible to be modified often. It is then more
convenient to keep the design internally. Changes in the design can be done faster, without all the
communication and delay problems that could happen if the supplier was external.
For a part that is non-critical and non-dependent, the customer prefers to have full service
supplier. The customer can have the specifications of the part or sub-system pretty early in the
product development cycle. In that case, the market is very competitive and there will be no renegotiation of the price between the customer and the supplier. The customer will do a lot of
competitive quoting and will be able to get an early commitment on the price. The customer will
then give a lot of weight to the price of the part, for equivalent quality.
Product Without New Design/ Technology and Legacy Supplier
The products having old design, with no new design iteration planned for the future are also
usually the products using an old technology. For those products, the demand is rapidly
98
decreasing as new products using new technology appear on the market. However, the customer
still has to manufacture those products for the remaining demand and also has to build or be able
to provide parts for the products sold, mainly for maintenance and warranty purposes.
In this situation, the customer doesn't want to invest in his relationship with the supplier. The
customer will keep the minimum amount of interactions with its suppliers and usually won't give
any new contracts to those them. Thus, those suppliers are legacy type of supplier.
Part Impact on the UMC & Full Service Supplier
The customer assesses that the more complex the part is, the more careful the customer is with the
type of relationship he will choose to have with its supplier. Depending on the dollar value of the
part and depending on how much it impacts the UMC (unit manufacturing cost) of the final
product, the customer will have a full service supplier or not.
Core Competency & Commodity Suppliers
If a part is a current or potential core competency of the customer, then the part it typically kept in
house. The customer wants to keep all those core competency parts developed internally. The
customer doesn't want to be a "hollow" company, meaning to be only an assembler, not doing
any sub-system design or manufacture. The design will be kept inside and the suppliers will only
supply component of the sub-system. In that case, the only external suppliers involved in the part
or sub-system are commodity suppliers using the design of the customer. Those commodity
suppliers are most likely to be tactical suppliers.
Intellectual Property and Type of Relationship
During a product development process, there is a range of relationships the customer might want
to have with its suppliers having intellectual properties needed for the products. The customer
needs to buy or acquire that intellectual property in order to include it in its products. The
customer will need to determine whether he will purchase the parts from the supplier having the
intellectual property, or he will buy the intellectual property, or have a license or agreement on
that core knowledge. The customer will then have different types of relationships with the
suppliers having intellectual properties, depending on the characteristics of the part. If the part is
critical to the product, the customer will have a technology alliance with the supplier. However, if
the part is only a component of a sub-system, then the customer will have a tactical supplier. The
99
supplier having the patent or intellectual property is in that case the only one able to provide those
patented parts, so the customer has to buy those parts from them. For this reason, the supplier is
considered to be a tactical supplier.
Uniqueness of the Design & Legacy Suppliers
Another possible situation is when the design of a part is simple, but unique to a supplier and no
other supplier is building such a part. In that case, the uniqueness of the product obliges the
customer to buy from the only supplier manufacturing such parts. When the design of the part is
simple, this supplier is then considered to be a legacy supplier because the customer doesn't
consider worthy to change its design and search for alternate suppliers. The customer will give
importance to the constancy in the quality level and in the price level of the supplier. Those kinds
of parts are usually small parts with simple design. The customer can always modify the design
of those parts and look for other suppliers if the quality or price level of the current supplier is no
longer satisfactory . For example, a design of a product can require a small tube of glass that is
manufactured only by a single supplier. The customer can buy this tube of glass from this single,
thus tactical, supplier or change the product design in order to avoid this tube of glass if the
supplier is no longer satisfactory. (Give an example!)
Aesthetic Parts & Long-Term Agreement
Some parts are mostly important for their aesthetic role. Those parts can be for example the cover
of the machines. The covers are important for the aesthetic of the whole product and usually have
the company logo on them, but their design is usually simple. Since the design is important for
the image of the company, the customer keeps the design internal, but will ask the supplier for
help with picking the material, modifying the design for manufacturing purposes, etc. The
customer outsources the manufacturing of those parts, but wants the inputs from the supplier, for
DFMA purposes for example. There could be a manufacturing process sensitivity that could be
affected by the design of the part. The most common examples for plastic part are the tool height,
the size of the part, the press required to mold and the cost associated with those items. The
supplier is usually an expert in plastic molding, so its inputs are valuable for the customer. For
those reasons, the customer will prefer to have a long-term agreement with those suppliers.
100
New Technology & Full Service or Extended Enterprise Supplier
For some products, the customer wants to use a new technology. As explained in the section
1.2.4, the technology might not be new for the world, but it is new for the customer (i.e., a new
application of an existing technology). In that case, if the part is not critical to the success of the
product, the customer will choose to have a full service or extended enterprise type of relationship
with the supplier making the part or having the new technology. However, the supplier has to
know the technology and how to deliver it. The supplier has to understand how the technology
works, how to manufacture it, what are the critical parameters about the technology, if is it a
manufacturable technology, etc. Once all those concerns will be cleared the customer will select
the supplier.
Summary
The first set of links we analyzed is the link between the product characteristics and the types of
relationships between he customer and its suppliers. Those links have been found in company A
during the interview process. However, this list is not exhaustive. The relationship found can are
summarized in figure 5.7.
Type of relationships
A
cc
VA
0
6)
C)
Part
Non-dependent
dependencv
DeDendent
Part criticality
No-critical
Design
Old / unique
New
No impact
Impact on UMC
Core
Involved
Not involved
Tactical
strategic
Full
Extended
Joint
supplier
supplier
supplier
service
enterprise
venture
suolier
suolier
4====P
= = =_
4=====
Impact
competency of
Legacy
=======_======_
==
=
=
"
=
=
the customer
property
Critic for the product
Needed or patented by
a supplier
Assthetic role
Present
Not present
Technology
involved
New
Old - mature
Intellectual
_====
=,
=
I
I
I
I
I
"_____" " "'__"""
I
"
Figure 5.7: Links between product characteristics and types of relationship found in company A
101
5.2.2 Links Between Types
Supplier Selection
of Relationship and Key Criteria in
This second mapping is between the types of relationship used by the customer and the potential
key criteria in the supplier selection process. For example, a full service supplier in charge of
designing a new product will need to have a proven design capability. Such relations are
described in this section.
Such links between the types of relationship and the key criteria in supplier selection can be
visualized on figure 5.8.. Figure 5.8 is a copy of the figure 4.2 first introduced in Chapter 4, it
provides the framework we used to map product characteristics, types of relationship and key
variables.
Set of potential suppliers
Product
Characteristics
Supplier Selection
Figure 5.8: Link between the types of relationship and the key variables used in supplier selection
After interviewing, we found the following relationships between the types of relationship and the
key variables used for supplier selection. The relationships described in this section are
summarized in figure 5.9.
Unconditional Criteria for any Type of Relationship
In order to be considered by the customer, any potential supplier for any type of relationship has
to have at least the following four critical performance requirements:
" Quality performance
" Cost performance
102
"
Delivery performance
-
Service performance
The suppliers are measured on those criteria, but the weighting on those criteria might be
different depending on the relationship the customer has with the supplier or the type of part the
customer want to outsource. However, all the criteria have to be met, they represent the minimum
requirements for any supplier. All the criteria have to be measured and the suppliers are ranked
according to all those four criteria.
Within those four categories, some categories might be hard to manage, for example for a new
technology. The supplier might not be able to achieve the cost target, but the performance is
achieved. In that case, the weighting of the cost performance and the quality performance would
not be equivalent.
Strategic, Full Service, Extended Enterprise and Joint Venture Suppliers &
Higher Management Commitment and Relationship
For any type of relationship other than legacy or tactical supplier, the support and the
commitment of the higher management of the supplier are critical. The product development team
and higher management of the customer have also to get along with the higher management of the
supplier. This cultural fit is essential in order for the supplier to be selected. The more the
relationship is close to a partnership, the more important this criterion is among other criteria. In
some case, the supplier who is considered the best among all the potential supplier won't be
selected if the higher management of both company don't have a good cultural fit.
Extended Enterprise Supplier and Core Competency
The core competency of the supplier has to be aligned with the product need. For an extended
enterprise type of relationship, a criterion for the supplier selection is that the supplier has to have
a core business that would create a module or sub-system of the final product.
Extended Enterprise Supplier and Design Capabilities
An extended enterprise supplier is in charge of the design and delivery of a whole sub-system of
the product. Therefore, his design capability is a key criterion for his selection by the customer.
103
Tactical / Strategic Supplier and Cost
The tactical and strategic suppliers are highly rated on their cost performance. In that area, the
competition among potential suppliers is strong. There are many potential suppliers with similar
capabilities. The customer can then do a lot of competitive quoting and more weight will be given
to the cost performance of the suppliers.
Tactical / Strategic Supplier and Supplier Location
The location of the supplier can be important in supplier selection, especially for tactical and
strategic types of relationship. If the outsourced part has a simple design and could be done by
many different potential suppliers, then the location of the suppliers could be a key criterion for
supplier selection, for example for delivery purpose or transportation cost.
Summary
This second set of links we analyzed is the link between the types of relationship and the key
variables for supplier selection. Those links have been found in company A during the interview
process. However, this list is not exhaustive. The relationship found can are summarized in
diagram 4.9.
Type of relationships
Legacy Tactical strategic Full
Extended
supplier supplier supplier service enterprise
suDplier supplier
Higher management
commitment and
relationship
(/)
U)
5
l
0
-.
1
o
0
Joint
venture
E
Quality performance
Cost perforamnce
Delivery performance
service performance
Core competency of
the supplier
design capabilities
Supplier location
=
_=
==_====
=====:_
=4
IME
Overall Chemistry fit
Figure 5.9: Links between the types of relationship and the key variables used for supplier
selection found in company A
104
5.2.3 Links Between Product Characteristics and Key Criteria in
Supplier Selection
This third and last mapping is between the product characteristics and the potential key criteria
used in supplier selection. The goal of this mapping is to find which product characteristics will
require which specific characteristics from the supplier. These latest characteristics are criteria for
supplier selection. For example, a product that occupies a huge volume could require a supplier
close by for transport purposes.
Such links between some of the product characteristics and the key criteria in supplier selection
can be visualized on figure 5.10. Figure 5.10 is a copy of the figure 4.2 first introduced in Chapter
4, it provides the framework we used to map product characteristics, types of relationship and key
variables.
Types of relationslhip
Set of potential suppliers
Supplier Selection
Figure 5.10: Link between product characteristics and key variables used for supplier selection
After interviewing, we found the following relationships between some of the product
characteristics and the key variables for supplier selection. The relationships described in this
section are summarized figure 5.13.
Critical Nature of the Part and Supplier Size
Depending on the critical nature of the part for the success of the product and the length of the
relationship the customer wants to have with the supplier, the size of the supplier could be a key
criterion in supplier selection. However, this criterion is not always considered as a key criterion.
The rule currently used by the customer is that if the part is more a component part, not critical
for the product, big companies or at least companies which future won't depend on that part will
105
be preferred. However, if the part is more critical for the product, the customer prefers smaller
companies because the future of the supplier can depend on the quality and performance of their
parts and therefore the customer has more of control over the supplier.
Non-Dependant Part & Cost Performance of the Supplier
If the part is a non-dependent, the customer would prefer to outsource the part to any supplier
able to make the part to the specifications required. In that case, the customer can start searching
for the supplier in the early stage of the product development process and thus has a lot of time to
choose his supplier. The customer will try to have the best cost/quality/delivery possible and will
do a lot of competitive quoting. The customer will retain the three best suppliers. Those suppliers
can be pictured as follow:
Quality /
Delivery
Qi
Supplier 1
Supplier 3
. .................... 3
Q2Supplier:'
JI
C2
C1
Cost
Figure 5.11: Initial situation during the bidding process
In that case, the customer would eliminate supplier 3 and will be able to leverage the quotes of
supplier 1 and supplier 2 to have overall better quotes from those two suppliers. For example, the
customer will try to have the cost of supplier 1 (Cl) as low as the cost of supplier 2 (C2) for the
same original quality.
106
__j
Quality / A
Delivery
Suplier
Part Dimensions andSLppien 2fte
uple
lcaiono he uppiger w .12: be toe goa keduitring
he s bpp ieslcinhsne
iPrtantmenithe
Thmoe comtwiti hve quote mnfaruredoearvtheopdc
ansdme ocao
bfte
belet his
has moretan imeo,
Tsle ls yi epcal mot when the outsourced part i o-eedntecsoe
supli and xenie at
fhvng prcs
herorthne frsomte
ndsg
Spigmsyarnestesupplier
sThethirg tat pat be s-taem ets ey Thoe eprtsiare fir gextspto bigsor iet. Treso,
location of the pirod
Fot snmepensivre part, The
Asemblky Pcr tend
tme
ipraadtecustomer,
percatintg of the warsout
to sfthupplier slcin hsne fhvn
preirll have thfcued neatir the
doesathenalaml of thewoe product sebypat. Thae shipin
sppler
oe t cuthmer
ositie of ucxprtol
waxes als buligdbe dsipepn, motl. aisr,ul
the
107
fbr the
suernme caghtdesygn
wArkembs ftePlant, anr oatheoln osthi Suptaliencr
taken into consideration during the supplier selection process.
te
db
New Technology and Technical Capabilities
When a part or sub-system includes a new technology, the technical capabilities of the supplier is
a key criterion for supplier selection and more weight would be given to this type of capability.
Location of the Market and Supplier Manufacturing Facilities
The location of the market for a product might constrain the supplier selection to supplier having
multi-national manufacturing facilities.
For example, if there is a huge market for a certain type of product in a certain country, like
China, the customer wants to build and sell the product in China. The customer then wants
suppliers that are going to manufacture the product in China, near the customer plant. Other
suppliers won't be strongly considered in the supplier selection.
Also, the laws of the country where the customer sells the product might influence that the
selected supplier has facilities in this country. Some countries require that if a company wants to
sell in their country, the company has to manufacture a certain percentage of the product in their
country. For example, some countries, like Brazil, require that a company imports at least as
much as the company exports from the country. In that case, the customer would prefer to
manufacture directly in that country. The customer wants to make that country "self-contained"
and has then to select suppliers having manufacturing capabilities in that country.
Material of the Part & Supplier's Condition to Store and Process Material
Some parts are using unstable material, i.e. a material that is affected by ambient temperature,
humidity, change of the seasons, exterior conditions, etc. In that case, a key criterion for supplier
selection would be the supplier's condition to store and process material, like for example, the
supplier's dryers of the resin for plastic part.
Summary
This third set of links we analyzed is the link between some of the product characteristics and the
key variables for supplier selection. Those links have been found in company A during the
interview process. However, this list is not exhaustive. The relationship found can are
summarized in diagram 4.13.
108
Supplier Cost
size
Part
Critic
Non-critic
Depedent
dependency
Non-dependent
Criticality of
the part
U)
C)
4.'
Location Technical Storage
performa of the
nce of the supplier
capabilitie condition
s of the
supplier
supplier
small
bigger
I
1~
I_______
__________________
Part
Small
dimensions
.
-C
Technology
non
less
Newimortant
Old - Mature
Material of the
part
Stable
Unstable
Market
location
L_
= No link
= Important
= Very important
Figure 5.13: Links between the product characteristics and the key variables used for supplier
selection found in company A
5.3 Tradeoffs Made in Industry
Any supplier selection implies tradeoffs. The accumulation of all those tradeoffs leads toward
selecting the supplier who fits the best the customer needs. This section summarizes the tradeoffs
mentioned by the customer during the interviews.
5.3.1 Make or Buy Decision
The first tradeoff in the supplier selection process is the make-buy decision for every part or subsystem of a product. Should the company make the part or should the company outsource the
part? Making or buying the part involves plus and minus that the company has to weight and
evaluate. For example, if the company decides to make the part, then the design stays in-house
and the company has more control over it. However, the total cost of the design and
109
manufacturing of the part could be much higher than if the company decides to outsource the part
to a supplier specialized in such parts.
5.3.2 Product Design Tradeoffs
Another tradeoff is the one made during the design and architecture stages of a product. The
whole architecture design is a tradeoff that will make some parts dependent from others and some
other parts completely independent. This tradeoff will then determine which part is dependent and
which other parts are not. It will also influence the types of suppliers a company will seek and the
types of relationship the company will have with those suppliers.
5.3.3 System Integration -V s- Supplier Availability / Existence
The customer would like to have sub-systems that do a complete function. For such sub-system,
the customer has to go to the highest level of integration in modules and sub-system. However,
finding suppliers able to do a complete sub-system might be difficult. For example, the customer
doesn't have suppliers that are the best in chemical and mechanical. If two very different
elements are in the same sub-system, then the tradeoff could be:
-
To pick a supplier with one of the two competencies required and to help the supplier
acquiring the missing competence in order to build the whole sub-system
-
To create a specification that is subjected to change often. The problem with changing
specification is that you cannot make any commitment to a price up front. Low bidder
supplier could win the contract and then raise their price as the specification is evolving
(as seen in the game theory part).
-
To pick two different suppliers, each of them having one of the required competency, and
to make them work together. The problem with that approach is that neither supplier will
ever want to make a tradeoff that would be optimal for the overall project, but not
directly good for them.
5.3.4 Vertical Integration a nd Horizontal Integration
There is a tradeoff or balance between a total vertical integration where the customer does all the
design and all the manufacturing of a product and a total horizontal integration where the
customer is an integrator of the product and doesn't design or manufacture any part of it. The
customer can not be just an integrator. In that situation, the customer situation would be fragile
because it sonly core competency would be the integration competency. Thus, the customer has to
keep this integration competency as a core competency, but he also has to have and keep other
110
core competencies required in his products. The customer must design those "core" modules
while outsourcing the others. Thus, there is a tradeoff between a total vertical integration and a
total horizontal integration.
5.3.5 Relative Weighting of Quality and Cost
For any given supplier, the quality and cost factors are critical factors, or key criteria in the
supplier selection. However, the relative weighting between the quality and the cost will depend
upon the type of part the customer wants to outsource. For example, if the part is not a critical
part, then the cost will have more weight than the quality in the supplier selection process,
whereas if the part is a critical part, then the quality will have more weight than the price. The
customer will tend to make more tradeoff on the price or on the quality when the part is critical or
not. We can see those tradeoff as:
WQC >WQNC and WCc <WCNC
WQc >WC, and WQNC <WCNC
With:
WQC = Weight of the quality for a critical part
WQNC
=
Weight of the quality for a non critical part
WCC = Weight of the cost for a critical part
WCNC
=
Weight of the cost for a non critical part
5.3.6 Internal Suppliers and External Suppliers
In some situations, the customer has also to do some tradeoff between hiring external suppliers or
giving the contract to internal suppliers, i.e. to keep the design and manufacturing of the part
internally. Such tradeoffs are made to avoid union or for survival of some internal suppliers.
5.3.7 Cost and Reliability
In some cases, the customer might do some tradeoff between the cost of a supplier and the
reliability of his parts. For example, for high end products, the reliability of the product is
extremely important and the customer has usually no competition. In that case, the customer will
111
give more weight to reliable parts than on their cost. The customer will also save in maintenance
by doing so.
5.3.8 Ease of Working with a Supplier and Supplier's Cost
The ease of working with a supplier includes the supplier location, time zone, language, etc.
Usually, a supplier easier to work with would be a local supplier, or from US or Canada for a US
company, speaking the same language. However, those suppliers are usually more expensive.
Then, the fact that it is easier to work with them might be considered more or less. It won't be
considered much for component parts, or production parts, but it might be considered more for
suppliers providing services, like design, engineering consulting service, etc. In that case, the ease
to work with the supplier, or cultural fit between the two companies will be considered more and
the tradeoff with cost will be different, but to a certain extent. A regional supplier, in the same
time zone, speaking the same language, in a close ride from the customer might be preferred.
However, the ease of working with a supplier might not be weighted heavily in the final decision
because the cost associated with having a regional supplier could expensive. This tradeoff will
then be done or not depending on the type of relationship the customer will have with the
supplier.
Tradeoff Between Production Rate and Supplier Location
The customer will also do some tradeoff in the supplier location depending on the production rate
planned for the product. For example, the customer will be more willing to consider a local based
supplier, with maybe higher labor rates for a high-end machine that the customer will build in low
volumes. In that case, the customer might not gain the economy in the low labor rate in a foreign
country like China if the customer is only building for example 10000 products over 7 years. But
if the market size for a low end product is important, then the location of the supplier will be a
consideration in the SSP.
Tradeoff Between
Mmanufacturing
a Supplier Good in Design and one Good in
The customer rule for that kind of tradeoff is that "you can fix manufacturing problems, but it is
harder or more expensive to fix design problems".
112
5.3.9 Saving in Design -Vs. - Saving in Manufacturing
According to the industry, manufacturing decisions can make the cost of the part have a
variability of 30 %, whereas design decisions can make the cost of the part varies up to 70 % of
the cost. Figure 5.14 illustrates the cost variability depending on the design openness, i.e. the
degree to which the design is fixed or not.
Cost distribution when
the design is fixed
Probability
L
30%
Cost distribution
when the design
70%1
is not fixed
Cost of
the part
Figure 5.14: Product cost variability depending on design flexibility
The manufacturing cost can vary depending on which country the part is produced, or how
reliable are the manufacturing processes, etc. The design cost can vary depending if DFMA is
used or not, or if the design is over specified or not, etc.
Thus, important savings can be done when a company gives specification about the part to its
supplier, but just a minimum, without over specifying the design. The more the customer
specified the design, the less will be the potential variation in product cost. Furthermore, if the
company doesn't possess the core competencies required to build a part, it has to choose a
supplier that has that core competency, on the condition that the customer is able to define what is
required for the part. Those potential savings are illustrated on figure 5.15.
113
Y Potential product cost
30%:
OMI
70%
Specified design
Specification - No
specified design
Figure 5.15: Potential savings on product expected cost depending on level of design
specification
The amplitude of the potential reduction in the product cost is more important when the design is
still flexible, i.e. not too specified, than when the design is not flexible anymore, i.e. when the
design is specified. The final cost of the product will then be determined by the quality of the
supplier selection. If the supplier selection process selects a good supplier, than the product cost
would be low, because the supplier will make savings by its design and manufacturing
capabilities. However, if the supplier is not good, the product cost will be higher. The supplier
selection process is then determinant for the final product cost.
5.4 Good Practices of the Supplier Selection
Process in
Industry
The former sections of this chapter described the supplier selection process used by the customer.
However, during the analysis of all the practices used by the customer, many practices appeared
to be original and positive. Those good practices are:
"
Goal congruence and market based transfer price
-
Having early conflicts
"
Co-location of the supplier
114
Each of those practices is described in this section.
5.4.1 Goal Congruence and Market Based Transfer Price
The common way of setting the price between the customer and the supplier is the market
based transfer price as shown in figure 5.16.
Customer
Supplier
(UMC)
1(Sale, Administrative
TP
and General expanses)
(Transfer Price)
1
Market
SP
(Selling Price)
Figure 5.16: Market based transfer price
The transfer price (TP) is a function of the selling price (SP), more often a percentage:
TP = f(SP)=%SP
However, goal congruence problems can appear in such a situation around the quantity of product
sold. Both the supplier and the customer want to sell a lot of products in order to make a lot of
profit. However, assuming there is not a competitive market, the customer could tend to control
or limit the number of products sold since he could save some selling cost. For some range of
total sale, the distributor would make an optimal profit whereas in some other range, he would
not. Such a behavior will limit the profit of the supplier since the maker gains a percentage of the
selling cost and thus a percentage of the total number of product sold.
In this situation, the best way to have a goal congruent for both the supplier and the customer, i.e.
to have the same incentive of selling the maximum number of product, is to set the transfer price
as being a function of the selling price and the quantity of product sold.
Another way to set up the transfer price is to make it a percentage of the price of a similar product
from a competitor. This can be done when the information, here the selling price of the
competitor, could be observed objectively.
115
5.4.2 Having Early Conflicts
For the selection of different types of suppliers, the supplier selection team is composed with
people coming from different areas and who will deal with the selected suppliers at different
points of the product development process. Those different people have different incentives. For
example, manufacturing people will emphasize more the manufacturing capabilities of the
supplier, whereas design people will be more concern by the design capabilities of the supplier.
Every member of the selection team has to agree on which supplier to select. This agreement is
hard to reach and will also create many conflicts. However, those early conflicts in the product
development process are judged to be beneficial since it allow the product development team to
solve them early on and to have a more harmonic product development process. Those conflicts
wouldn't be avoided anyway through time, so the customer prefers to create and solve them early
on. The customer prefers that all the interested groups disagree early in the product development
process than later. The contracting process will also force early conflicts to be resolved between
supplier and customer.
5.4.3 Co-location of the Supplier
Some types of supplier, especially the extended enterprise type of supplier, co-locate at the
customer place during the product development process. This co-location allows frequent and
more efficient communication between the customer development team and the supplier
development team. This co-location is also useful to solve interface problems. The different colocated suppliers can meet and solve those interface problems in a relatively short period of time.
5.5 Areas of Improvement of Current Supplier Selection
Process
During the analysis of all the practices used by the customer, many practices appeared to be
original and positive. However, the current supplier selection process is also considered to be not
perfect and there is some areas where improvement can be done. Those areas of improvement are:
-
Legal bindings
-
Option in contracts
"
Total cost analysis
-
Internal suppliers preferred
116
"
Different incentives within the customer / Corporate goals aligned
"
Non fact-based evaluation of the supplier
"
Bonus structure
"
Data
"
Quality of the assessment teams
"
Pre-work section and customization of the selection process
"
Follow up of the supplier
*
Supplier selection process concurrent with the product development process
-
Packaging & full service partner
Each of those areas of improvement is described in this section.
5.5.1 Legal Bindings
The contracts in some types of relationship, like the extended enterprise or the full service types
of relationship, don't have legal bindings and specific data about prices and its evolution through
time. For example, the customer will buy x units per year and the price will be $y for the first
year, then $z for the second year, and so on.
Also, the contracts are sometimes not well defined and they don't have enough legal binding.
Each company wants to maximize their individual economical profit and are looking for their
own interest. The contracts should be built with an idea of creating the same objective for each of
the companies; they should create a goal congruence.
5.5.2 Option in Contracts
The contracts in most of the partnership types of relationship don't include any "option",
i.e. any specific transfer price between the customer and the supplier in case of different
ending of their contract. For example, the contract between the supplier and the customer
could include two quotations. The first quotation could be tied to a quantity of items the
customer will buy and the other quotation with no specific volume to buy, or with a
minimum quantity of item to buy plus an option for more items that could be ordered by
the customer. In that later case, the unit cost of each item bought will be higher than in
the first case, and the difference between the two quotation will determine the cost of the
option.
117
5.5.3 Total Cost Analysis
In most type of supplier selections, the customer asks the potential suppliers to submit a quote for
a part. Then, the customer uses that quote to rank and choose the optimal supplier, especially
when the cost is the most important selection factor. However, the cost analysis for each quote is
not always completely done and many element of the cost are not considered. The following list
of cost factors could be important in a total cost analysis:
The Currency
The currency of the country where the supplier is located could or could not be important. For
international companies where the customer buys and sells in many different countries, the
currency and exchange rate could be used to generate more profit. The company needs a good
understanding of the overall cash flow of the total enterprise. On the other hand, for smaller or
non-international companies, the currency and exchange rate could be a source of important
uncertainty. This factor is especially important in countries where the currency is unstable or
subject to potential crisis.
However, the companies, small or large, can be protected from currency fluctuation by option
that fixes the exchange rate at a certain level during a determined time period.
The two common mistakes are done by customers. The first mistake is to think that the currency
cost and risk are not predictable. The second mistake is to think that the currency and exchange
rate are always a lost of money.
The Cost of Supply Chain Inventory or Pipeline Cost
The inventory within the supply chain also adds to the total cost. Two factors enter in that supply
chain inventory cost: the location of the supplier and its flexibility rules.
The location of the supplier determines the transport duration and cost of the supplied parts. The
further the supplier is or the farther he is from transportation commodities, the longer the
transportation duration will be. Thus, if it takes 5 weeks to transport the parts from the supplier to
the customer, the customer will have to pay for those 5 weeks of inventory "in transit".
118
The second inventory cost in the supply chain is the flexibility rules of the supplier. Those
flexibility rules are for example the number of weeks of inventory the supplier keep as safety
stock or the number of weeks of production committed for the customer.
In the case of a single supplier in the supply chain, those costs can be visualized as shown in
figure 5.17.
Customer
Supplier
Flexibility rules:
S weeks of
inventory
Transport:
T weeks of
inventory
Market
Flexibility rules:
C weeks of inventory
Figure 5.17: Cost for a single supplier in the supply chain
Where:
S = Number of weeks of inventory due to the flexibility rules of the supplier
T = Number of weeks of inventory due to part transportation between the supplier and the customer
C = Number of weeks of inventory due to the flexibility rules of the customer
The cost of the supply chain inventory in that case is:
Cost of supply chain inventory = S x Cs + T x CT + C xCC
Where:
Cs = Cost of one week of inventory due to the flexibility rules of the supplier
CT =
Cost of one week of inventory due to part transportation between the supplier and the customer
cc = Cost of one week of inventory due to the flexibility rules of the customer
In the more general case where there is more than one supplier in the supply chain, the supply
chain inventory costs can be visualized as shown by figure 5.18.
119
Figure 5.18: Cost for multiple suppliers in the supply chain
Where:
S, = Number of weeks of inventory due to the flexibility rules of the supplier i
Tj = Number of weeks of inventory due to part transportation between the supplier (j-1) and j
C = Number of weeks of inventory due to the flexibility rules of the customer
The cost of the supply chain inventory in that case is:
Cost of supply chain inventory=
(S
(Tj x CT)+ CX Cc
x Cs )+
j=1
j=1
Where:
Cs; = Cost of one week of inventory due to the flexibility rules of the supplier j
C Tj = Cost of one week of inventory due to part transportation between the supplier (j-1 ) and
j
cc = Cost of one week of inventory due to the flexibility rules of the customer
the parts,
Thus, the customer has to evaluate not only how much it will cost the supplier to make
not small
but also how much it will cost in total to execute the whole business. Those costs are
and the common mistake is to ignore them.
Other Costs
the
Some other cost can also be considered to obtain the total cost of a supplier. For example,
to
customer can also add the duty cost (importation taxes), the transportation cost or the insurance
select
obtain the total cost of a supplier. In order to be able to rank all the potential suppliers and
the optimal one, the customer should consider all those costs and explore the different alternatives
would
of each supplier. For example, would the total cost of the supplier change if the supplier
take in charge the transportation cost instead of the customer, etc.
120
5.5.4 Internal Suppliers Preferred
In some companies, an internal supplier (i.e. a sub-group of the company) can deliver a part of the
product instead of having to select an external supplier. However, internal suppliers could be not
competitive. They might not be very competitive because they don't feel pressure to compete on
price. Their selection is based on the priority of other factors.
5.5.5 Different Incentives Within the Customer / Corporate Goals
Alignment
There exists some point of friction, or difficulty, between different divisions within the customer.
Each different group has their own goals and incentives, and the customer as a corporation has
also goals and incentives. However, all those different goals and incentives are not always
aligned.
For example, such difference in incentive can occur between the manufacturing team and the
procurement team. One of the goal of the manufacturing team is to keep inventory low and have
the product made on time. On the other hand, the procurement team wants to get the lowest cost
possible for the part and that usually requires ordering parts in bigger quantities, i.e. to raise
inventory.
The different teams might not want to select the same supplier and in that situation, those two
divisions have opposite goal/incentive.. The goal of each division is not always aligned with the
other division's goals and this has an influence on the supplier selection process.
5.5.6 Non Fact-Based Evaluation of the Supplier
Some supplier selections are made based on personal preferences or past experiences people had
with certain suppliers. Although sometimes the choice is optimal, it might not be always the case.
So personal feelings toward suppliers could be good or bad. Those personal feelings could also
reflects the good cultural fit existing between the customer and the supplier, a cultural fit that
could be hard to evaluate quantitatively. However, more fact-based evaluations of the potential
suppliers would lead to more unanimous and less risky supplier selections.
121
5.5.7 Bonus Structure
The bonus structure of the procurement team might not be optimal. They are bonused on their
ability to take cost out of the product. If the selected supplier is optimal (right supplier, efficient
design, multinational manufacturing capabilities, mature design obtained quickly, technology
absorption), the customer will launch the product at or near worldwide benchmark level and it
would be harder to take cost out of the product.
5.5.8 Data
The customer doesn't always have all the data needed to do a full assessment of the existing
potential suppliers. The customer will get that data in future iterations of selection, but for some
selections, for example in new areas for the customer, all the required information is not always
available when the customer needs it.
5.5.9 Quality of the Assess ment Teams
Two different teams can do the same supplier selection process and the results could be
completely different. The supplier selection team has to have experience in selecting suppliers,
they need to understand the technology of the product/sub-system/component they are selecting
the suppliers for and that requires a knowledge in many different areas, like design,
manufacturing, quality control, technologies, etc. The current selection process is weak in
assessing the supplier design skills up front, and the customer is currently looking for existing
proof of world class design tools and practices. For example, the selection team needs to
understand if the supplier can exhibit evidence that they understand all the variables that add up
to the variations, if the supplier can define and control all those variables. This is currently not in
the supplier selection process for manufacturing and design. In summary, the wide variance in
results of the selection process is due to the variance of the selection team competency and the
gap in completeness and rigidity of the selection materials.
5.5.10 Supplier Selection Preparation Work and Customization of the
Selection Process
The supplier selection process doesn't start when the customer has to select a supplier out of a list
of potential suppliers. The first step is to do a selection team formation and a selection team work,
then to define which key or special characteristics the customer wants to assess in each design in
order to retain supplier. The customer needs to do a preparation before going to see each potential
122
supplier in order to know what to assess exactly. The current supplier selection process is
assessed to be too generic. The current selection packages are not always used, because they are
too complex or too generic. Not all the current supplier selection process is useful to assess each
supplier, the current process is not customized enough. Some questions or sections can applied to
any type of suppliers, some can be additive, for example anything that is required for a
component supplier would also be important for a full service supplier, etc. The supplier selection
team would need to define what is critical in the supplier and this team has to include design
engineers, manufacturing engineers, technology specialists, etc.
5.5.11 Follow up of the Supplier
The customer has a certified supplier program. However, once a supplier is certified, the supplier
could stop caring, and the quality could go down. To prevent such thing, doing a lesson learned
after each product development would be useful. Some key variable in the supplier selection
process could be followed during or after the supplier selection process. The customer could then
use this feedback to improve his own supplier selection process.
5.5.12 Supplier Selection
Development Process
Process
Concurrent with
the Product
The customer follows a product development process in order to develop each product. However,
the current supplier selection process doesn't have phase gates like the product development
process. Having a selection process with phase gates would be good. A selection process in phase
with the product development process. The milestones of the supplier selection process have to be
included into the product development process used otherwise those milestones would not
happen. The product development team uses the product development process to develop a
product, so the selection process has to be concurrent with the product development process.
5.5.13 Packaging & Full Service Partner
In the current supplier selection process, the packing is not done by a full service supplier.
However, there would be some advantages with having a full service supplier taking care of all
the packaging for a product.
If the customer can choose a packaging supplier early enough in the product development
process, the supplier can even influence the product design. It is very important to avoid breakage
123
during transport. Those packaging suppliers could do finite element analyses on the machine and
on the packaging and give advice on how to modify the design in order to make it more robust for
transportation. For example, they can give advice about where to put more structure in the design
at the places transmitting all the loads to the machine boxes.
Also, boxes are usually thrown in manufacturing. A packaging supplier would put more thoughts
into the product or part packaging in order to reuse them.
Moreover, having a packaging supplier could also avoid having problems with unpacking the
product. In some cases, when the end-user unpacks the product, a part of the product is damaged.
The packaging supplier might be able to design the packaging in order to avoid such situations.
In summary, the packaging full service supplier could help with reusing the same packaging, with
modifying the product design, especially if hired early. This can be very cost effective, especially
if the customer has to repair all the damages of the products that break when they are shipped to
vendors or unpacked by the end-users.
5.6 Conclusion
In this chapter, we describe the current supplier selection process used by company A. After
interviewing company A, we found the links between product, relationship and criteria
characteristics that guide the supplier selection process. It seems that the type of relationship used
with a supplier is mainly dictated by the critical nature of the parts to outsourced as well as its
dependency with the rest of the product. Also, company A had some unconditional key criteria
for supplier selection, which are quality, cost, delivery, and service criteria. Those supplier
selection criteria are also used by many other companies.
Another interesting feature of the supplier selection process of that company is that the supplier
selection has to be done very early in the product development process. This early selection is
done by the different group of persons who will have to deal with the selected suppliers during
the product development process. Therefore, this contracting process forces early conflicts to be
resolved between supplier and customer. Also, the co-location of the supplier done at company A
is assessed to be one of the best practices to integrate suppliers into new product development
(Ragatz, Handfield and Scannell 1996).
124
Finally, one of the main areas of improvement is the bonus structure of the procurement team and
the need to align the objectives within the company. This problem seems to be one of the
symptoms of a company that just changed or is changing its supplier selection process and
mentality. The transition between having only component level suppliers to giving more
responsibilities to suppliers takes time and requires a change in mentality and organization of the
company. It is a new way of perceiving other companies and all the history, mentality and culture
developed through the years with the conventional product development model is not in the same
path of what is required now.
This first case study shows one supplier selection process, tradeoffs, good practices and areas of
improvement. However, the supplier selection process is a long and hard process that could be
very different from a company to another. Therefore, we interviewed another company, company
B, about their current supplier selection process. The next chapter of this thesis describes the
supplier selection process used by this other company.
125
126
CHAPTER 6 CASE STUDY - COMPANY B
This case study is a second study made in order to understand the supplier selection process used
in industry. The company interviewed produces high complexity and very expensive products
with a long production time. This case study is similar to the previous one. We first list which
types of relationships are used by this company, which are the main product characteristics that
can influence the supplier selection and what are the more important criteria for supplier
selection. Then, the best practices and weaknesses of the supplier selection process used by this
company are explained, as well as the main tradeoffs made during the supplier selection.
6.1 Terms Explanations
The first section of this chapter explains the terms that we use in this study. We used three
categories of terms:
"
The terms for different types of relationships used by the customer with its suppliers
=
The terms for different product characteristics that influence the supplier selection
"
The terms for the criteria used by the customer to select his suppliers
6.1.1 Types of Relationship
There are two main types of relationship used by the customer with his suppliers: the commodity
supplier relationship and the system supplier relationship. The definitions of those relations are
given in this section.
Commodity Suppliers
This type of relationship is used with suppliers that provide a wide range of products. This
relationship follows the traditional build-to-print model, i.e. the supplied part are standard pieceparts or built to the customer specifications. There is little or no customized design, development,
127
or testing, almost all the part are designed by the customer. The contracts generally based on
lowest cost and are short-term (4-5 years), rarely long-term (10 years).
System Suppliers
In those kind of relationships, the supplier is most of the time completely responsible for the
design, development, and testing of entire subsystems, which are then integrated, assembled, and
tested on the system level by the customer. The supplier works together with the customer. Most
of the time, the customer gives to the supplier design requirements, not drawings, and the
customer develops specifications together with the supplier. The suppliers can function at their
own site without extensive interface with the customer or they can be co-located at the customer
site. This kind of supplier supplies technology and design expertise, taking full functional system
responsibility, but the customer is still responsible for the finished product. The business
arrangements are based both on supplier capabilities and cost and they are long term. The
contracts are long-term (10 years). For example, a supplier in charge of the whole control system
for temperature and pressure would be a system supplier and his contract would be around ten
years.
Summary
This first section described the different relationships used by the customer with his suppliers:
commodity suppliers and the system supplier. In the next section, we will see in which conditions
those relationships are used, for which product characteristics and in which situations.
6.1.2 Product Characteristics
The product characteristics that may influence the type of relationship the customer will choose to
have with his suppliers are the following:
The size of the product. Overall dimensions of the product or part.
Needfor "product-kit". Some outsourced parts are in a "kit". A kit is a set of different parts that
are delivered to the customer in the same box. A kit can, for example, be a cut out in the foam
transporting a set of gears. Some products need to be delivered in kit at the customer facility.
128
Design level.
The design of the product is also a product characteristic. Depending on (1)
whether or not the design is new (2) the level of new design, or, (3) whether or not there is any
design existence or precedence, the supplier selection will be different.
Design complexity. The complexity of the product can be evaluated by the competencies required
to design and develop it. The specificity of the knowledge involved in the product or the easiness
to replicate the product can also be used to evaluate the complexity of the product. For example, a
bolt has a very simple design, whereas a scanner has a more complex design.
Technology. The technology involved in the product.
Specialization of the product. The specialization of the product can be evaluated by the number of
suppliers who can provide it, or by the number of competitors of the customer. Is the product
really specific to the customer and its range of product, or is it a product that many other
companies are developing and manufacturing? For example, a bolt is not specific to any
company, whereas a space shuttle is specific to only a limited number of companies.
These product characteristics influence the supplier selection in company B, however, references
about those influence are not readily available in literature.
6.1.3 Set of Key Variables for Supplier Selection
The customer is looking at many important characteristics of the suppliers during the supplier
selection process. Those characteristics are evaluated by the customer using different methods,
such as rating, audits, reviews, etc. Those important characteristics or key criteria are the
following:
-
-
The performance of the supplier in the areas of:
"
Quality
"
Cost
"
Delivery
Customer service/satisfaction and support issues
"
The capability of the supplier in the areas of:
m
Manufacturing
"
Engineering/design
129
The customer is also looking at the manufacturing ability and capacity of the supplier. Other
criteria are also used for the supplier selection, more like a go/no go criteria, such as the liability
of the supplier or the viability of the supplier - for long term agreements.
Finally, other criteria are considered, such as:
"
The performance of the supplier product/part in the field
"
The credit and the business side of the supplier
"
The way the supplier handles their own business
6.2 Links Between the Product, Relationship and Criteria
Characteristics
The mappings are based on the interview done with the customer. The relationships found
between the product characteristics, the types of relationship and the key criteria for supplier
selection are described in the three following sub-sections.
6.2.1 Links Between Product and Relationship Characteristics
This first mapping is between the product characteristics and the types of relationship used. We
will relate the different product characteristics to the different types of relationship between
customer and supplier. For example, a product involving a new technology could require a
technology alliance with the supplier developing that technology. In that case, the important
product characteristic is the new technology, or at least new for the customer, and the type of
relationship is a partnership. On the other hand, a product that involves no new technology and
which design is simple and well known by the customer could be bought from a commodity
supplier. In that case, the important product characteristic is the simplicity of the design and the
type of relationship is a commodity supplier relationship.
Such links between the product characteristics and the types of relationships can be visualized on
figure 6.1. Figure 6.1 is a copy of the figure 4.2 first introduced in Chapter 4, it provides the
framework we used to map product characteristics, types of relationships and key variables.
130
I1
Set of potential suppliers
Set of key variables for
supplier selectio
N
Supplier Selection
Figure 6.1: Link between the product characteristics and the types of relationship
The interview analysis shows some relationships between some product characteristics and the
types of relationship used between the customer and his suppliers. The relationships described in
this section are summarized in figure 6.2.
Non-Core, New or Complementary Technology of the Product & System
Supplier
System suppliers are used when the customer doesn't have the technology required to design,
develop and manufacture a subsystem. In that case, the customer will start a partnership with a
supplier that has the Non-core, new or complementary technology involved in the product.
Specialization of the Sub-System & Long-Term Agreement / System
Supplier
The customer uses partnership relationship with the suppliers on the major sub-systems
outsourced. Most of the major sub-systems are specific only to the type of product the customer is
making. Only a few qualified suppliers in the world are able to make such specific sub-system.
Those suppliers might sometimes be even larger companies than the customer itself is. For those
reasons, the customer will engage long-term agreements with those suppliers and most of the time
those suppliers will be system suppliers.
131
Complex Design & System Supplier
The customer provides the product requirements to the supplier and the supplier is responsible for
the design, the testing and the detailed development of the product. System suppliers are used for
the development of those complex parts.
Summary
The first set of links we analyzed is the link between the product characteristics and the types of
relationships between he customer and its suppliers. Those links have been found in company B
during the interview process. However, this list is not exhaustive. The relationship found can are
summarized in figure 6.2.
Type of relationships
Commodity
System supplier
supplier
Non-core
Technology
0 0
i
M
New
Complementary
Specilization of the
Specialized
sub-system
Non-specialized
Design
Complex
4
~
Figure 6.2: Links between product characteristics and types of relationship found in company B
6.2.2 Mapping Between Ty pes of Relationship and Potential Key
Variables in SSP
This second mapping is between the types of relationships used by the customer and the potential
key criteria in the supplier selection process. For example, a system supplier in charge of
designing a new product will need to have a proven design capability. Such relations are
described in this section.
Such links between the types of relationship and the key criteria in supplier selection can be
visualized on figure 6.3.. Figure 6.3 is a copy of the figure 4.2 first introduced in Chapter 4, it
provides the framework we used to map product characteristics, types of relationship and key
variables.
132
Set of potential suppliers
Characteristics
$0,
Supplier Selection
Figure 6.3: Link between the types of relationship and the key variables used in supplier selection
After interviewing, we found the following relationships between the types of relationship and the
key variables used for supplier selection. The relationships described in this section are
summarized in figure 6.4.
Quality: an Unconditional Key Criteria
This unconditional key criterion is a characteristic that any potential supplier has to possess in
order to even be considered by the customer in the supplier selection process. The supplier has to
have a quality monitoring process and a quality philosophy in order to be considered as a
potential supplier of the customer. This quality criterion is unconditional for both commodity
suppliers and system suppliers
The customer rates the quality of the quality system of the supplier. The quality system of the
supplier measures and monitors the quality of the parts. The customer looks at their quality
systems, such as the supplier inspection process, rejection rate, etc. The customer sends field
representatives in charge of auditing the supplier quality system. The suppliers are evaluated on a
regular basis, the audit of the quality system is made on a regular basis.
System Suppliers & Design Ability
The customer has a partnership with the suppliers when the suppliers are involved in the design of
parts or sub-systems. Those suppliers have to demonstrate that they have the design ability
required to design the part or the sub-system. The supplier has to prove that he has done similar
133
design before. This demonstration can be done by similar past projects or contracts between the
customer and the supplier, or by showing similar designs done for other customers. However, for
smaller or unknown suppliers, the demonstration of the design capability has to be done by
building the product on a smaller scale first.
System Suppliers & Size of Supplier
The size of the supplier is of consideration for a partnership for many reasons. First of all, the
partnership is a long-term agreement and is supposed to last for a long period of time. The
customer wants to be sure of the viability of the supplier, and the size and the history of the
supplier is a good measure of his long-term viability. Also, the customer wants the supplier to be
able to sustain a flexible demand without running out of business. The customer doesn't want the
supplier to be too dependent on the customer business. So the larger the supplier is, the less
sensitive to the customer demand the supplier is assumed to be.
Commodity Supplier & Cost
A commodity supplier receives the part designs from the customer. The customer owns the
design and is less dependent on the supplier than in the case when the customer doesn't possess
the design. The customer can then have competitive quoting from many suppliers and during the
supplier selection process the cost of the supplier will be a major criteria with a bigger weight
than in a system supplier selection.
System Supplier & Supplier Flexibility
When the customer has to ramp up in his schedule (i.e., produce more products than expected), he
has to have its supplier able to perform and support whatever its production rate might be. The
customer needs to have suppliers flexible in their rate of production. The suppliers have to be able
to follow the customer high rate of production when the customer has high rates. Thus, an
important criterion in the supplier selection process is the supplier flexibility.
Summary
This second set of links we analyzed is the link between the types of relationship and the key
variables for supplier selection. Those links have been found in company B during the interview
134
process. However, this list is not exhaustive. The relationship found can are summarized in
diagram 5.4.
Type of relationships
Commodity
System
Sizeofthe
supplier
Quality
performance
design
-o
capabilities
Cost
performance
py
Figure 6.4: Links between the types of relationship and the key variables used for supplier
selection found in company B
6.2.3 Mapping Between Product Characteristics and Key Criteria in
Supplier Selection
This third and last mapping is between the product characteristics and the potential key criteria
used in supplier selection. The goal of this mapping is to find which product characteristics will
require which specific characteristics from the supplier: these would be the criteria for supplier
selection. For example, a product that occupies a huge volume could require a supplier that is
geographically close in order to reduce transportation burdens.
Such links between some of the product characteristics and the key criteria in supplier selection
can be visualized on figure 6.5. Figure 6.5 is a copy of the figure 4.2 first introduced in Chapter 4,
it provides the framework we used to map product characteristics, types of relationship and key
variables.
135
Set of potential suppliers
Types of relationship
X_
Supplier Selection
Figure 6.5: Link between product characteristics and key variables used for supplier selection
After interviewing, we found the following relationships between some of the product
characteristics and the key variables for supplier selection. The relationships described in this
section are summarized figure 6.6.
Specialization of the Part & Supplier Design Capabilities
Most of the major sub-systems are specific to the type of product a customer is making. The
customer provides product requirements to the supplier and the supplier is involved in or totally
responsible for the design, testing and detailed development of the sub-system. A major
characteristic of the suppliers for those specific sub-systems is then to have proven design
capabilities.
Technology & Supplier Proven Technology
It's important for the customer to have leading edge technology in his product, but the technology
used in the product has to be proven. The suppliers providing those technologies have to prove
the viability of the technology and their capabilities of delivering it. For example, a new radar
technology or a new communication technology might be interesting for the product, but those
technologies have to be proven because any failure during product use could be harmful to the
product user.
136
New Design & Similar Design / Experienced Supplier
If the customer wants to make a new part (new design), the customer prefers suppliers that have
already made the same kind of product for the customer in past products. Thus, the customer will
choose to outsource those new parts to experienced suppliers.
Own / Simple Design & Supplier Cost
In the case of a part for which the customer possess the design or for which the design is simple,
one of the most important selection criteria will be the cost of the supplier. The customer can
more easily do a competitive quoting among suppliers of the same quality range and thus the cost
will have more weight in the supplier selection.
Dimensions of the Part & Supplier Location
The customer outsources some sub-systems that are of important dimensions. Those sub-systems
cannot be transported by air. The only transportation way is the railway. In that case, the supplier
has to be located close to the customer. The location of the supplier will be a criterion in the
supplier selection for those sub-systems.
Need for "Product Kit" & Supplier Location
Some outsourced parts are in "kit". As described before, a kit is a set of different parts that are
delivered to the customer in the same box. The kit is shipped from the supplier directly on the
customer production floor, at the location where it has to be installed. Once the parts are installed,
the empty boxes are shipped back to the supplier. This whole process works in just-in-time and
the timing as to be accurate in order to receive the kits at the right moment, and at the right
location. For this type of parts in kit, the customer prefers local suppliers because he can have a
higher control on the shipping timing and there is less uncertainty and risk of delayed deliveries.
Also, another advantage to having the supplier in geographical proximity is the savings made on
the shipping cost for the empty foam cut outs that the customer sends back to the supplier.
Complex Parts & Supplier 3D Drawings Handling Capability
If the outsourced part has complex surfaces, a complex program will be required to manufacture
the part. In that case, especially if the customer has a short production run, there is an advantage
of giving 3D drawings to the supplier. The 3D drawings will enable the suppliers to save time in
137
programming hours, but the supplier needs to be able to handle those 3D drawings. Thus, having
the 3D drawings handling capability would be a consideration in the supplier selection for that
type of complex parts. The supplier who has that capability would be preferred for complex parts
and his advantage would be a faster delivery of the parts, or shorter lead-time.
Summary
This third set of links we analyzed is the link between some of the product characteristics and the
key variables for supplier selection. Those links have been found in company B during the
interview process. However, this list is not exhaustive. The relationship found can are
summarized in diagram 5.6.
Supplier
design
ca abilitles
Specilization
Speciizatio
S
New or
uncertain
technolgy
technlogy
.
Design
DeUg
=
IL
Paot
Proven
y Variables 1n SSP
Supplier Supplier's
Experienced
itea K
supplier with
ma
oain
tehooysimilar desan
cs
oain
tehooy
3D drawing
handling
capability
alized
non-s
ecialized
Involved in the
pr
Not involved in
the prt"A
__Newj
old - mature
Design
Sim le
complexity
Comrlex
Dimensions
Small
Bi
of the part
Need for "product kit*
k
= No link
= Important
= Very important
Figure 6.6: Links between the product characteristics and the key variables used for supplier
selection found in company B
138
6.3 Tradeoffs Made in Industry
Any supplier selection implies making tradeoffs. The accumulation of all those tradeoffs leads
toward selecting the supplier who fits the best the customer needs. This section summarizes the
tradeoffs mentioned by the customer during the interviews.
6.3.1 Tradeoff in the Weighting Factors According to the end Customer
Needs
For each new product, the customer has to make a great number of tradeoffs while selecting
suppliers and while designing new products. Even for existing designs, the end-user of the
product, i.e. the customer of the customer, has many options and can change some part of the
product according to his needs.
The whole design process and supplier selection is a sequence of tradeoffs and those tradeoffs are
mainly between cost and functionality. In the supplier selection process, the customer has to use a
complex scale of weighting because he wants to provide to his end-user the newest and best
technology, but he also has to weight the risk, the cost and the reliability of such a product
relative to what the end-user wants and is willing to pay. The end-user may prefer to have the
newest technology, or he might prefer a lower cost or a faster delivery of the product.
Thus, many criteria have to be taken into consideration in the design and supplier selection
processes according to the needs of the end-user.
6.3.2 Tradeoff Between the Location of the Customer and the Cost
During the supplier selection process, the customer has to make the tradeoff between having a
supplier physically close to his facilities and the supplier's cost. It is especially desirable for the
direct user of the parts, the assembly plant, to have a supplier close by, but it could also be more
expensive. To resolve this issue, some suppliers decide to set up facilities near the customer site,
but this could be also more expansive for the customer than having a further, but more
economical supplier.
There is a variety of reasons for having the supplier close by, for instance:
"
The shipping cost is less expensive
"
The amount of time for the shipping is shorter
139
"
The duration of the shipping is less subject to fluctuation
"
Some parts cannot be shipped by air because of their important size, so the supplier has to
have a facility close by
"
The customer can bring a team of people to bring the supplier up to speed at fairly low
cost
"
The communication is better, and there is more face to face meeting
-
Logistics are improved in general
"
Some parts can be shipped from the supplier to the customer in a 'just-in-time" way,
directly where the parts have to be installed, like the "kits"
6.3.3 Tradeoff Between the Quality and the Cost
The customer will never sacrifice quality. However, the customer will go on the supplier site to
evaluate the supplier's manufacturing and quality according to the customer quality standard. The
customer will select a supplier which quality system corresponds to his standard, but the cost of
the supplier has to be competitive too.
6.3.4 Tradeoff Between Schedule, Quality and Cost
The customer prefers to make a priority on focusing on the quality. The customer believes that
focusing on quality and the improving quality of the supplier will also improve the schedule and
the cost of the supplier. An improved quality will bring time and cost savings.
6.3.5 Tradeoff Between
Capability / Cost
Technology
and Supplier Manufacturing
This tradeoff is also a tradeoff between customer's employees' preferences and the cost of the
product. In some situations, the customer's engineers prefer a certain type of technology and
include that technology in their designs. However, they have also to consider the business side of
their designs and make sure that they know or have suppliers able to manufacture those designs at
an acceptable cost. The customer has to make sure to have suppliers able to deliver such
technology and he has also to make sure that the value of such technology balances its cost.
During the product development process, engineers and material people have to balance the
technology desired to its cost and its manufacturing feasibility.
140
6.3.6 Tradeoff Between Time Savings and 3D Drawings
Currently, most of the drawings sent to suppliers are 2D drawings. However, the customer might
be sending more and more 3D drawings in the future, so that having 3D drawing capabilities may
become a criterion in supplier selection.
However, in certain cases, the length of time saved by sending 3D drawings to a supplier having
the 3D drawing capabilities (i.e. a supplier whose processes can handle 3D drawings) doesn't
justify the choice of going to the supplier having that 3D drawing capability. For example, a
supplier having that capability will be faster, but might be more expensive. The customer might
not need this saving in time, not justifying the difference in the supplier's cost.
6.4 Good Practices of
the Supplier Selection
Process in
Industry
The last sections of this chapter describe the supplier selection process used by the customer.
However, during the analysis of all the practices used by the customer, many practices appeared
to be original and positive:
-
Evaluation of the supplier's quality system
*
Long-term agreements even for commodity suppliers
"
Co-location of the purchasing people
"
Subjective/objective selection
6.4.1 Evaluation of the Supplier's Quality System
The customer always evaluates the supplier's quality system. The customer has different ways of
measuring quality and can have a lot of details in evaluating it. The customer can look at the
supplier quality from different perspectives, for example, from:
"
The site perspective, by doing an audit
-
How supplied parts perform in the field
-
How the supplier quality people handle quality within the manufacturing facility
"
What kind of programs the supplier has in place in its facility to measure its own quality
performance.
"
How do the supplier monitor and track quality.
141
The customer wants the supplier to be responsible for the design and quality of the parts so the
customer makes sure the supplier has processes that measure and monitor them. The customer
sends field representatives to the supplier's site to do the supplier audit system, which rates the
quality of the quality system of the supplier. Those field representatives evaluate the supplier
whole quality system: it's a system audit, not a part audit. The suppliers are evaluated on a
regular basis and the audit system is done on a regular basis. The customer might also do other
types of audits, like a product audit, a design audit, etc.
6.4.2 Long-Term Agreements even for Commodity Suppliers
Long-term agreements are best for the supplier, and by extension for the customer. Long-term
agreements allow the suppliers to invest in their manufacturing process in a long-term
perspective. It also gives to the suppliers a higher chance to get loans from bank in order to invest
massively in their manufacturing processes. The customer can then help the supplier in that way
to reduce its cost in a long-term process. Long-term agreements are then beneficial for both the
supplier and the customer.
6.4.3 Co-Location of the Purchasing People
The co-location of purchasing people with the product development team was tried with very
positive results for one of the customer projects. The purchasing people are co-located with the
engineering team and are working with engineering. It allowed them to understand more the
engineering side of the project and the constraints that the engineers have during the project.
Other groups are also co-located with the product development team. With this co-location, the
different groups were more able to understand each other and had a broader view of the
engineering side of the project as well as the quality side, the business side, the cost side, etc.
6.4.4 Subjective / Objective Selection
The supplier selection is often susceptible to be a subjective decision. The decision can be
subjective because of the background of the decision maker, because of his personal preferences,
his history, etc. In order to make the supplier selection decision the less subjective possible, the
decision is taken by a group of people instead of by a single person. The decision group is
composed by people from finance, quality, engineering, customer support, material and any group
142
involved in the product development cycle. The entire group has to decide and agree on the
supplier selection. If there is any disagreement, the decision is taken by facts and data. The group
tries to eliminate subjective rating or preferential criteria toward certain suppliers and tries to
create an incentive of opinion by diverse groups that have to agree.
6.4.5 Summary
Those four practices are good because they improve the customer-supplier relationship and the
product development cycle in general. The customer was also convinced of their utility and
wanted to use them in other projects.
6.5 Areas of Improvement of the Current Supplier Selection
Process
During the analysis of all the practices used by the customer, many practices appeared to be
original and positive. However, the current supplier selection process is also considered to be not
perfect and there is some areas where improvements could be made. These areas of improvement
are:
" Length of the SSP
-
Qualification of the buyers
6.5.1 Length of the Supplier Selection Process
One area of improvement of the current supplier selection process is the length of the process.
The length of time and the amount of paper work and meetings required to select a supplier is
heavy. However, such process allows a great amount of input and there are other good reasons for
such a process. The customer has to make sure to choose the right supplier, especially for longterm agreements. Some attempts were made to straighten the process.
6.5.2 Qualification of the Buyers
Buyers and other procurement representatives need knowledge in different areas in order to make
the best decision in the supplier selection process. They need an understanding in technical and
business areas. They have to have or acquire knowledge in areas such as design, manufacturing,
143
quality control, management analysis, and more. Also, the buyers have to be able to communicate
with the different teams and suppliers. As a consequence, experienced/effective buyers are hard
to find or take a lot of time to form. The new buyers lack most of those types of knowledge,
especially in the domain of statistics.
The customer hired a lot of new buyers over time and experienced personal wishes that those new
buyers would have more education in advance quality systems, continuous improvement,
statistical process, control, design and other areas. Thus, even if the customer evaluates its buyers
to be ahead of a lot of other companies, he also judges that it is time for re-education and
refreshing training for buyers.
The customer knows those two areas of improvement and some projects might be done soon in
order to improve them.
6.6 Conclusion
In this chapter, we described the current supplier selection process used by company B.
After
interviewing company B, we found the links between product, relationship and criteria
characteristics that guide the supplier selection process. This company has two main types of
suppliers: the component level supplier and the system level supplier. Company B is in a
particular situation where the number of potential suppliers able to design and manufacture its
systems is very limited. Hence, the selection process is more a contract definition between the
customer and the supplier than a real selection for system suppliers.
This second case study shows that other types of product and other industries use different ways
of selecting suppliers. However, the two supplier selection processes have common points. For
example, a key criterion for selecting supplier will always be the quality of the supplier and its
quality mindset. Another common point between the two case studies is the importance of the
quality of the selection team. Both companies emphasize the complexity of the selection decision
and the broad knowledge that the decision-makers have to possess. Furthermore, the selection
decision in both companies is made by a team composed by members coming from various fields
in the company whereas the traditional selection decisions were taken by only procurement
people. This need of having a team with a broad knowledge can be explained by the fact that the
companies
give
more
responsibilities
to
their
144
suppliers.
Suppliers
have
now
design
responsibilities, which requires more interactions with the customer. Therefore, those decisionteam are required to be able to cover all the selection criteria in the different field to be assessed,
i.e. design, manufacturing, technology, research capabilities of the supplier, etc.
Other case studies would find industry wide practices, best practices and areas of improvement
that could also help new or smaller companies to make their supplier selection. Also, it could help
the suppliers improving their capabilities.
145
146
CHAPTER 7: CONCLUSION
Chapter 2 used game theory to show the importance of the supplier selection process in industry.
This part showed the existence of links between the supplier selection process used by the
customers, the quality of the information exchanged between customers and suppliers, and the
type of relationship between customers and suppliers. This part demonstrated the importance of
the supplier selection process and criteria and how the customer can get locked into situations
where suppliers are not cooperative because of the selection process used by the customer. Thus,
the supplier selection process influences the relationship that the customer will have with its
suppliers, but it will also greatly influence its product cost.
In chapter 3, we showed how the supplier selection and the product expected cost were linked.
We saw the importance of the supplier reliability and quality. This second part provided a
mathematical framework that links the reliability of the supplier's manufacturing processes and
the supplier's process capability information to the product expected cost. This mathematical
framework was done using a Bayesian updating process.
Hence, chapters 2 and 3 showed the importance of the supplier selection process, but didn't show
how it was currently done in industry, which was the purpose of chapters 4, 5 and 6. This third
part of the thesis described the supplier selection process used by two companies and highlighted
the product characteristics that influence the supplier selection, the types of relationship and the
key criteria for supplier selection. This third part showed the links between these items and
compiled some supplier selection good practices and areas of improvement. Also, a list of
tradeoff made during the selection process was compiled.
Chapters 5 and 6 were two case studies made in two different industries. Although those two
companies make different types of product, their supplier selection processes have some common
points. Those common points were mostly the unconditional supplier selection criteria of
suppliers' cost, quality, delivery and service. These criteria filter the existing suppliers and
determine which ones are potential suppliers for the customer. These criteria are also mentioned
147
in literature as the major ones in supplier selection (Lehmann and O'Shaughnessy 1982; Dickson
1996). However, the selection processes and criteria of the two companies also differ on some
points. For example, the geographical proximity of suppliers was very important for company B,
whereas it was not as important in company A. This was partly explained because of the large
size of the products made by company B which prevent them to be transported by common
transportation way. This was also explained by the fact that there is a frequent interaction among
engineers from the customer and the suppliers. In company A, this was solved by co-locating
suppliers with the customer. Another common point between the two case studies is the
qualification of the buyers. Both companies expressed the need of having highly qualified buyers,
with a broad knowledge in many fields, especially statistics.
However, some features of the supplier selection processes used by the companies are specific to
each company. Company B designs and produces very expansive products of a high complexity.
Also, those products have huge dimensions and the company doesn't have many competitors.
Hence, the criteria for supplier selection will be more focused on the quality and the delivery
performance of the supplier than on its cost. On the other hand, company A has many competitors
for some of its market segments. Therefore, the cost of the supplier will be a determinant criterion
in its selection process. However, the criterion of quality has also to be present, but the tradeoff
between quality and cost might not be the same as in company B. For example, the company A
might emphasis more the cost criteria for non-critical parts of its products.
Furthermore, the companies tend to integrate suppliers into their product development process at
the earlier possible stage. Supplier integration into new product development is a strategic critical
issue (Ragatz, Handfield and Scannell 1996). A survey done in 1996 by Ragatz, Handfield and
Scannell clearly showed that the responding companies planed to integrate suppliers earlier and in
greater depth in future new product development efforts to generate new ideas, develop and apply
new technologies, reduce cycle time, improve quality, and reduce costs. However, as the
companies integrate the suppliers early in their product development process, they also have to
change their supplier selection process. Their selection process have to evolve from a traditional
way of selecting suppliers, i.e. by bidding process and mostly based on supplier's cost, to a more
complex way of selecting suppliers where the supplier is also considered for his technical
capabilities. Those suppliers need more competencies and will be given more responsibilities in
the product development; hence, they also need a different type of selection process than the
traditional one. The customers have then to go through a transition period where the mentality
and culture of selecting suppliers have to change toward considering suppliers more as partners.
148
This transition seems to be difficult, as the mentality is still more toward evaluating the suppliers
based on their costs.
The supplier selection practices in industry are evolving and some companies are facing a
transition period where the culture and mentality toward suppliers have to change. These changes
and adaptation of the customer lead to organizational changes, inter-organizational changes and
also intra-organizational changes. For example, as a customer reduces the number of its supplier
to a smaller number of suppliers with more responsibilities, the customer has to change part of its
procurement organization. The analysis of these organizational changes, inter-companies and
intra-companies, would be an interesting research.
On the other hand, as the supplier selection decision becomes more complex, the uncertainty
linked to this decision also becomes more important. More research should be conducted on how
to evaluate and manage uncertainty in supplier selection, as the selection becomes more
uncertain. Many tools can be developed in order to help decision-maker in selecting the
appropriate suppliers, with the appropriate contracts and legal bindings. Furthermore, more
research on the industry best practices in term of total cost analysis under uncertainty would also
be very helpful.
149
150
BIBLIOGRAPHY
"
"
Acemoglu D. (1998 ) Game theory lecture notes 1998, Massachusetts Institute of Technology
Anton James J. and Yao Dennis A. (1989) "Split awards, procurement, and innovation."
RAND Journal of economics, Vol.20, No4.
m
Anonymous (1998) "What is game theory?" Ivey Business Quarterly. 62(4): 43. 1998
" Banks M. (1982) "Build or Buy?" Systems International. 10(7): 70-71. 1982 Jul.
"
Baron David P., Besanko David (1987) "Monitoring, moral hazard, asymmetric information,
and risk sharing in procurement contracting." RAND Journal of economics, Vol.18, No4
"
Baudry Bernard and Bouvier-Patron Paul (1994) "De la sous-traitance traditionnelle ' la
sous-traitance aprteneriale: une application de la thdorie de l'agence." Presse universitaire de
Grenoble
"
Bennett P. (1996) "ABM and the procurement cost model." Management Accounting. 77(9):
28-32. 1996 Mar.
"
Boath D., Hess P. and Munch C. (1996) "Virtual R&D: A core competency approach
to
outsourcing." Pharmaceutical Executive. 16(6): 72-78. 1996 Jun.
-
Box George E.P. and Tiao George C. (1973) Bayesian inference in statistical analysis.
Addison-Wesley Publishing Company
"
Buchok J. (1999) Canada Computer Paper Inc.
"
Buchowicz B. S. (1991) "A Process Model of Make-vs.-Buy Decision-Making; The Case of
Manufacturing Software." IEEE Transactions on Engineering Management. 38(1): 24-32.
1991 Feb.
"
Clemens Robert (1996) Making Hard Decisions. Duxbury
-
Crosby P. B. (1982) "The Management of Quality." Research Management. 1982 Jul.
Crosby P. B. (1983) "Don't Be Defensive About the Cost of Quality." Quality Progress.
"
"
Degraeve Z. and Roodhooft F. (1999) "Improving the efficiency of the purchasing process
using total cost of ownership information: The case of heating electrodes at Cockerill Sambre
S.A." European Journal of Operational Research. 112(1): 42-53. 1999 Jan 1.
"
Degraeve Z. and Roodhooft F. (1999) "Effectively selecting suppliers using total cost of
owenership." Journal of Purchasing & Materials Management. 35(1): 5-10. 1999 Winter.
Deming W. E. (1981) "Improvement of Quality and Productivity Through Action by
Management." National Productivity Review. 1(1): 12-22. 1981-1982 Winter.
"
" Diallo A., Khan Z. U., CMA, and Vail F. C. (1995) "Cost of quality in the new
manufacturing environment." Management accounting
151
"
Dickson G.W. (1996) "An Analysis of Supplier Selection Systems and Decisions," Journal of
Purchasing, vol. 2 (1996), pp. 5-17
-
Dixit Avinash K., Nalebuff Barry J. (1993) Thinking Strategically : The Competitive Edge in
Business, Politics, and Everyday Life.
"
Feigenbaum A. V. (1990) "The Criticality of Quality and the Need to Measure It." Financier.
14(10): 33-36.
"
Fine, Charles E. (1986) "Quality improvement and learning in productive systems."
Management ScienceVoll2, NolO
"
Fisher F. M. (1989) "Games economists play: a non-cooperative view." RAND Journal of
economics, Vol.20, Nol.
"
Gallon, M. R. Stillman, H. M. Coates, D. (1995) "Putting core competency thinking into
practice." Research-Technology Management. 38(3): 20-28. 1995 May/Jun.
"
Harding M. L. (1998) "How to calculate total purchase cost." Hospital Materiel Management
Quarterly. 19(4): 9-13. 1998 May.
"
Hartmann-Wen (1992) "Optimal incentives and asymmetric distribution of information."
European Journal of Operational Research 143-153
"
Helper, Susan R. Sako, Mari. (1995) "Supplier relations in Japan and the United States: Are
they converging?" Sloan Management Review. 36(3): 77-84. 1995 Spring.
-
Hines W. W. and Montgomery D.C. (1990) Probability and statistics in engineering and
management science John Wiley & Sons
"
Kalpakjian
S.
(1995)
Manufacturing engineering and technology. Addison-Wesley
Publishing Company
"
Katsikeas C. S. and Leonidou L. C. (1996) "International supplier selection: The relevance of
import dependence." Journal of Global Marketing. 9(3): 23-45. 1996.
"
Katz Michael L. (1991) "Game-playing agents: unobservable contracts as recommitment"
RAND Journal of economics, Vol.22, No3.
"
King W. R. (1994) "Strategic outsourcing decisions." Information Systems Management.
11(4): 58-61. 1994 Fall.
-
Klier T. H. (1994) "The impact of lean manufacturing on sourcing relationships." Economic
Perspectives (Federal Reserve Bank of Chicago). 18(4): 8-18. 1994 Jul/Aug.
-
Lambert D. M., Adams R. J. and Emmelhainz M. A. (1997) "Supplier selection criteria in the
healthcare industry: A comparison of importance and performance." International Journal of
Purchasing & Materials Management. 33(1): 16-22. 1997 Winter.
"
Lehmann D. R. and O'Shaughnessy J. (1982) "Decision Criteria Used in Buying Different
Categories of Products." Journal of Purchasing & Materials Management. 18(1): 9-14. 1982
Spring.
"
Lewis, T. R. and Sappington D. E. M. (1991) "Incentives for monitoring quality." RAND
Journal of economics, Vol.22, No3.
"
Lovitt, Mike
(1996) "Continuous improvement through the QS-9000 road map" Quality
Progress. 29(2): 39-43.
"
Maltz A. (1995) "Building successful relationships." Transportation & Distribution. 36(5):
63-68. 1995 May.
152
"
Prahalad, C K. (1993) "The role of core competencies in the corporation." ResearchTechnology Management. 36(6): 40-47. 1993 Nov/Dec.
"
Prahalad, C K. Hamel, G. (1990) "The Core Competence of the Corporation." Harvard
Business Review. 68(3): 79-91. 1990 May/Jun.
"
Pratt J. W., Raiffa H. and Schlaifer R. (1995) Introductionto StatisticalDecision Theory. The
MIT Press
a
Ragatz G. L., Handfield R. B. and Scannell T. V. (1996) "Success factors for integrating
suppliers into new product development." The Journal of Product Innovation Management
"
Raiffa Howard and Keeney Ralph (1993)] Decisions with Multiple Objectives. Cambridge
University Press
"
Sako, Mari. (1996) "Supplier's Associations in the Japanese Automobile Industry: Collective
Action for Technology Diffusion." Cambridge Journal of Economics. 20(6): 651-671.
-
Sexton Richard J. and Sexton Terri A. (1987) "Cooperative as entrants" RAND Journal of
economics, Vol.18, No4.
*
Speir R. E. (1989) "Make or Buy: A Winner's Guide." Purchasing World. 33(2): 32-33. 1989
Feb.
m
Taguchi G. and Clausing D (1990) "Robust Quality" Harvard Business Review
"
Thornton A. C., Donnelly Stephen, Ertan Basak (1999) "More Than Just Robust Design:
Why Product Development Organizations Still Contend With Variation and Its Impact on
Quality." MIT
-
Thornton A. C., Tata Melissa (1999) "Process capability database usage in industry: myth vs.
reality." ASME DFM DETC '99 conference
"
Thornton, A. C. (1998). "A Mathematical Framework for the Key Characteristics Process."
Research inEngineering Design - Theory Applications and Concurrent Engineering.
"
Thornton A. C. (1999) "Variation Risk Management: More Than Just Robust Design." 17th
Annual Taguchi Symposium: Robust Engineering: Powerful tools for the new Millennium.
"
Thornton A. C. (1999) "Optimism vs. Pessimism: Design decisions in the face of process
capability uncertainty." ASME Journal of Mechanical Design
"
Ulrich K. T., Eppinger S. D. (2000) Product design and development. The McGraw-Hill
Companies, Inc.
"
Ulrich, K. (1995) "The role of product architecture in the manufacturing firm." Research
Policy. 24(3): 419-440.
m
Verma R. and Pullman M. E. (1998) "An analysis of the supplier selection process." Omega.
26(6): 739-750. 1998 Dec.
-
Vonderembse M. A. and Tracey M. (1999) "The impact of supplier selection criteria and
supplier involvement on manufacturing performance." Journal of Supply Chain Management.
35(3): 33-39. 1999 Summer.
-
Womack, J. P., Jones, D. T., Roos, D.. (1990) The machine that changed the world. New
York: Macmillan
153
154