CHAPTER - V
STRATEGIC OUTSOURCING & SUPPLIER
SELECTION - AN APPLICATION OF KRALJIC
OUTSOURCING MODEL & FACTOR ANALYSIS
CHAPTER-V
STRATEGIC OUTSOURCING & SUPPLIER SELECTION
- AN APPLICATION OF KRAL JIC OUTSOURCING MODEL &
FACTOR ANALYSIS
5.1 Introduction
Outsourcing has become a very important issue facing many companies today. It is
proving to be a significant factor in a company’s strategic decision making process as
more companies are divesting their manufacturing activities, i.e. becoming less and less
vertically integrated. From the perspective of supplier relationship management (SRM),
strategic sourcing (as opposed to traditional sourcing) involves finding and building on­
going relationships with trading partners that will account for the majority of an
enterprise's expenditure towards material and services. These close relationships will
also provide materials or services that are key constituents in the final product or
service, or that can help the buyer and the organization to achieve its profitability and
customer satisfaction goals. Strategic outsourcing is different in many ways from the
old traditional purchasing. In traditional purchasing organization buyer focuses much
on cost and delivery and one way of utilizing the opportunity from cost perspective
only, whereas today’s strategic outsourcing provides focus on relationship building,
long term business and understanding each other’s problem, mutual benefits and
objectives. In the boundaries of SRM, strategic outsourcing concepts are utilized in
sharing common resources, information within buying and selling organizations in
order to reduce the material, conversion and inventory cost, apart from improving the
78
delivery period, quality of the product / service, and meeting or exceeding the
expectations of the end customer.
The very next step after formulation of strategy for outsourcing is supplier selection.
Supplier selection largely depends upon organizational policy, business environment,
government policy, environmental laws, local laws and other factors. To produce low
cost and high quality products within the assigned time frame the organisation is
required to have a group of competent and loyal suppliers. The effectiveness and
competitiveness in the business only can be derived from the correct supply bases. So
supplier selection is the basic or key issue of supply chain management or supplier
relationship management. The supplier selection process is complicated by the multi­
objective nature of the decision making required from different categories of materials
and equipment having differing needs and priorities. It is further complicated with the
different selection criteria from different segments of the industry. It also lays impact
on the perception and experience of the supply chain policy makers of the specific
industry as well as front line buyers. The feedbacks from the cross functional team
members of the specific purchasing environment, also is having impact on the supplier
selection process or criteria.
5.2 Chapter Objective
This chapter though mainly focuses on the strategic outsourcing of components and
supplier selection, the specific objectives of the chapter are stated below:
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1. To identify the type of relationship that the manufacturing division of L&T,
Kansbahal, Orissa has to maintain with the various types of suppliers for the
supply of specific products / components etc.
2. To determine the attributes / factors that contributes to the selection of
appropriate suppliers for the manufacturing division of L&T, Kansbahal, Orissa
3. To briefly review the related research works done on strategic outsourcing and
supplier selection by manufacturing division.
4. To briefly highlight the current strategic outsourcing and supplier selection
practices of L&T Kansbahal, Orissa.
5. To specify the techniques / models used for supplier relationship building and
for the determination of attributes for supplier selection.
The twin objectives of this chapter will be analyzed under section - A on strategic
outsourcing and in section - B on supplier selection.
SECTION - A
5.3 STRATEGIC OUTSOURCING
5.3.1 Literature Review - Strategic Outsourcing
Eagerness to outsource has been partly driven by the cost-cutting and downsizing
exercises of the late 1980’s and early 1990’s. This has led to a situation where
company’s financial resource is being wasted and resources are being poorly applied
because components are bought at a higher cost from external suppliers which could
have been more effectively made in- house, while at the same time there are other items
being made in-house which should be bought from suppliers at cheaper rate. Another
80
reason for this situation is that the decision to outsource has been purely historical, i.e.
the item has always been sourced in this way. Consequently, there is a need to develop
a methodical approach at the strategic level in order to decide whether a company
should make or buy a particular product, service or component.
Many researchers have observed that the buyers as well as sellers are the critical forces
in the entire business purchasing decisions. In many situations, organizations are trying
to reduce the number of suppliers and establish long term buyer supplier relationships
to achieve competitive advantage through more effective use of the supplier base. In the
make or buy decision, the core competencies and capabilities of the organization must
not be jeopardized by outsourcing key processes or product elements, thereby losing
that skill. Purchasing will impact profitability by allowing suppliers to become involved
in new product development, and by supporting the manufacturing process, monitoring
the supply environment, and forecasting the availability and cost of materials for future
production needs (Mclvor et. el, 1997).
Hal Mather (1987) suggests that unnecessary complexity in products and product
ranges is a major cause of delays in supply chains. He proposes, for example, that the
Bill of Material for each product should be rated according to what proportion of it are
standard parts and what proportion unique to that product. Products with a high
proportion of unique components should be redesigned. The consequent possible
rationalization of component lists would reduce inward stock and take uncertainty out
of supplier schedules. He further suggests that product ranges should be so designed
that the product remains ‘standard’ as far up the manufacturing process as possible, the
variations which create the differences between models being inserted as late in the
process sequence as is feasible. Flexibility of scheduling will thus be greatly enhanced,
81
aind the time to respond to product variation in the product mix demand will be more
effectively met.
Literature review also suggests that a strategic purchasing function needs to be
viewed by top management as an important area and it may be at par with other
major functions in the firm. White and Hanmer-Lloyd’s data analysis (1999)
found that a purchaser is likely to be significantly impaired from achieving a
significant strategic role by inadequate internal status and trust, and by the
supportive involvement and influence of the firm’s CEO. Spekman et al. (1999)
apprehended that companies with outstanding sourcing strategies appear to share
two characteristics: executive level commitment to building sourcing capabilities
and viewing sourcing as a cross functional capability. (Carter &Narasimhan
,1996c) argued that importance of purchasing within organization was the most critical
factor for performance, and consequently a high purchasing contribution requires from
top management to give emphasis on the purchasing function. A major influence
impacting on the outsourcing of products and/or sendees is consideration of scale and
costs (Finlay and King, 1999). The Boston Consulting Group (1991) studied more than
100 key companies with extensive outsourcing practices and concluded that most
Western companies outsource primarily to save on overhead or induce short-term cost
savings (The Economist, 1991). Others argue that the growth in indirect overhead costs,
which represent "non-core competencies", are increasingly being outsourced
(Chalos, 1994; Branda, 1999). Lewis and Sappington (1991) have examined the
incentives for outsourcing and argue that outsourcing is a trade-off between
lower production costs (provided the supplier possesses lower cost technology) and
higher monitoring costs. Outsourcing is creating substantial intangible value for
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firms (Quinn, 1992), such as, agility to adapt to varying business conditions, quality or
productivity improvement, speed to market, access to outside experience and expertise,
and so on.
Carter et al. (2000) identified the most important areas of concern in a ten year forecast,
including “electronic , commerce”, “strategic cost management”, “strategic sourcing”,
“relationship management”, and “performance measurement”. It is witnessed that
purchasing affects more than the material flow along the value chain (Carter and
Narasimhan 1996b; Carter et al. 2000). Traditionally treated as a lower level function,
purchasing’s role is changing due to the increasing emphasis on reduced cost and
improved quality, on faster product development through cross-functional teams, and
on closer buyer-supplier relationship (Pearson 1999; Watts et al. 1995). Finally, the
enunciated trends indicate awareness that purchasing has a role in corporate strategy.
Suppliers and supply management can play together a strategic role in achieving
sustainable competitive advantage in rapidly changing markets (Carter and Narasimhan
1996b, 1996c).
Focused strategic purchasing organizations will be a major contributor to their
businesses. Key activities will continue to include supplier evaluation selection and
development including cross-functional and cross-enterprise teams. However tactical
purchasing activities such as ordering, quoting, expediting and so forth will be
automated and/or outsourced and headcounts will be reduced. Selected low-value, noncritical standard commodity purchases are likely to be outsourced to full-service
providers. (Carter et al., 2000)
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The research carried out by (Narasimhan& Das, 2001) suggest that external purchasing
initiatives i.e. supply base leveraging, buyer-supplier relationship, development, and
supplier performance evaluation may not be sufficient to elevate purchasing into a
strategic function. These practices should be accompanied by internally focused
purchasing initiatives that enable purchasing to become a member of the business
planning process and leverage its supply base investments for competitive advantage.
Organizational buying behavior has received considerable attention in academic
research. One of its main research focuses of interest was the understanding of buying
behavior and its predictors. Organizational buying behavior has been dramatically
changing due to transformations oh the nature of industrial competition. Global
competitiveness, industry restructuring through mergers or alliances, TQM philosophy,
and information technologies/ technological advancements demanded firms to search
for new competitive advantages (Carr and Pearson, 2002). As firms recognize the
purchasing function as an important resource for obtaining high quality levels, fast
deliveries and cost savings (Carr and Pearson 2002), it reveals opportunities for the
purchasing management to become a business key contributor
The study carried out by (Paulraj et.al., 2006) provides strong empirical support for the
importance of strategic purchasing by showing that, by moving towards the more
advanced stages, firms at the nascent stage of strategic purchasing can achieve better
supply integration, a second-order construct composed of four facets of relational,
process, information, and cross-organizational team integration. Their analysis further
reveal that strategic purchasing can have a profound impact on supply chain
performance for both buyer and supplier firms.
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Article by Javier Gonzalez-Benito (2007) develops a different approach focused on
purchasing capabilities rather than purchasing practices and proposes that purchasing
contribution to business performance depends on the degree to which purchasing
capabilities fit with and support the business strategy. By adapting the Theory of
Production Competence to the purchasing context, this article distinguishes two levels
of fit: between purchasing strategic objectives and purchasing capabilities, defined as
“purchasing efficacy,” and between business strategy and purchasing strategic
objectives, which is viewed as an immediate consequence of the strategic integration of
purchasing.
Changes in purchasing and supply strategy are examined in terms of the key strategic
issues facing the purchasing function and its role in supporting the corporate strategy of
the firm (Ellram and Carr, 1994). With regard to major trends in purchasing strategies,
there was considerable consensus that organizations are increasingly reliant on
collaborative alliances with other organizations (Carter et al., 2000b). Carter et al.
(2000b) reported increased international alliances and the increasing importance of
relationships with full service third parties, such as logistics providers. Crichton et al.
(2003) found that supplier relationship management was perceived as one of the key
issues of strategic alignment between purchasing strategy and corporate strategy.
5.3.2Strategic Outsourcing Practices At L&T, KBL
The outsourcing strategy of Larsen & Toubro Limited, Kansbahal, Orissa is considered
one of the key initiating points for supplier relationship management. The outsourcing
strategy is decided based on the complexity in products and product ranges,
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organizational
strength,
competitors
and
the
customer
requirements.
Both
manufacturing and procurement strategies are developed once a sound understanding of
customer requirements is obtained. Customer requirements in terms of the actual costs,
quality and delivery levels as well as the relative priority of cost, quality and delivery
considered before deciding the outsourcing strategy. L&T, KBL gets orders in a mixed
bag concept means some products and services are within their capacity and capability
and some they have to sourced down and supply the complete contact to customer. In
this process strategic outsourcing divided into two major parts. One is project level
outsourcing decided during engineering stage and by project team also. Second is at
operational level, where central planning and shop manufacturing team decides the
volume and type of outsourcing depending on availability of resource and skill at that
particular time frame.
The outsourcing decisions taken at engineering and project team level are based on
technological aspect and partly customer specific requirement. Technological aspect
means the products which are not manufactured at L&T, KBL or do not have the
adequate technology to be manufactured. If some other manufacturing unit of L&T
carries that skill this KBL unit gives preference to outsource this type of specific
products from within the organization. In many cases customer demands or specifies
particular type of product or sub-assembly from specific company. In such cases there
is no option, but to make order to that company only. But in rare cases L&T takes
clearance for other companies due to conflict of interest or non-suitability of quality
and delivery.
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5.4 Research Methodology
In order to identify the product-wise relationship that the L&T, manufacturing division
should maintain with the corresponding suppliers, the study here uses KRALJIC model.
5.4.1
Sample: The different products / components used in the manufacturing
division of L&T, Kansbahal, Orissa are taken as the sample for analysis.
5.4.2
Data: For the study of the relationships with the respective suppliers for the
supply of the different products / components used in the manufacturing
division, both primary and secondary data from Larsen & Toubro Limited,
Kansbahal, Orissa are used. Secondary data are collected from the records of
the manufacturing division of L&T Kansbahal, Orissa with respect to
different products / components under study. The opinion from the
experienced executives in the concerned field with respect to purchasing of
such products for the L&T, manufacturing division of Orissaare taken into
account as a source of primary data.
5.4.3
Technique: For defining the type of relationship to be maintained with its
suppliers KRALJIC MODEL for strategic outsourcing is applied on all the
components of manufacturing division of L&T, Kansbahal,Orissa.
5.5
KRALJIC MODEL
Purchasing portfolio models have received much attention in the recent literature about
professional purchasing. Portfolio models have basically been used in strategic decision
making to support resource allocation decisions, by identifying which groups of
products, suppliers, or relationships that require greater attention than others. It is
thereby also seen as a useful management tool (Ellram, 1997).From the purchasing
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perspective purchasing portfolio models are needed to support decisions regarding
different kinds of supplier relationships. Many portfolio models developed by
researchers but Kraljic model is considered the base and one of the strongest models for
strategic outsourcing (Cox, 1997: Lammings &Harison, 2001).
One of the most famous portfolio models was introduced by Kraljic in 1983. According
to Kraljic a firm’s supply strategy depends on two factors i.e. profit impact and supply
risk. Kraljic offers a model for the top management to recognize the extent of its own
supply weakness and treat it with a comprehensive strategy to manage supply. The
article through which he has developed the model focuses on manufacturing
companies. Kraljic developed 2X2 matrix and these matrices give only one
recommendation for each portfolio quadrant, namely: form partnerships for strategic
products; assure supply for bottleneck products; exploit power for leverage products
and ensure efficient processing for non-critical products.
The matrix classifies the
stages of purchasing sophistication within companies and identifies four stages:
purchasing management; materials management; sourcing management; and supply
management. Kraljic argued that supply management is critical when the supply market
is complex and the importance of purchasing is high. Kraljic stated that the general idea
of the portfolio approach is to “minimize supply vulnerability and make the most of
potential buying power”. It seems that power and dependence play a significant role in
the Kraljic approach. The relative power and dependence position of buyers and
suppliers are therefore expected to be factors of importance in explaining the conditions
that influence the choice of purchasing strategy within each quadrant.
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Figure 5.1 Kraljic Outsourcing Model
Bottle-neck items
3
*
Non-Critical Items
OQ
Strategic Items
V
W
20
T3-
•o
|<
in
,C
|
Profit Impact
UQ
if
jC
Leverage Items
Source: Kraljic, P. (1983), Purchasing must become supply management, Harvard
Business review
Strategic products represent a considerable value to the organization in terms of a large
impact on profit and a high supply risk. Bottle-neck items are products have a moderate
influence on the financial results of a firm; however, they are vulnerable with regard to
their supply. Suppliers have a dominant power position for these products. Leverage
products can be obtained from various suppliers. These products represent a relatively
large share of the end product’s cost price in combination with a relatively low supply
risk. The buyer has many possibilities and incentives for negotiation, since small
percentages of cost savings usually involve large sums of money. At the same time the
supply risk is minimal. These characteristics justify an aggressive approach to the
supply market. Non-critical products usually have a small value per unit. In addition,
many alternative suppliers can be found. From the purchasing point of view, these
items cause only few technical or commercial problems. As a rule of thumb routine
products require 80% of the purchasing department’s time, while they often represent
less than 20% of the purchasing turnover. In general, in this situation purchasers are
advised to pool purchasing requirements.
89
The various steps in applying the Kraljic model are as follows:
(a) Recommended Approach
(b) Strategic Directions
5.5.1 (a) Recommended Approach
Kraljic suggests that two factors are important for a supply strategy. The first factor
concerns the strategic importance of the purchasing in terms of the value added by the
product line, the percentage of raw materials of the total costs and the impact on
profitability. The second factor concerns the complexity of the supply market measured
by supply scarcity, pace of technology and/or materials substitution, entry barriers,
logistics cost and/or complexity, and monopoly and/or oligopoly conditions (supply
risk).
The approach recommended for determining the purchasing strategy is a series of steps
describe as follows.
1. Classify the items according to four categories that the model presents: leverage,
strategic, bottleneck and normal items.
2. Perform a market analysis, where the company assesses the power of its suppliers
against its own strengths.
3. Strategic positioning of the items identified in the first step.
4. Create the action plans for the purchasing strategy.
(i) Classification of products
Classification of a company’s different commodities, based on the dimensions profit
impact and supply risk, is the first phase in Kraljic’s working method. The
90
classification in the four categories requires a distinctive approach and the complexity
of the supply market (supply risk) is in proportion to the strategic implications. In the
strategic quadrant analytic techniques are needed to support supply decisions. Kraljic
gives examples of such techniques as market analysis, risk analysis, computer
simulation and optimization models, price forecasting and other microeconomic
analysis. Specific market analysis and decision models are needed for bottleneck
products, and vendor and value analysis, price forecasting models and decision models
may be important for leverage items. For non-critical items simplified market-analysis;
inventory optimization and clear decision policies are needed.
(ii) The power dependence between the buyer and the supplier
The second phase in Kraljic’s framework, after the classification of the product
categories, deals with market analysis by plotting the bargaining power of the suppliers
against its own strength as a buyer. This concerns everything from quality and quantity
aspects to the relative strength of existing suppliers. Important factors during this phase
are the check of supplier’s capacity utilization, supplier’s break-even stability,
uniqueness of supplier’s product, past variations in capacity utilization of main
production units and the potential costs of non-delivery and inadequate quality. Taken
together, Kraljic stress the importance of knowing both the supplier strength and
company strength in order to do a good market analysis. The evaluation criteria will
also differ for different industries.
(iii) Strategic positioning of the products identified in the classification phase
The third phase concerns strategic positioning of the materials/products identified in
phase one. This action makes it possible to spot the opportunities and vulnerabilities in
91
the supply markets and it also makes it possible to develop counter strategies. Three
basic risk categories are possible in the strategic quadrant depending on where in the
matrix a product category is positioned: exploit, balance and diversify. The normal
situation is that companies will have different roles when different items and suppliers
are regarded. The company will have more flexibility in negotiations if the company is
stronger than its supplier. Exploit strategy is used when the buyer plays a dominant role
and the supplier’s strength is medium or low; there should however be a balance in
order not to jeopardize the relationship with the supplier. With an equal power situation
a balanced approach are used and when the supplier dominate a diversified approach is
used. This can also mean that the buyer should try to find material substitutes or new
suppliers. This can lead to inducements as longer contracts and higher prices. This stage
is more related to the prevailing conditions the purchasing department faces.
(iv) Long-term actions plans and strategies
The fourth phase concerns setting up actions plans for the long term and opens up for
changing the prevailing conditions in phase three above. The previous phases have
dealt with volume, price, supplier selection, material substitution, inventory policy and
so forth. The fourth phase makes it possible to improve the general sourcing strategy.
This can mean securing long-term supply and taking actions depending on the risks,
that are the company is currently facing. Options with clear objectives, steps,
responsibilities and different measurements need to be clear for the top management.
The fourth phase should lead to strategies for critical purchasing materials both
considering time and actions that needs to be taken.
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5.5.1 (b) Strategic Directions
Depending upon the nature of business, environment and supplier different components
fall in the four quadrants as mentioned in the portfolio quadrant. Naturally for different
components placed in the quadrants will follow different strategies are advised by
Kraljic.
Organisations have to apply suitable strategies out of available options
depending on their requirement and business.
Figure 5.2 Strategic Directions of Kraljic Model
A
;
Leverage '
:■ >
,7:;
6
t O:
■j;
\ru.
;
■■
*
Strategic
jil’
■
<- - - - - - - - - - -
t
o-:;i
i l.
f ;q..;
;4,-
8
jfkr..... -.
9
Nfln-critical ; ■ ■
•5"
i Maintain strategic partnership y
Accept locked-in partnership
:-3>; Terminate partnership, Find new partner
v4.s Accept dependence^TCduce^negative consequences
■'Sc Reduce dependece and risk, find other solutions
y
: 6 Exploit Buying power r.
■
;7? Develop strategic relationship
Individual ordering. Pursue efficient processing
3'; Pooling of Requirements
Bottleneck:
- .
:Low
/ y/yv'; High
, Supply-Risk' ■. '
yy-'
Source: Modified from Gelderman and Van Weele, 2003
(i) Strategic Components
Many times strategic products can only be purchased from one supplier (single source),
causing a significant supply risk due to compulsion or specific requirement from end
93
customer. The general recommendation for supplier management in this quadrant is to
maintain a strategic partnership. Purchasing practitioners employ two additional
purchasing strategies in this quadrant, namely accept a locked-in partnership and
terminate a partnership, find a new supplier (Gelderman and Van Weele, 2003). In
order to reduce the supply risk, organizations will aim at building a partnership
relationship with its supplier. Mutual commitment, trust needs to build with the supplier
for this quadrant components. This position describes the balanced power between
buyer and supplier. Locked-in partnership strategy often occurs when the buyer is
subject to unfavorable conditions of the supplier and is unable to pull out of the
situation. This situation describes monopoly power of the supplier. Terminate a
partnership strategy is employed when a supplier’s performance has become
unacceptable and incorrigible. The buyer will try to reduce his dependence on the
supplier. One way of achieving this is to search for alternative suppliers.
(ii) Bottleneck Components
The purchasing strategy that is commonly recommended for these products is primarily
based on acceptance of the dependence and reduction of the negative effects of the
unfavorable position. An alternative strategy suggested by purchasing practitioners is to
find other suppliers and move towards the non-critical quadrant. The main focus of this
strategy is to assure supply, if necessary even at additional cost. Examples of this
strategy are keeping extra stocks of the materials concerned or developing consigned
stock agreements with suppliers. This strategy is geared towards reducing the
dependence on the supplier. The most common way to achieve this is to broaden the
specifications of the product or to search for new suppliers.
94
(iii) Leverage Components
Leverage products can be obtained from various suppliers. These products represent a
relatively large share of the end product’s cost price in combination with a relatively
low supply risk. Small percentages of cost savings usually involve in these category of
products.
Buyers exploit their buying power in this quadrant component. Firm pursues for
competitive bidding. Since suppliers and products are interchangeable, there is no need
for long-term supply contracts. In general, a coordinated purchasing approach is
adopted that has the form of a centrally negotiated umbrella agreement with preferred
suppliers. In a few cases practitioners choose to abandon the leverage position and opt
for a strategic partnership with a supplier. This cooperative strategy is only pursued
when the supplier is willing and able to contribute to the competitive advantage of the
buyer’s firm.
(iv) Non-critical Components
For this quadrant component purchasers are advised to pool purchasing requirements.
For non-critical products strategy should be aimed at reducing the logistic and
administrative complexity. The main idea is to enhance purchasing power by
standardization and bundling of purchasing requirements. Whenever it is not possible to
pool the purchasing requirements, Professional purchasers adopt some kind of
individual ordering, for instance by means of a purchase card. This strategy is aimed at
reducing the indirect purchasing costs that are associated with administrative activities,
such as ordering and invoicing.
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Figure 5.3 Summary of Kraijic Purchasing Portfolio
Phase-
Phase-
Phase-
Phase-IV
Classification
of Material
Market
Analysis
Strategic
Positioning
Action plans
Normal
Product
Bottleneck
Item
Leverage
lk
e a
Supply Risk
Company Strength
Company Strength
Market Strength
Policy Issues
Volume
Price
Contract
New Supply
Inventory
Own Production
Substitution
Value Engg
Logistics
Low
Exploit
Spread
Press for Reduction
Buy Spot
Stay in Touch
Keep Low
Reduce
Stay in Touch
Enforce Supplier
Minimise Cost
f Vft?/.-!
Market
Strength
Market Strength
Market Strength
ISiSl Balance
Shift carefully
Negotiate
Balance /spot
Selected Vendors
Buffer
Decide selectively
Pursue
Perform Slectively
Optimise
# Volume
# Price
Contract
New Supply
#
Inventory
Own Production #
high Substitution
' # Value Engineering
# Logistics
Company Strength
Product
Assess
Supplier's
strength VS
Strategic Company's
strength
Item
lllill Diversify
Centralise
Keep Low Profile
Through Contract
Search
High
Enter
Search
Own Program
Secure sufficient Stocks
5.5.2 Application of Kraijic Model to L&T, KBL, Orissa
Before applying the Kraijic model to L&T, KBL, Orissa it is very much essential to
understand die nature of business, environment, supplier, geographical issues, customer
96
type, economical factors, organizational strength, weakness and the people. To derive
the components falling under each quadrant of Kraljic model the following activities
carried out in L&T, KBL, Orissa
•
Understanding the business scenario from business heads, marketing heads of
all the three SBUs of Kansbahal Works
•
Supplier strength and weakness from highly experienced buyers and buying
heads & material head
•
Manufacturing strengths and weakness from production head, shop head from
all the three SBUs.
•
Refereeing to secondary data sources of the organization
•
Buyer heads & Completion center heads also contacted to get a clear picture of
materials and their deliverable capabilities
Appling the four steps advised by Kraljic for this model to L&T, KBL, Orissa
Notable Points for Applying the Model
•
Larsen & Toubro Limited executed projects and equipment in the field of
cement, lime stone , coal, paper business, wind mill products and mobile
equipment business ( as described in detail in the company profile chapter )
•
Manufacturing is the core strength of the organization. Organization is capable
of high quality fabrication, high quality machining, variety of alloy castings and
grate strength in assembling components to derive final products
•
Some of the key equipment, components for the above mentioned business
sector is procured from single source like Gear Box, Screens, High thickness
97
mild steel (MS) plates, High and medium stainless steel (SS) plates, special
components applied to paper machine which is imported from Voith or
Germany. Very large size forgings, wearing elements of specific quality and
hardness and automation related components are very critical and carry very
high impact from profit and business perspective.
•
Apart from the above items Motors applicable for the equipment’s, bearings,
locking assemblies, Gears, pressure regulators, dust suppression systems,
hydraulic components, cranes, tyres and tubes for mobile equipment, couplings
and special class electrodes for welding are the critical components and needs
much focused attention. In addition to that large size fabrication and large size
machining components are also bottle necks for the organization. These
components are also having significant impact on profitability and execution of
the project. Apart from these components large size fabrication, machining and
casting are also very critical from this unit’s perspective.
•
Consumables for fabrication like welding gases, normal electrodes, tools for
machining, oil, grease, paints, standard plates up to 50 thicknesses for both mild
steel and stainless steel, low diameter forgings, chassis for mobile equipment,
fasteners are falling under non-critical components and easily available from
specified sources.
•
L&T, KBL, Orissa developed supplier base in and around its premises in the
diameter of 20-30 KM. these suppliers are very much capable of producing
small castings in large numbers, small and medium machining, and small and
medium fabrication components along with machining.
Angles, channels,
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wooden items, scraps for melting, sands for moulding, safety accessories are
falling under leverage components.
5.6 L&T, KBL on Kraljic Matrix
Considering the inputs mentioned above all the components falling under different
quadrants placed in the following matrix.
Figure 5.4. L&T, KBL on Kraljic Matrix
High 'f'
Strategic Items
( Gear Box, Screens) High thickness
mild steel (MS) plates, High and
(small castings, small and medium
medium stainless steel (SS) plates,
machining & fabrication
special components applied to
components, Angles, channels,
paper machine,(from Voith or
wooden items, scraps for melting,
Germany), Very large size forgings,
sands for molding, safety
wearing elements of specific
accessories)
quality and hardness and
automation related components)
Profit Impact
Leverage Items
Bottle-neck items
( Motors applicable for the
equipment's, bearings, locking
(welding gases, normal welding
assemblies, Gears, pressure
electrodes, tools for machining, oil,
regulators, dust suppression
grease, paints, standard plates up
systems, hydraulic components,
to 50 thicknesses for both mild
cranes, tyres and tubes for mobile
steel and stainless steel, low
equipment, couplings and special
diameter forgings, chassis for
class electrodes for welding, large
mobile equipment & fasteners)
size fabrication & large size
machining)
Non-Critical Items
Low
High
Supply Risk
----- >
99
5.6.1
Strategic Road Map for L&T, KBL
Based on the classification of components of L&T, KBL, Orissa should prepare
strategic guidelines for the buyers to implement as advised by Kraljic or they can
modify the strategy depending upon the business practice and business environment.
As gear box, screens, high thickness plates, automation components etc. are falling
under strategic components of L&T, KBL, the buyers must give special care and
attention through forming team with very high level decision makers. As these
components are having very high impact on profit and falling under high risk zone
careful handling is required. As suggested by the model termination of relationship with
supplier may be one of the strategies by finding alternatives, but practically most of the
times it is not possible. Also this process needs a lot of time and high risk also involves
in this process. So it is advisable to develop mutual trust, commitment and share a
partnership approach for this segment of components.
In the bottleneck quadrant Motors , bearings, locking assemblies, Gears, pressure
regulators, dust suppression systems, hydraulic components, cranes, tyres and tubes for
mobile equipment, couplings and special class electrodes for welding are falling. As
buyer has to ensure supplies of these components, proper buyer supplier relationship
needs to be established. Parallel alternate supplier and crating competitor among the
supplier is also one of the strategies to these quadrant components. To meet the delivery
needs buyer and the initiator of the purchase order may keep some stock. But this is
sometimes problematic as L&T, KBL executes orders on specific demands of the
customer and few of these components are changed every time depending upon
specifications.
100
In the non-critical box welding gases, normal electrodes, tools for machining, oil,
grease, paints, standard plates up to 50 thicknesses for both mild steel and stainless
steel, low diameter forgings, chassis for mobile equipment, fasteners are falling. These
are the most common items for any manufacturing company and market strength is
very high in supplying these components. Buyers can create enough competition among
existing suppliers and take the advantage of supply duration and cost advantage. As
suggested by the model organization also can standardize the products, can club the
requirement of all the different departments to minimize the ordering and
administrating costs attached to this segment of products.
The components falling under leverage quarter are small castings, small and medium
machining, small and medium fabrication components along with machining. Angles,
channels, wooden items, scraps for melting, sands for molding, safety accessories are
available. These components are falling in this sector, as L&T has developed a strong
supplier base of small castings, machining and fabrication in and around Kansbahal,
Orissa L&T can derive extensive cost benefits from these components and delivery
requirements can be absolutely as per its requirement. Co-operative strategy works
mostly for this sector. No need to focus much on this category of component. Rate
contract for various types of components falling under this quadrant can be made with
suppliers.
SECTION - B
5.7 SUPPLIER SELECTION
5.7.1 Literature Review - Supplier Selection
Supplier evaluation is one of the most interesting and most talked about subjects in the
area of organizational strategic planning among senior executives and entrepreneurs
101
around the globe. Today’s High-technology market poses a greater challenge to both
customers and vendors. Buyer firms are frequently affected by “mass confusion” and
“customer bewilderment” and at the same time vendor choice becomes increasingly
challenging. Several research papers on vendor performance evaluation, including
mathematical and heuristic modeling have been already published but few of them are
being applied successfully. In effective Supply Chain Management, correct vendor
evaluation plays the most important role in formulating sub-contracting strategies.
Kraljic (1983) proposes a four-stage approach as a framework for developing supply
strategies for single products or product groups. In the first stage, a company classifies
all its purchased products in terms of profit impact and supply risk. Subsequently, the
company weighs the bargaining power of its suppliers against its own power. Then, the
company positions the products that are identified in the first stage as strategic (high
profit impact and high supply risk) in a portfolio matrix. Finally, it develops purchasing
strategies and action plans for these strategic products, depending on its own strength
and the strength of the supply market. Three general purchasing strategies are
recommended: exploit (in case of buyer dominance), balance (in case of a balanced
relationship), and diversify (in case of supplier dominance).
Ellram (1990) investigated partner selection with five large manufacturing firms and
established the following factors to be considered when choosing a partner; in addition
to quality, total cost and cycle time performance.
102
Table 5.1- Supplier selection criteria
Researchers
Banville and Domoff (1973)
Chao et. al. (1993)
Dempsey (1978)
Fawcett (1993)
Lehman and O'Shaughnessy
(1974)
Rank order of su pplier selection criteria
1. Service
8. Salesman's personality
2. Product quality
9. Supplier extends credit
3. Supplier support
10. Prestige of dealing with
4. Low price
Supplier
5. Reputation
11. Reciprocity
12. Improves My Status in My
6. Proximity to supplier
Company
7. Friendship with
supplier
1. Delivery reliability
5. Service/responsiveness to
2. Product quality
customer needs
3. Price
6. Buyer-seller relationship
4. Professionalism of
salesperson
1. Delivery capability
11. Financial position
2. Quality
12. Attitude toward buyer
3. Price
13. Bidding compliance
4. Repair service
14. Training aids
5. Technical capability
15. Progress communications
6. Performance history
16. Management and
7. Production facilities
Organization
8. Aid and service
17. Packaging capability
9. Control systems
18. Moral/legal issues
10.Reputation
19. Geographic location
20. Labor relations record
1. Delivery dependability 5. Price
2. Domestic content laws 6. Proximity
3. Engineering capability 7. Quality
4. Financial strength
8. Technology
1. Delivery
2. Price
3. Flexibility
4. Reputation
5. Technical
specifications
6. Past experience
7. Sales service
8. Maintenance
9. Financing
10.
11.
12.
13.
Ease of use
Reliability
Technical service
Preference of user
14.
15.
16.
17.
Confidence in salesmen
Convenience in ordering
Training offered
Training required
Source: Finding from selected studies - Warwick university supply chain notes (2009)
103
Weber, et. al. (1991) used the criteria identified in Dickson's study as the basis of their
study. They believed that they could use the study done by Dickson as a benchmark
from which to identify possible trends in the importance of various supplier selection
criteria. They reviewed the literature since Dickson's study with the aim of providing a
comprehensive view of the criteria that academicians and purchasing practitioners
considered important in the supplier selection decision. A total of 74 articles written in
English in major journals are reviewed. Furthermore, they also provided a review of
JIT's impact on the supplier selection process. From this study, it was identified that 42
of the 74 or 57% of the articles reviewed have appeared since 1985. This finding
reflects a growing interest in the supplier selection process in recent years. Furthermore,
it was identified that net price, delivery, and quality have received the greatest amount
of attention in the preceding five years of this study.
Table 5.2 - Supplier partnership selection criteria
Category
Financial issues
Organisational culture and
strategy issues
Technology issues
Other factors
Factor
Economic performance
Financial stability
Feeling of trust
Management attitude/outlook for the future
Strategic fit
Top management compatibility
Compatibility across levels and functions of buyer and
supplier firms
Supplier’s organizational structure and personnel
Assessment of current manufacturing facilities/capabilities
Assessment of future manufacturing capabilities
Supplier’s design capabilities
Supplier’s speed in development
Safety record of the supplier
Business references
Supplier’s customer base
Source: Supplier evaluation criteria Ellram (1990)
104
Mohanty and Deshmukh (1993) define the evaluation of suppliers as an unstructured
decision problem because:
• The nature and structure of the supply management process is complex.
• There is often a lack of complete information as the business environment is dynamic
and uncertain.
• As the competition in the marketplace increases there exists a large search space for
the decision maker.
• There is often no existence of quantifiable data because of the developmental nature
of the supply process itself.
• There are multitudes of factors involved in a selection decision which are often
conflicting and sometimes complementary. Many times, such factors are nonexpressible in commensurable units and some factors might reflect psychological
aspects such as qualitative considerations and intangibilities.”
According to Gonza'lez (1996), there are nine variables involved in the supplier
management process namely:(l) Supplier selection process (SSP), (2) Materials quality
control (MQC), (3) Supplier process control (SPC), (4) Supplier documentation system
(SDS), (5) Supplier management system (SMS), (6) Supplier availability (SA), (7)
Supplier quality policies (SQP), (8) Supplier quality system (SQS), (9) Material
specification accomplishment (MSA).
Supplier alliances have no specific form and they vary with both parties’ goals and
objectives - Heide, 1994; Morgan and Hunt, 1994. Some may be only moderate
extensions of traditional arm’s length relationships, with longer-term contracts and
expanded buyer-supplier communications. In a few extreme cases, the buyer and
supplier develop a degree of mutual dependency, with the buyer relinquishing some
control to the supplier and the supplier dedicating resources to serve the buyer
105
exclusively, resources that cannot be easily altered to serve other customers. Sako
1992 describes three major areas where alliances differ from traditional supplier
relationships. The three areas described in the research carried out by David
McCutcheon, F. Ian Stuart (2000) are (1) Technology transfer and training: especially
where the costs or value of providing this to the other party are neither tracked nor pre­
approved. (2) Increased communication channels: number of different access points
across firm boundaries and intensity of frequency of use. (3) Risk sharing, especially
where the costs of shared risk are settled case-by-case after the fact, using fairness
rather than prior negotiations as the means of deciding factor.
If it performs as intended, a strong supplier alliance offers both firms numerous
advantages -1. It can reduce transaction costs, 2. The buyer firm may be able to secure
better access to technologies that, although not core, are still important to the buyer’s
organization. 3. A well-established, close relationship may make the inter-firm
boundaries more permeable, allowing technology to be transferred more easily.
Example set by Japanese firms and the just-in-time production philosophy affected the
attitude of western companies, which are nowadays seeking reduction of their supplier
base. Some of the potential benefits of such a decision include (Chen and Paulraj,
2004), Fewer suppliers to contact in the case of orders given on short notice, Reduced
inventory management costs, Volume consolidation and quantity discounts, Increased
economies of scale based on order volume and the learning curve effect, Reduced lead
times due to dedicated capacity and work-in-process inventory from the suppliers;
reduced logisticalcosts; coordinated replenishment, In improved buyer-supplier product
design relationship; trust due to communication; improved performance; and better
customer service and market penetration.
106
Research carried out by Nelson OlyNdubisi, MuhamadJantan and Loo Cha Hing, Mat
SallehAyub (2005)
emphasized that supplier selection strategies (e.g. technology,
quality, cost and delivery performance), and supplier management strategies (such as
supplier early involvement, quality roadmap, technology roadmap, and inventory
management) are directly associated with product flexibility, volume flexibility, and
launch flexibility. More precisely, the model proposes supplier selection and supplier
management strategies as predictors of manufacturing flexibility.
From the above, two broad references are derived:
(1) There is a significant positive relationship between supplier selection strategies
namely, technology, quality, cost, and delivery performance and manufacturing
flexibility such as product flexibility, volume flexibility, and process flexibility.
(2) There is a significant positive relationship between supplier management strategies
for example, supplier early involvement, quality roadmap, technology roadmap, and
inventory management in one hand and product flexibility, volume flexibility, and
process flexibility in another hand.
Figure 5.5 - Supplier selection & Manufacturing flexibility
Source: Nelson OlyNdubisi, MuhamadJantan and Loo Cha Hing, Mat SallehAyub
(2005)
107
The study carried out by Pal & Kumar (2008) provide a “trait based approach” for
vendor selection and evaluation for expensive procurements in large businesses through
a simple and easy-to-use mathematical model using safety, quality, delivery and cost
criteria.
They have used 16 traits addressing safety (S), quality (Q), delivery (D) and cost (C)
areas for evaluating performance of a vendor on a linear 10 point scale. Started with
evaluating each “supplier-supply item” combination and compute gross averages for
each of the SQDC areas and finally arrive at an “Overall Performance Index” for each
supplier-supply item combination. These indices form a “Vendor Performance
Dashboard” for decision making.
The traits are : 1. Infrastructure and technology adequacy for order handling, 2. Price
competitiveness, 3. Adequacy of cost-saving measures, 4. Competitiveness of delivery
lead-time, 5. Track-record of defect-free delivery, 6.Complaint avoidance abilities, 7.
Responsiveness to quality problems, 8. Timeliness of Certificate of conformity,
^Completeness
of
delivery
documentation,
lO.Technical
competence
of
representatives, 11. Vendor’s adherence to NPI development schedules, 12. Adequacy
of safety measures during transit, 13. Trends of Vendor’s innovativeness towards fail
safe products, 14. Vendor’s Sales and Administration efficiencies 15. Vendor’s
expansion and growth plan, 16. Safety, Packaging and delivery aesthetics.
5.7.2
Supplier Selection Practices at L&T, KBL, Orissa
Larsen & Toubro, Kansbahal works has a very systematic and structured way of
selecting suppliers. The objective of L&T, KBL is to select those suppliers who have
capability and capacity to supply the product/service that meets the organisational
108
requirement. This capability and capacity can be ascertained either through past
performance or actual trial supplies or by evaluating their reputation in the market for
supply of same products/services or by customer's preference/recommendation. Only
those vendors with proven capability and capacity are included in the "Approved
Vendors List
The process starts from the users with a specific requirement of product or service
along with quality requirements. Suppliers can be selected based on their past
performance or supplies, may be based on specific requirements from the end customer.
The customer specific suppliers are usually project specific. Quality Assurance (QA)
Department shall assess technical capability of the vendors / suppliers and give their
approval within 7 days, failing which it will be presumed that QA & VD (Vendor
Development) Department has no objection in registering the vendor as approved
supplier.
Head of the department, Purchase shall inform the suppliers on the
acceptance criteria and offer shall be obtained from them. Deviations, if any are to be
sorted out in consultation with the indenter. After negotiation for trial supplies &
establishment of acceptance criteria “Trial Order” is placed on suppliers. For vendors
whose performance is not up to the mark, head of Purchase shall identify the reasons
for failure by collecting information on vendor performance and assist the vendor in
identifying the root causes of unsatisfactory performance through discussions and
removing them. Similar assistance is provided for Improvement in Existing Vendor
Performance by identifying requirements & assisting them. If the performance is not up
to the mark, trial order may be repeated or else the decision otherwise, is conveyed to
the suppliers. Approval for technical competence of suppliers shall normally be done
jointly by QC &VD, Buyer & Buyer head. Suppliers shall be registered directly in
109
cases of unique or proprietary equipment’s which are only possible / desirable to be
maintained or repaired by OEM or their agents. Similar is the case for customer
approved / specified vendors / suppliers. However, Suppliers of one-off items/service
need not be included in the approved Vendor List.
The complete process and the commercial requirements from the supplier are attached
herewith for reference.
Figure 5.6 — Supplier Selection Process
110
REQUEST FORM FOR VENDOR MASTER CREATION
(Form to be filled in Capital Letters)
1)
2)
Vendor’s Name
:
(Length 41 characters - If the
Address is long, PI suggest abbreviation)
Mailing
:
Mailing Name
:
(As appears in the cheque)
3)
Address (Line 1)
Address (Line2)
Address (Line 3)
Address (Line 4)
City
State
Postal Code
PAN No.
4)
VAT/CSTNo.
:
:
:
:
:
:
:
:
(Copy of proof mandatory)
:
(For Orissa based vendors, VAT is a must and CST No. is applicable if the vendor is
carrying out jobs out- side Orissa. CST No. is a must for out side Orissa vendors.)
5)
Service Tax/Reen. No.
Excise Regn. No.
(or both)
:
:
(Service Tax Regn. No. must)
6)
Currency Exchange Rate
(In case of Overseas Vendor)
:
7)
Person / Corporation Code
i)
Individual
ii)
Corporate Entity
iii)
Both (Ind& Corp. Entity)
iv)
Non-Corporate Entity
v)
Customs Authority
:
:
:
:
:
8)
E-Mail / Telephone / FAX
:
9)
Contact person(s)
:
:
111
5.8
Research Methodology
In-order to identify the attributes / factors which contribute to the selection of
appropriate suppliers for the manufacturing division of L&T, Kansbahal, Orissa and the
study here uses a multivariate technique in the form of factor analysis.
5.8.1
Sample: The present objective of the study is to identify the factors contributing
to the selection of suppliers. Accordingly a questionnaire containing 42 questions on
the various aspects of supplier quality are put to executives / officers / personnel having
exposure to the environment of purchasing of different manufacturing units of L&T,
Kansbahal, Orissa. A total of 215 responses are finally used for the study, though a total
of 235 responses are collected.
5.8.2
Data: For this study primary data collected through questionnaire method,
designed using five point Liker scale where 1 meant strong disagreement and 5 meant
strong agreement having a neutral point with a particular selection criteria of the
supplier
5.8.3
Technique: For analysis of primary data collected from the selected samples
Descriptive statistics, Factor analysis, and Regression analysis techniques are used. The
Statistical Package for Social Sciences (SPSS version 18.0) is used for the following
purpose.
•
Calculation of first and second moment (mean & standard deviation).
•
Determination of principal factors for supplier selection.
•
Establishing relationship by means of regression analysis.
112
Principal components / variables derived through Factor analysis from the primary data.
These factors are considered as independent variables and Overall supplier selection
criteria considered as dependent variable in regression analysis.
The mathematical representation of the regression equation can be written as follows
Y = bO + bl(Xl) + b2(X2) + b3(X3) + b4(X4) + b5(X5).....
+ bn (Xn)
Where,
bO = Constant, Value of dependent variable when value of independent variables are
zero
= Also called intercepts, because it determines where the regression line meets the Yaxis.
bl, b2 ...bn
= Coefficients, that represents the estimated change in mean value of
dependent variable for each unit change in the independent variable values.
5.9 Analysis of the findings
Table 5.3 contains the descriptive statistics in the form of mean (1st moment) and
standard deviation (2nd moment) of the opinion of 215 executives/officers those who
are exposed to supply chain practices and supplier selection process having their
perception about the supplier selection criteria. The above mentioned statistics are
graphically represented in figure 5.7.
Table 5.3- Descriptive statistics of supplier Selection criteria
Var.
Variable Description
Mean
Std.
Deviation
No. of
Sample
1
Cost of the product
3.428
1.458
215
2
Delivery adherence
4.344
0.787
215
3
Product Quality
4.293
0.757
215
4
Previous business relation
4.070
0.785
215
5
Local to OEM
4.112
0.830
215
6
Supplier’s management
3.200
1.090
215
7
Acceptability to terms and conditions
3.567
1.083
215
8
Offering of quality product with low cost.
4.074
0.839
215
9
Innovative
3.251
1.431
215
113
Var.
Variable Description
Mean
Std.
Deviation
No. of
Sample
10
Manufacturing Process
3.707
1.201
215
11
Concerned about OEM target & End customer
3.437
0.979
215
12
Safety at work place
3.074
1.154
215
13
Environment policy knowhow.
2.986
1.186
215
14
Ability and interest to learn
3.335
1.027
215
15
OEM policy accommodation
4.135
0.552
215
16
Loyalty
4.637
0.482
215
17
Confidentiality
3.107
1.405
215
18
Quality system certification.
2.819
1.203
215
19
Fair Labor practice
3.028
0.853
215
20
Informative ( Source of information)
3.456
1.035
215
21
Technical Capability
4.307
1.072
215
22
Manufacturing facility
4.107
0.997
215
23
Financial capability
4.144
0.744
215
24
Reputation of the supplier
3.963
0.858
215
25
Previous performance
3.837
1.109
215
26
Design and development capability
3.335
0.922
215
27
After sales service
3.777
1.057
215
28
Documentation ability
3.549
0.900
215
29
Government Regulations
3.651
1.039
215
30
Respect towards OEM
4.195
0.880
215
31
Geographical proximity
3.707
1.024
215
32
Employee/Management reference
3.005
1.182
215
33
Better labor relation records
3.414
0.756
215
34
Strategic fit to OEM
4.037
0.779
215
35
End user preference
3.358
0.801
215
36
Ethical behavior and attitude
3.358
1.026
215
37
Business reference
3.079
0.748
215
38
Compatibility across levels and functions
3.423
1.033
215
39
Flexibility in order Management
3.674
0.879
215
40
Capability of New product development
3.837
1.053
215
41
Cost saving measure adoption
3.698
0.941
215
42
Complaint avoidance abilities
3.065
0.789
215
114
NJ
in
Figure 5.7 — Mean and Standard Deviation
...... Moan
Local to OEM
Acceptability to terms and conditions
Innovative
Concerned about OEM target & End customer
Environment policy knowhow.
OEM policy accomodation
Confidentiality
Fair Labour practice
Technical Capability
Financial capability
Previous performance
After sales service
Government Regulations
Geographical proximity
Better labour relation records
End user preference
Business reference
Flexibility in order Management
Cost saving measure adoption
Cost of the product
Product Quality
....... Std. Deviation
Visual inspection of the graphical representation of the data collected from the 215
respondents does not show any spikes / outlines. Hence, it is approximately treated that
the data follows a normal distribution. There after the study proceeds for the
identification of relevant factors that contribute maximum to the supplier selection by
using factor analysis. The results of the factor analysis are stated below.
115
To the data collected through the primary survey by means of questionnaire,
Cronbach’s alpha, KMO and Bartlett’ test are applied in order to study the reliability of
the data and sampling adequacy. As per the study by Nually, 1978, Cronbach’s alpha if
is more than 0.5; the data will be considered as reliable for the application of advanced
statistical technique. In the present case the Cronbach’s alpha is found to be 0.89. The
data is found to be statistically reliable and consistent.
Table 5.4 -Cronbach’s Alpha
Case Processing Summani
N
%
Reliability Statistics
Cases Valid
Cronbach's Alpha Not Items
100
215
0.893
Excludeda
0
0
42
Total
215
100
a. Listwise deletion based on all variables in the procedure.
The Kaiser-Meyer-Olkin (KMO) measure of sampling adequacy tests whether the
partial correlations among variables are small. Bartlett's test of sphericity tests whether
the correlation matrix is an identity matrix, which would indicate that the factor model
is inappropriate. The results show that the KMO and Bartlett's Test supports our data
set.
Table 5.5- KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of Sphericity
0.S93
Approx. Chi-Square
Df
Sig.
1.12E+03
903
0
After the reliability test, factor analysis is used to remove the redundant/highly
correlated variables from the survey data and to reduce the number of variables into a
116
definite number of factors. The factor analysis is performed using the principal
component extraction method with varimax rotation. The Eigen values of selected
factors are greater than 1. Table 5.6 shows the total variance explained by the factors
extracted.
Table 5.6- Total Variance Explained
Total Variance Explained
Component
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
Initial Eigen values
Total
% of
Cumulative
Variance
%
10.75
28.596
28.596
4.693
42.771
14.175
3.164
11.534
54.305
2.784
9.628
63.933
2.429
7.784
71.717
2.181
3.192
74.909
1.942
2.624
77.533
79.854
1.815
2.321
1.443
2.036
81.89
1.245
1.965
83.855
1.211
85.738
1.883
1.043
87.221
1.483
0.917
88.404
1.183
0.892
1.124
89.528
0.719
1.511
91.039
0.669
1.492
92.531
0.641
1.326
91.758
0.575
93.125
1.308
0.495
1.179
94.304
95.364
0.445
1.06
0.394
0.937
96.302
0.34
0.809
97.111
0.27
0.642
97.753
0.223
0.53
98.283
0.163
98.672
0.389
0.134
0.32
98.992
0.109
99.252
0.26
0.094
0.224
99.476
0.084
0.199
99.675
0.141
0.059
99.816
0.041
0.097
99.913
0.017
0.04
99.954
0.013
0.031
99.984
0.005
0.012
99.996
0.001
0.004
100
1.772E-15
4.218E-15
100
1.286E-15
3.062E-15
100
2.502E-16
5.957E-16
100
Extraction Sums of Squared
Loadings
Cumulative
%of
Total
Variance
%
28.596
10.75
28.596
42.771
4.693
14.175
54.305
3.164
11.534
63.933
2.784
9.628
7.784
71.717
2.429
117
Total Variance Explained
Component
39
40
41
42
Initial Eigen values
%of
Cumulative
Total
%
Variance
-2.638E-16
-6.28E-16
100
100
-5.683E-16
-1.35E-15
100
-2.03E-15
-8.506E-16
-1.894E-15
-4.51E-15
100
Extraction Sums of Squared
Loadings
Cumulative
%of
Total
%
Variance
Extraction Method: Principal Component Analysis.
In the initial application of the technique, the numbers of variables are reduced from 42
to 39. In the second application, these 39 variables are classified under five dimensions
based on their factor-loading score. The sorted rotated values of factor loading with
minimum value of 0.5 or more are considered. After dropping the redundant variables
having all the five components loading less than 0.5 the following matrix has been
formed to understand the significant components that explain 71.72% of variation in the
criteria of supplier selection. Generally, factor loading represents how much a factor
explains a variable. The variables which dropped from the total set of variables
considered in the questionnaire are respect towards OEM by the supplier, ethical
behavior and attitude and flexibility in order management. High factor loading indicates
that the factor strongly influences the variable. Assuming a factor loading of more than
0.80 as having high impact on the variables, it is concluded that some variables which
are less than 0.80 is having low impact on the supplier selection process.
Table 5.7- Rotated Component Matrix
Components
Var.
Variable Description
1
Cost of the product
2
Delivery adherence
3
Product Quality
.
1
0.869
2
-0.079
3
-0.295
4
-0.089
5
-0.199
0.786
0.142
-0.165
-0.033
-0.175
0.66
-0.422
0.036
0.179
0.007
-0.421
0.456
0.505
-0.115
0.205
4
Previous business relation
0.146
5
Local to OEM
0.399
0.686
0.006
;3d®&:<566;;
0.231
0.039
6
Supplier’s management
0.269
0.252
7
Acceptability to terms and conditions
0.308
0.328
0.689
0.127
0.327
0.066
118
Components
3
-0.446
4
-0.008
5
0.161
0.653
2
-0.249
0.52
0.095
-0.002
-0.053
0.819
0.177
-0.127
0.085
-0.231
0.428
0.11
-0.235
0.519
0.018
Safety at work place
0.474
-0.033
0.016
-0.265
0.548
Environment policy knowhow.
0.398
0.312
-0.047
0.122
0.166
-0.09
-0.254
0.658
-0.065
-0.106
0.49
0.359
-0.406
0.432
0.678
0.716
0.127
0.567
0.285
-0.467
Confidentiality
0.207
-0.317
-0.141
0.863
-0.121
Quality system certification.
0.413
0.292
-0.094
Var.
Variable Description
8
Offering of quality product with low cost.
9
11
Innovative
Manufacturing Process
Concerned about OEM target & End
customer
12
13
10
14
15
Ability and interest to learn
OEM policy accommodation
16
Loyalty
17
18
19
Fair Labor practice
20
Informative ( Source of information)
21
22
Technical Capability
Manufacturing facility
23
24
Financial capability
Reputation of the supplier
25
26
1
0.696
0.31
0.439
0.438
V
0.006
0.342 ;
-0.201 ;
-0.236
0.581
0.249
0.243
-0.464
0.041
0.524
-0.073
. 0.552
-0.027
0.877
o.8ii
-0.036
-0.349
0.188
0.628
0.428
0.136
0.452
0.168
0.548
0.209
0.073
Previous performance
0.469
: 0.771
0.094
0.002
Design and development capability
0.427
-0.405
-0.092
i: 0.626
-0.02
0.286
After sales service
Documentation ability
0.386
0.402
-0.416
0.797
-0.15
0.113
29
Government Regulations
-0.209
0.116
0.567
0.27
-0.329
0.013
-0.146
0.064
30
Respect towards OEM
Geographical proximity
0,125
0.479
0.495
0.072
-0.388
0.282
0.539
0.494
0.377
-0.294
0.074
-0.364
0.253
0.057
-0.014
-0.139
0.299
0.668
-0.104
-0.338
-0.015
27
28
31
32
33
Employee/Management reference
Better labor relation records
34
Strategic fit to OEM
35
End user preference
Ethical behavior and attitude
36
0.399
0.451
0.17
0.663
0.541
.
0.056
-0.099
0.782
0.1
0.846
0.171
0.201
-0.345
0.015
-0.1
0.068
-0.339
0.221
-0.009
0.597
0.05
0.556
-0.221
37
Business reference
38
Compatibility across levels and functions
0.016
0.022
0.164
39
40
Flexibility in order Management
Capability of New product development
0.778
-0.133
0.048
0.144
0.115
0.061
-0.034
0.041
0.046
0.672
0.463
-0.24
41
42
Cost saving measure adoption
0.864
0
0.108
-0.696
0.196
Complaint avoidance abilities
0.011
0.551
-0.08
-0.406
0.154
Extraction Method: Principal Component Analysis
Based on the results of factor analysis, the variables are classified into five different
principal factors, which are suitably named. The principal factors and the corresponding
variables are shown in table 5.8.
119
Table 5.8- Supplier selection factors in manufacturing
SI.
No.
Selection Dimensions
Variables
Cost of the product
Offering of quality product with low cost.
Cost saving measure adoption
1
Principal Requirements
Manufacturing Process
Innovative
Delivery adherence
Product Quality
Local to OEM
Geographical proximity
Compatibility across levels and functions
2
Strategic Importance
Employee/Management reference
Strategic fit to OEM
End user preference
Business reference
Complaint avoidance abilities
Manufacturing facility
Technical Capability
Quality system certification.
Design and development capability
Financial capability
3
Capacity & Capability
Previous performance
Reputation of the supplier
After sales service
Informative (Source of information )
Documentation ability
Capability of New product development
Concerned about OEM target & End customer
OEM policy accommodation
Confidentiality
4
Partnership Approach
Loyalty
Ability and interest to learn
Acceptability to terms and conditions
Previous business relation
Supplier’s management
Safety at work place
Environment policy knowhow.
5
Regulatory Adherence
Fair Labor practice
Government Regulations
Better labor relation records
120
ANALYSIS OF PRINCIPAL FACTORS
(i) FACTOR-1: PRINCIPAL REQUIREMENTS
Factor 1 describes the basic requirements of the supplier selection criteria. The QCD
theory i.e. quality, cost and delivery is mostly the prime influencer of this factor. The
mean
and standard deviations (SD) towards various drivers of supplier selection in
manufacturing are analysed. The cost is having factor loading of .869, delivery is
having factor loading of .786 & the manufacturing process is having factor loading of
.819 indicates the highly influence attributes in supplier selection in manufacturing
industry. Other parameters are innovation, manufacturing process and cost saving
measures. Indirectly the innovation, manufacturing process and cost saving attitude of
the supplier reduces the cost of the product and minimizes the cycle time. As all these
attributes are the prime or principal requirements of a supplier selection process we
name the factor as Principal requirement.
(ii) FACTOR-2: STRATEGIC IMPORTANCE
Factor 2 stands for strategic importance to the business. Suppliers usually selected
based on the strategic requirements in most of business sectors. This is one of the basic
guideline to the supplier selection process. The major attributes falling in this factor are
end user preference, geographical proximity and strategic fit to OEM and business
reference. End user preference having factor loading of .846 and strategic fit having
factor loading of .782 indicates that they provide the most of the impact to this factor.
Other major attributors are reference and supplier’s compatibility at all the levels and
across the organisation. In engineering manufacturing industries buyers are having
specific choice of selected suppliers those who supply sub-assemblies or specific
121
equipment. Usually buying organisation or project managing organisations issue
approved supplier lists, through which the specific component/sub-assembly/equipment
has to be ordered by the OEM. Buying organisation always prefers to buy from the
organisations those who are aligned to the strategic objective of their own organisation
or due to market compulsion or forced by the competitor’s strategy. That’s why end
user preference and strategic fit to OEM plays the major role in supplier selection.
(iii) FACTOR-3: CAPACITY & CAPABILITY
Factor 3 stands for capacity and capability of the supplier. When supplier selection
considered in operational terms, then these two words are the best describer of the
suppliers. In real terms capacity to execute and capability to handle order and complete
is the strength of the supplier. Major attributes are technical capability with factor
loading of .877 and manufacturing facility with having factor loading of .811 indicates
their influence. Other major attributes to this factor are after sales service, previous
performance and design and development capability. When manufacturing order
considered being outsourced buyer always search for the supplier those who are having
manufacturing facility to handle the specific job and capability to manage the related
works associated with the order.
(iv ) FACTOR - 4: PARTNERSHIP APPROACH
Factor 4 stands for partnership approach of suppliers. Current supply chain trend
exhibits the increased bonding between buying and selling firms for a longer time
frame. Supply base reduction and making long term relationship with limited suppliers
resulted many supply chains effective. Confidentiality with factor loading .863, OEM
policy accommodation with factor loading .716 and acceptability to terms and
122
condition with factor loading .689 is the major attributes of this factor. Others
attributors of the partnership approach are loyalty, ability and interest to learn and
supplier’s management / board. Organisations or buyers prefer suppliers those who
honest to the buying organisation, keeps secrets, drawings, manufacturing documents,
processes within the boundary of the two organisations and never shares with
competitors. Organisation like L&T, GE, TISCO and many more Indian and foreign
organisations makes confidentiality agreement with suppliers. But legal binding and
self-motivated honesty two different paths in supply chain.
(v) FACTOR S: REGULATORY ADHERANCE
Factor 5 stands for regulatory adherence of the supplier selection process. Many selling
organisations become disqualified for not being falling under this category of supplier
selection criteria. Law of land is having their own regulations, but for a sustainable or
triple bottom line theory we must look the safety, labor and environment policies much
more than desired. Better labour relations with factor loading .668, fair labour practices
with factor loading .552, safety at work place with factor loading .548 and care to
environment with factor loading .658 are the attributes to this factor. These are the
basic minimum requirement to qualify for a supplier to better organisations.
Organisations are having good reputation or those organisations those who care for
people and world they make review such attributes of the supplier very seriously during
selection process.
To find out the significant difference between the major supplier evaluation factors
analysis of variance test is conducted. The result of the analysis reveals the following
results.
123
Table 5.9 - Analysis of variance
F
Sig.
Mean Square
Model
Sum of Squares
df
.000
9.477E3
5
8.339
1
Regression
41.697
.814
209
.001
Residual
Total
214
42.511
Predictors: (Constant) Principal Requirements, Strategic Importance, Capacity & Capability,
Partnership Approach and Regulatory Adherence, b. Dependent Variable: Total supplier
evaluation criteria
The result of analysis of variance shows that the five major supplier selection factors
are significantly different. Then the regression analysis is done to know the influence of
each selection dimensions on overall selection criteria.
Regression Analysis
Regression analysis is used to establish relationship between the overall supplier
evaluation factors with the identified principal factors. The independent variable and
the dependent variable used in the regression analysis are described below:
Independent Variables: The five principal factors emerged through factor analysis are
taken as the independent variables for the regression equation. The dimensions are
Principal Requirements (XI), Strategic Importance (X2), Capacity & Capability (X3),
Partnership Approach (X4) and Regulatory Adherence (X5).
Dependent Variable (Y): The overall supplier evaluation criteria for manufacturing are
taken as dependent variable.
Table 5.10- Relationships between Overall selection attributes and Derived
Dimensions
Independent
Std. Error
Coefficients
t
P
Variables
Coefficient
Constant
0.024
-.485
0.628
-0.011
X,
0.179
0.005
0.248
X2
0.184
0.007
.144
X3
0.303
0.008
.341
x4
0.211
0.006
.267
0.123
0.005
Note: R-Sq = 76.3% R-Sq (adj.) = 76.0%
.194
0.000
0.000
0.000
0.000
0.000
124
Now, considering the values from the table, the regression equation will be in the
following form:
Y = -0.011+ 0.179 Xi + 0.184 X2 + 0.303 X3 + 0.211 X4 + 0.123 X5
(2)
Total selection criteria = 0.011 + 0.179 Principal Requirement + 0.184 strategic
importance + 0.303 capacity & capability + 0.211 Partnership approach + 0.123
Regulatory adherence.
It is observed from the Table 5.10 that the relationship between the overall selection
criteria (Y) and the various dimension (Xi........X5) are statistically significant at 95%
confidence level (p < 0.05). It may be noted that the capacity and capability has more
influence on the overall selection criteria followed by partnership approach. The reason
for this may be in manufacturing most of the outsourcing takes place in operational
level, where capacity and capability of the supplier is directly associated with the
selection criteria. The decision of awarding order largely depends upon what is the
manufacturing facility available with the supplier, what technical capability and process
knowhow the selling or executing organisation is having. The partnership approach is
the essence of the supplier relationship. The confidentiality in managing the issues of
OEM (Original equipment manufacturer) as a supplier, concerned about the buying
organisation, commitment to the requirements of the end user usually prefers by the
buying organisation. The terms and condition of the order, ability to learn and showing
interest to adopt the requirements of the OEM shows the interest of the selling
organisation to be a long term partner of the OEM.
125
5.10
Conclusion
Strategic sourcing is the most important and center point of supplier relationship
management. Based on this many factors of supply chain management like buyer
supplier relationship, supplier selection, supplier development, supplier performance
measurement and supplier satisfaction derived. For many organizations and buyers
strategic sourcing means just saving money for the organization, but this is very little
objective in comparison to the actual goal of the strategic sourcing and this should not
be the sole objective of the strategic outsourcing. As in this process the objective and
goal of both the companies involves, it is essential to see the complete process from
single organization perspective. Reduction of risk in technological, commercial,
political aspects should be taken care jointly; Supplier performance and quality
improvement must be given priority, innovation and agility must be brought into the
supply chain, early supplier involvement must be encouraged and most importantly the
social responsibility aspects of the buying organization should be owned by the selling
organization. Then a sustainable relationship can be possible.
From this strategic outsourcing perspective Kraljic model provides a very strong
framework to understand the business, understand the product portfolio, understand the
supplier and market strength and formulate the strategies to be followed for each
segment of products. This model is very essential to be understood by each decision
makers of the supply chain and the front line buyers.
This chapter also provides an insight into the supplier selection criteria considered by
the supply chain stake holders in the L&T, KBL. As it is seen from the analysis of data,
five major & critical factors influence supplier selection in manufacturing i.e. Principal
Requirements, Strategic Importance, Capacity & Capability, Partnership Approach and
126
Regulatory Adherence. The selection attributes are diverse in nature and lots of careful
attention is required by the selection committee while going through supplier selection
process. In this process both the party means the buying and the selling organisation
should equally concerned about the ultimate business and relationship they are going to
share within the strategic frame work made by the individual organisation.
From the data analysis it is very clear that the capacity & capability of the supplier is
the most vital followed by the partnership approach for manufacturing industry.
Capacity and capability developed by the selling organisation with due course of time
or keeping the business strategy in line with the buying organisation. The role of the
buying organisation or the front line buyer’s play major roles in developing the capacity
and capability through constant guidance, process improvement implementation and
finance support. For example in heavy engineering fabrication process, new welding
technologies, current casting (foundry) technology, exposure to new machine tools and
tackles can be implemented to the suppliers associated to such industry. The role of the
selling organisation or supplier should show the interest and should act as a strategic
partner to the initiating organisation. This becomes a win-win situation to both the
organisations. As partnership is the next important issue in supplier selection process,
proper relationship between buyer and supplier gives the competitive age to the
business as well as creates a long lasting partner for the organisations. For this the key
issue again lies with what type of supplier being selected with which type of
strategically framework one organisation follows. Constant performance monitoring
and bridging the gap between expected and actual requirement can help in building
long term relationship. The role of the supplier is considered to be more vital in this
aspect. The confidentiality in dealing the process, drawings and technology are
127
sensitive issues in supplier relationship. The adherence to the terms and conditions of
the buying organisation, accommodative through the levels and functions in the buying
organisations, proper attitude towards buyer and commitment to the requirement of the
end customer helps a lot in building the relationship and the partnership.
128
ANNEXURE
QUESTIONNAIRE FOR SUPPLIER EVALUATION CRITERIA
/■ This survey is conduct*sd for the academics purpose only.
- - ' '
' '’ " ' ' ......... . •
.•
/ Please answer the question based on the prevailing practices of your organization.
Rate the following questions with a scale of 1 to 5. Put a circle mark against the appropriate box. Logic behind the
numberings are
5 = Strongly agree to the statement
4 = Agree to the statement
3 = Neutral to the statement
2 = Disagree to the statement
1 = Strongly disagree to the statement
Qi
Cost is the prime factor of selecting supplier for your organisation.
5
4
3
2
1
Q2
Delivery is also considered same important as cost.
5
4
3
2
1
Q3
Product Quality of supplier plays a very importance role in selecting supplier
5
4
3
2
1
Q4
You prefer to award order to reliable suppliers/previously having business only
5
4
3
2
1
Q5
Location of the supplier is also a factor of awarding order.
5
4
3
2
1
Q6
Your organisation is very much concerned about the supplier’s management / Board
5
4
3
2
1
Q7
Your organisation usually award order to those suppliers who are ready to accept terms
and conditions of your organisation.
5
4
3
2
1
Q8
Your organisation always keeps on searching alternate suppliers having good product
quality and low cost.
5
4
3
2
1
Q9
Your supplier always suggests how to reduce price without sacrificing quality in an
innovative way.
5
4
3
2
1
Q10
Most of the suppliers associated with your organisation know the process of
manufacturing of your products.
5
4
3
2
1
Qll
Suppliers are equally concerned about your target and aware of your end customer
requirements.
5
4
3
2
1
Q12
You never award order to the supplier who is not having all safety features at their work
place.
5
4
3
2
1
Q13
Your organisation does not place order If the supplier is not having environment policy
knowhow.
5
4
3
2
1
Q14
If one supplier is not having the manufacturing process know how you ensure that
through training he/she acquires that skill.
5
4
3
2
1
Q15
You prefer the suppliers who can change their company policy to meet your
requirements.
5
4
3
2
1
Q16
Your organisation delists the suppliers who directly contact your end customers for the
same job making for you.
5
4
3
2
1
Q17
All your suppliers are having confidentiality agreement with your organisation.
5
4
3
2
1
Q18
You only select the suppliers those who are having IMS / ISO certification.
5
4
3
2
1
Q19
Your organisation always delists the supplier, who is violating the labour, safety and
environmental laws.
5
4
3
2
1
129
Q20
Your existing suppliers provide details of the other suppliers for the components which
are not supplied by them.
5
4
3
2
1
Q21
Before ordering your organisation ensures the technical capability of the supplier.
5
4
3
2
1
Q22
Manufacturing facility of the supplier judged thoroughly before order placing
5
4
3
2
1
Q23
Financial capability of the supplier, taken into consideration before order placing;
5
4
3
2
1
Q24
Reputation of the supplier matters a lot to your organisation.
5
4
3
2
1
Q25
Previous performance of the supplier always taken into consideration.
5
4
3
2
1
Q26
Design and development capability also considered during order finalization.
5
4
3
2
1
Q27
After sales service of the supplier is also considered seriously before order placing.
5
4
3
2
1
5
4
3
2
1
5
4
3
2
1
5
4
3
2
1
Q28
Q29
Q30
Documentation ability is also coming under supplier selection criteria of your
organisation.
Knowledge in the government rules and regulations also a factor of supplier evaluation in
your organisation.
Your organisation prefers supplier those who are having respect towards your
organisation and company.
Q31
Geographical proximity is considered a lot during supplier selection
5
4
3
2
1
Q32
Supplier selection also done through employee/ senior Management reference
5
4
3
2
1
Q33
Organisation prefers supplier who are having better labour relation records
5
4
3
2
1
Q34
Organisation prefers supplier who are having strategic fit to them.
5
4
3
2
1
Q35
Supplier selection is also done based on end user preference
5
4
3
2
1
Q36
Ethical behavior and attitude towards buyer's play a major role in supplier selection
5
4
3
2
1
Q37
Business reference of the supplier is also a factor to the selection process
5
4
3
2
1
Q38
Supplier's compatibility across levels and functions of the organisation helps him/her to
be selected as a long lasting partner
5
4
3
2
1
Q39
Buyers prefer suppliers having flexibility in changing the order
5
4
3
2
1
Q40
Capability ofNew product development with speed plays a vital role in supplier selection
5
4
3
2
1
Q41
Capability of adopting cost saving measure gives the added advantage to the supplier in
selection process
5
4
3
2
1
Q42
Buyers prefer suppliers having complaint avoidance abilities
5
4
3
2
1
PERSONAL DETAILS
NAME:
AGE:
NUMBER OF YEARS IN SERVICE :
Thank You for your co-operations
130
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