Supplier Selection
RJ Whitehead
BYU Undergraduate - Class of 2011
What will be covered
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Supplier Selection Overview
Brainstorming Exercise
Supplier Selection in-depth
Real World example
Exercise
Summary
Reading List
Supplier Selection
• Supplier selection is the process by which
firms identify, evaluate, and contract with
suppliers
Why is Supplier Selection Important?
Average Percent of Revenue Use in COGS
50%
50%
COGS
Revenue after COGS
Brainstorming Exercise
• What is the role of strategy in supplier
selection?
• What are some of the difficulties with
selecting suppliers?
Nuts and Bolts
Supplier Selection Process
• Steps to Supplier Selection
1.
2.
3.
4.
Determine the type of Relationships
Find Potential Suppliers
Evaluate Suppliers
Select Suppliers
Step 1- Determine type of
Relationship
• 3 Types of Relationships
1) Transactional
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Not mission critical
Commodity items
Mostly focused on prices
Minimal time and energy are required
Less loyalty
Inflexible
Potential Communication problems
Step 1- Determine type of
Relationship
2) Collaboration
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Non-commodity items and services
Requirement of improvement of products (R&D)
Long-term agreements
Higher two-way communication
Higher levels of trust
Supply disruptions reduced considerably
Lower total costs
Step 1- Determine type of
Relationship
3) Alliance
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Relationship-specific capital investments
Lower Total Cost
Reduced time to market
Improved quality
Highest levels of trust
High time commitment
High switching costs
Step 2 – Find Potential Suppliers
• Finding a Supplier:
o Internet
o Supplier
Records
o Trade Registers
o Trade Journals
o Company
Personnel
o Trade Shows
o Professional
Organizations
Step 3 – Evaluate Suppliers
• Evaluate Suppliers:
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Supplier Survey
Financial Analysis
Facility Visits
Quality Capability
Analysis
o Capacity Capability
Analysis
o Service Capability
Analysis
o Flexibility Capability
Analysis
o Information Technology
Capability Analysis
Step 3 – Evaluate Suppliers
• Evaluate Suppliers:
o Supplier Survey
o Helps provided preliminary information about
the company and whether they should be
considered further for selection
o Example information: Principal officers, bank
references, credit references, history of sales
and profit, number of employees, space
currently occupied, Current defect rate, etc.
Step 3 – Evaluate Suppliers
• Evaluate Suppliers:
o Financial Analysis
o This is essential for a company to know if the
supplier is financially stable enough to reliable
o A member from the finance department
generally does the analysis
o The risk may be too great if they are
financially unstable. Your supply may be
disrupted at anytime without notice.
Step 3 – Evaluate Suppliers
• Evaluate Suppliers:
o Facility Visits
o Visiting a suppliers plant can be very
educational. It allows you to decided if they
are going to be able to do what they promised
in their survey and other information they
provided.
o It helps you to survey their true technical
capabilities.
Step 3 – Evaluate Suppliers
• Evaluate Suppliers:
o Quality Capability Analysis
o Quality is a critical factor for any supplier. It
effects your product and your bottom line
directly. They analysis should include a study
of upper management’s philosophy on quality
o Capacity Capability Analysis
o This helps you assure if a supplier can meet the
requested demand. It isn’t uncommon for
suppliers to promise the sky and under delivery
Step 3 – Evaluate Suppliers
• Evaluate Suppliers:
o Service Capability Analysis
o This is an analysis of what levels of service they
will offer. How they will react to special orders,
rush orders, settling disputes, delivering on time,
etc.
o Flexibility Capability Analysis
o This is an analysis of how lean they operate and
how they will be able to react to changes in
supply and demand, changes in regulation, etc.
Step 3 – Evaluate Suppliers
• Evaluate Suppliers:
o Information Technology Capability Analysis
o Information Technology is what has allowed to
supply chain to become core competencies of
companies. Their capability should fit in with
your companies strategy. It should include
information about integration through EDI and
XML-SOAP services.
Step 4 – Select Supplier
• Selection Methods:
o Bidding
o Negotiation
o Reverse Auctions
o Two-Step Bidding/Negotiation
o Solicitation
o Weighted-Factor Analysis
Step 4 – Select Supplier
o Bidding
o Bidding is the process of sending out request for bids
to a few suppliers and the lowest price wins
o Good when contract is large enough to justify the
bidding expense
o Specification are explicit
o Must have sufficient number of qualified suppliers
o Suppliers must want the contracts
o There must be sufficient to for suppliers to send bids
Step 4 – Select Supplier
o Negotiation
o Negotiation is the process where there is deliberation
between supplier and purchase over price and terms
o Good technique when difficult to estimate costs
o Used when prices aren’t the only determining factor
o Used when there are possibilities to specifications
changes
o Used when there is required tooling and setup costs
Step 4 – Select Supplier
o Reverse Auction
o Reverse auctions allow a company to get as close as
possible to the true market price
o All bidders must already meet all requirements
o Must be used with caution. It can often damage longterm relationships. It shows that you are more
concerned with the lowest price than relationships
Step 4 – Select Supplier
o Reverse Auction
o Reverse auctions allow a company to get as close as
possible to the true market price
o All bidders must already meet all requirements
o Must be used with caution. It can often damage longterm relationships. It shows that you are more
concerned with the lowest price than relationships
Step 4 – Select Supplier
o Weighted-Factor Analysis
o Weighted-Factor Analysis allows you to quantify
different factors and attribute of suppliers to easily
compare them
o Best used when the best supplier isn’t easily
identifiable
o 4 Steps
1.
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Determine Factors and Weights
Determine Sub-factors and Weights
Determine Scoring point scale (1-5, 1-10, etc)
Score and Evaluate suppliers
Weighted Factor Analysis
Factors
Weight
Sub Weight
Score
(1-10)
Supplier -1
Weighted
Score
Supplier -2
Weighted
Technical
25
Design
10
7
7
6
6
Experience
15
8
12
10
15
References
15
10
15
7
10.5
Liquidity
10
5
5
10
10
Defect Rate
20
7
14
6
12
Practices
5
8
4
4
2
6
15
10
6
Finance
Quality
Price
Total
25
25
25
72
61.5
Real World Example
• In 1997 Quaker Oats realized that their supplier was
charging them a 40% mark up on the plastic bottles for
Gatorade.
• They explored new options supplier options. They decided
that an alliance would prove to be the most lucrative. They
came up with requirement and visited 8 different bottling
companies. After negotiation they found one supplier that
best fit with their strategic plans.
Exercise
• On the following slides take each exercise
and determine the following things:
– What is the optimal type of relationship?
– What would be the best way to find the
supplier?
– What factors would you focus on for your
weighted-factor analysis?
Exercise
• #1 - You are a producer of silicon memory
chips. You have been working with a longtime supplier for silicon but you are trying
to lower your costs. Silicon is a commodity
and there are many suppliers
Exercise
• #2 – You are a manufacturer of medical
equipment and are considering outsourcing
major mechanical assemblies. You have
long produced them yourself. You are
hoping to gain design insights from your
new supplier.
Exercise
• #3 – You are a small niche market
company. You provide consulting for
reverse logistics providers. You have
identified the need for web based tracking
program for the industry.
Summary
• Supplier selection is a integral part of any
company.
• If ignored there is a gold mine of savings
waiting to be found.
• Supplier selection should always work
within the bounds of company goals
Reading List
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Beil Damian Supplier Selection [Online]. - July 2009. - April 11, 2010. http://www-personal.umich.edu/~dbeil/Supplier_Selection_Beil-EORMS.pdf.
Burt David, Petcavage Sheila and Pinkerton Richard Supply Management
[Book]. - New York : McGraw-Hill Irwin, 2010. - Eighth.
http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1073920782
http://www.asq.org/learn-about-quality/supplier-quality/overview/tutorial.html
http://www.ism.ws/education/PastConfDetail.cfm?ItemNumber=19340