The Importance of Supplier Selection

1. The Importance ofSupplier Selection Presented by: Deborah Anderson Danaillie Woodfine

2. Evolution of the Supply Function The Handling of Railway Supplies – Their Purchase and Disposition – Published in 1887 Attention in the first half of 1900’s to reliable access to supply of raw materials, supplies, and service Two problems arise in the 1970’s that puts senior managements attention on the supply function: International shortage of basic raw materials Price inflation 1990’s, firms are faced with challenges of global supply chains and increased reliance on suppliers Technological developments in the early 21st century provides expectations for supply chain integration, lower transaction costs, and faster response times.

3. Supplier Selection Criteria • Price • Quality • Delivery • Service

4. Four Product Categories • Routine Order Products – no problems associated with learning to use the product • Procedural Problem Products – no question about the capability of the product, but problems in learning to use the product • Performance Problem Products – some doubt as to whether the product will perform satisfactorily in the application for which it is being considered • Political Problem Products – require large capital outlays, and the buying decision will likely involve people from several functional areas within the organization.

5. Buyer-Supplier Relationship:Investment Versus Rewards Obtained

6. Supply Risks and Dollars • Bottleneck • Unique specification • Supplier technology important • Production-based scarcity • Substitution difficult • Usage fluctuates • Potential storage risk • Strategic • Continuous availability essential • Custom design or unique specifications • Supplier technology important • Few adequate suppliers • Changing source of supply difficult • Substitution difficult High Source: Peter Kraljic, Purchasing Must Become Supply Management,” Harvard Business Review, September-October, 1983 • Non-Critical • Standard or commodity type • Substitute products available • Competitive supply market • Leverage • Unique cost management important • Substitution possible • Competitive supply market Low Low High Value

7. Traditional Lowest price Specification-driven Short-term, reacts to market Trouble avoidance Purchasing’s responsibility Tactical Little sharing of information View of Buyer-Supplier Relationship:A Paradigm Shift Partnership • Total cost of ownership • End-customer driven • Long-term • Opportunity maximization • Cross-functional teams and top management involvement • Strategic • Both supplier and buyer on both sides share short- and long-term plans • Shared risk and opportunity • Standardization • Joint ventures • Share data

8. Supply Strategy Questions • Where • Local, regional • Domestic, international • Large versus small • Multiple versus sole source • High versus low supplier turnover • Supplier relations • Supplier certification • Supplier ownership

9. Supply Strategy Questions • Blank check system • Group buying • MRP • Long-term contracts • Ethics • Aggressive or passive • Purchasing research • Value analysis • How • Systems and procedures • Computerization • Negotiations • Competitive bids • Fixed bids • Blanket orders/open orders

10. Quality Price Delivery Service Formal Supplier Evaluations Good Performance Fair Performance Unsatisfactory Performance

11. Weighted Point Evaluation Systems • Identify suppliers • Important suppliers and/or critical goods and services • Identify factors or criteria for evaluation • Determine the importance of each factor • Establish a system for rating each supplier on each factor

12. Evaluation of Potential Sources: Two Key Questions • Is this supplier capable of supplying our requirements satisfactorily in both the short- and long-term? • Is this supplier motivated to supply these requirements in the way we expect in the short- and long-term?

13. Arguments in Favor of Multiple Sourcing • Traditional practice • Keep suppliers “on their toes” • Assurance of supply • Capable of dealing with multiple suppliers efficiently • Avoid supplier dependence on one customer • Obtain a greater degree of volume flexibility • Strategic considerations • Government regulations • Limited supplier capacity • Opportunity to test a new supplier • Supply market volatility

14. Arguments in Favor of Single Sourcing • Exclusivity: The supplier may be only available source • patent protection, exclusive distributorship • Outstanding quality or service  value • Order too small to split • Opportunities for discounts or lower freight costs • More important customer  more attention from supplier • Cost of duplication prohibitive • Easier to schedule deliveries • JIT, stockless buying or EDI arrangements • Easier to manage one supplier • Prerequisite to partnering

15. The customer’s point of view

16. The suppliers’ point of view

17. Helpful Websites International Federation of Purchasing and Supply Management (IFPSM) http://www.ifpmm.org/ • Institute of Supply Management (ISM) http://www.ism.ws/ • Purchasing and Supply Management Certificate Program Louisiana State University (LSU)http://www.is.lsu.edu/newDOCE/Professional/certificate.asp?Home=1

18. Questions? Works Cited: Purchasing and Supply Management, McGraw Hill Companies ProQuest – The Relative Importance of Supplier Selection Criteria: A Review and Update