Supplier Evaluation and Selection

1. Supplier Evaluation and Selection 1

2. Outline 2 supplier evaluation & selection (Chapter 7) industrial practices effect of operations and culture on supply management

3. Relation Between Chapters Well before … Specifications and Operations Standards Supplier Evaluation & Selection (Chapter 7) Supplier Quality Management (Chapter 8)) Supplier Management & Development (Chapter 9) 3

4. Chapter 7 Overview 4 supplier evaluation and selection process key supplier evaluation criteria developing a supplier evaluation and selection survey critical supplier selection issues reducing supplier evaluation and selection cycle time

5. Evaluation and Selection Process no best way, at least no known best way overall objective: best trade off in maximizing value and minimizing risk long-term relationship with suppliers 5

6. Supplier Selection and Evaluation 6 Supplier Evaluation and Selection Process

7. Strategic Sourcing Decisions single vs. multiple sourcing short-term vs. long-term contracts design support vs. operational support full-service vs. non-full-service suppliers domestic vs. foreign-based suppliers collaboration vs. arm’s length relationship 7 Supplier Evaluation and Selection Process

8. Information Search Requirements Capability of Suppliers High Low Importance of Purchased item to Buyer High Low Minor to Moderate Information Search Major Information Search Minor to Moderate Information Search Minor Information Search 8 Supplier Evaluation and Selection Process

9. Sources of Information Current suppliers Preferred suppliers Sales representatives Information databases Experience Trade journals Trade directories Trade shows Second-party or indirect information Internal sources Internet searches 9 Supplier Evaluation and Selection Process

10. Sourcing Alternatives multiple vs. single sourcing large vs. small suppliers manufacturer vs. distributor local, national, or international suppliers 10 Supplier Evaluation and Selection Process

11. Limit Suppliers in Selection Pool • removing obviously inappropriate suppliers, by, e.g., • financial risk analysis • Ex. Dun and Bradstreet reports • evaluation of supplier performance • for existing suppliers • evaluation of supplier-provided information • preliminary surveys (entry qualifiers) 11 Supplier Evaluation and Selection Process

12. Methods of Evaluation and Selection evaluation from supplier-provided information supplier visits use of preferred suppliers external or third-party information 12 Supplier Evaluation and Selection Process

13. Key Suppliers Evaluation Criteria price, quality, and delivery management capability employees capabilities cost structure total quality performance, systems, and philosophy process and technological capability 13 Key Supplier Evaluation Criteria

14. Key Suppliers Evaluation Criteria environmental regulation compliance financial stability production scheduling and control systems e-commerce capability supplier’s sourcing strategies, policies, and techniques longer-term relationship potential 14 Key Supplier Evaluation Criteria

15. Interpreting Financial Ratios Liquidity Ratios Interpretation Current ratio = Current assets / Current liabilities Should be > 1.0, but look at industry averages Quick ratio = (Cash + Receivables) / Current liabilities At least 0.8 if supplier sells on credit Low = cash flow problems Activity Ratios Interpretation (compare with industry average) Inventory turnover = COGS / Inventory low = slow inventory or possible cash flow problems Fixed asset turnover = Sales / Fixed assets Too low = supplier may be inefficient using its fixed assets Total asset turnover = Sales / Total assets Too low = supplier may be inefficient using its total assets Days sales outstanding = (Receivables x 365) / Sales Too high hurts cash flow; Too low shows restrictive credit policy 15

16. Interpreting Financial Ratios Profitability Ratios Interpretation (compare industry average) Net profit margin = Profit after taxes / Sales Represents after-tax return Return on assets = Profit after taxes / Total assets Represents the return earned on what a company owns Return on equity = Profit after taxes / Equity Represents return on shareholders’ investment Debt Ratios Interpretation (compare industry average) Debt-to-equity = Total liabilities / Equity > 3 means highly leveraged Current debt-to-equity = Current liabilities / Equity Too high means supplier may be unable to pays its bills Interest coverage = (Pretax income + Interest) / Interest Should be > 3; low may mean difficulty in paying creditors 16

17. Evaluation and Selection Surveys identify supplier evaluation categories assign a weight to each category identify and weight subcategories define a scoring system for categories and subcategories evaluate supplier directly review results and make decision 17 developing a supplier evaluation and selection survey

18. Initial Supplier Evaluation

19. Dell  Make or Buy 19

20. Make or Buy a Technology merits in either way general strategy buy if there are many developers in the market follow and invest on the winners 20

21. Dell  Selecting Suppliers 21

22. Selecting an ODM of Notebooks for Dell 1991, Aug, three potential suppliers Compal (仁寶), Inventec Corporation (英業達), and Quanta (廣達) Compal: most promising Quanta: relatively immature by then result: Inventec Corporation, because of site visits GM of Compal answered all questions, even cutting answers of subordinates insufficient respect for professional, insufficient delegation of power, reliability of answers Inventec Corporation showed division of labor during interview, and provided detailed test in reliability 22

23. Key Suppliers Evaluation Criteria 23

24. Key Suppliers Evaluation Criteria 24

25. Selecting a Supplier of Power Supply for Dell early 1991, three qualified suppliers: Delta (台達)、Lite-On (光寶)、Vidar-SMSCO (三光惟達) Delta distant leader result: Lite-On Lite-On: proactive and responsive in quotation stage and in preparation of sample 25

26. Key Suppliers Evaluation Criteria 26

27. Key Suppliers Evaluation Criteria 27

28. Large or Small Suppliers? 28

29. Which One to Choose from, Large or Small? possible problems with small ones (first clip: 00:25:48 – 00:28:53) unreliable 29

30. McDonald  Selecting Suppliers 30

31. McDonald competition in the fast food industry not advanced technology helpful with resource in marketing and expansion, but not critical keys the lowest prices from suppliers the lowest operations costs the most appropriate technology the highest morale in operations the strongest desire to improve 31

32. McDonald large suppliers played no attention to the strict rules and standards of McDonald operations standards of McDonald risky with small ones unsure technological and financial ability to expand in the pace of McDonald successfully to turn into organized, efficient, and motivated suppliers 32

33. Effect of Operations and Culture on Supply Management  Japanese Influences in Manufacturing Processes 33

34. Relation Between Chapters Well before … Specifications and Operations Standards Supplier Evaluation & Selection (Chapter 7) Supplier Quality Management (Chapter 8)) Supplier Management & Development (Chapter 9) 34