Materials Management BUS 3 – 141 Supplier Selection Week of Apr 16, 2007

1. Materials ManagementBUS 3 – 141Supplier Selection Week of Apr 16, 2007

2. Highest Level Materials Management Process Calculate HOW MUCH is Required Identify WHAT Items are Required Schedule WHEN they are Received & FROM WHOM At the LOWEST Total COST of Ownership With the Highest QUALITY and Reliability

3. How this Course supports Supply Chain Objective & Process The Right PRICE The Right SERVICE paying The Right SUPPLIER and with the The Right PLACE The Right TIME at the The Right QUANTITY at the The Right QUALITY with the

4. Before Anything Else…… Is the Supplier CAPABLE? Yes No Yes Is the Supplier MOTIVATED? No

5. Company records Catalogs (online and printed) Trade Journals and Trade Shows Advertisements Supplier and commodity directories The Internet Sales contacts and interviews Colleagues, networking, professional contacts Suppliers can be found through many sources There are GENERAL sources and COMMODITY-SPECIFIC sources

6. Factors to Consider when Selecting Suppliers Technical, Engineering and Operations • Quality History • Quality Systems • Design Engineering capability • Sustaining Engineering capability • Facilities and Equipment • Output Capacity • Ability to ramp up and down quickly • Long term potential • Flexibility and responsiveness • Track record of cost reductions • Logistics expertise

7. Additional factors to consider for STRATEGIC Suppliers Management and Financial • “Going concern” • Financial history • Balance Sheet and Income Statement • Credit worthiness • Executive and Management Team • Management controls, information systems, policies and procedures • Organization structure and decision-making • Alignment with Mission, corporate culture, values and goals • Ability to integrate procurement systems Physical Visits with Individuals outside Purchasing and Design

8. Sources and Channels

9. Dealing Direct with Manufacturer vs. another Channel Sales Channels: • Direct to Manufacturer • High volume • Influence with Design • Physical proximity less of an issue than strategic factors • Wholesale • Greater variety of products from multiple manufacturers • Pooled buying by the wholesaler can result in better availability and pricing than can be achieved directly • Generally local • Distribution • Similar to Wholesale • Frequently includes Value-Added services • Packaging • Light Assembly • Test • Retail Buying and Selling organizations deal with each Channel every day, depending on the needs and circumstances of the Business Value

10. Definitions Multiple Sourcing Items can be purchased from a variety suppliers, including Manufacturers, Distributors, Retailers, and “e-tailers” Single Sourcing While many suppliers are capable and qualified for particular items, ONE is chosen to provide all spend volume “Short List” Sourcing From a list of qualified (and interchangeable) sources, a small number of Suppliers compete for volume Sole Sourcing Critical items that require a specific technical capability and Performance must be supplied by ONLY ONE source

11. 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; e.g., military preparedness Government regulations Limited supplier capacity Opportunity to test a new supplier Supply market volatility Arguments in Favor of Multiple Sourcing * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

12. Arguments in Favor of Single Sourcing • Outstanding quality or service  value • More important customer  more attention from supplier • Opportunities for discounts or lower freight costs • Orders too small to split • Cost of duplication prohibitive • Easier to schedule deliveries • JIT, stockless buying or EDI arrangements • Focus on one, not many suppliers • Prerequisite to partnering Avoid exceeding 33% of a Supplier’s total Revenue * Adapted from Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

13. Argument in Favor of Sole Sourcing Performance of the item results in a Competitive Advantage for the Buying organization Key Implications when managing Sole Sourced items • Increased focus on supplier continuity • Greater safety stock levels • Longer term contracts • Eventual part substitution • Eventual development of new supplier(s)

14. Using Technology in Sourcing Tracking and Decisions • Planned spend percentages linked to ERP systems • Enter planned split (e.g. Supplier “A” 60%, Supplier “B” 25%, Supplier “C” 15%) • Planned Orders and Requisitions automatically tied to percentages • Eventual PO’s tied to plan • Procurement applications • Record recent volumes committed and provide reports of Planned spend vs. Actual • Ensure that contractual agreements are followed • Supplier evaluations available in formal data bases • Information on previous Quality issues easily accessible • Disputes and delays recorded • Automated Reports for periodic (Quarterly or Annual) formal assessments

15. Evaluating Supplier Performance

16. Price Delivery Quality Responsiveness (ability to flex up or down quickly) Customer Service Ease of Doing Business Key Criteria for Evaluating Suppliers The process can be FORMAL and/or INFORMAL. In either case, the following should be estimated for potential Suppliers and tracked for existing Suppliers:

17. Dynamics in Supplier Evaluation Relative weight and importance can vary. For some Items and Industries, it can be primarily Price; for others Delivery, etc QUALITY SERVICE PRICE QUANTITY DELIVERY QUALITY SERVICE PRICE QUANTITY DELIVERY QUALITY SERVICE PRICE QUANTITY DELIVERY QUALITY SERVICE PRICE QUANTITY DELIVERY

18. The Objective of Supplier Evaluation Tracking and Reporting should result in DECISIONS and ACTIONS The information should lead to: • Keeping current Supplier(s) • Selecting New Supplier(s) • Developing under-performing Supplier(s) • Negotiating future Pricing and Terms

19. Risk Factors in New Supplier Sourcing • Continuity of Supply • Time and Cost to develop new sources • Nondisclosure and Intellectual Property • Political and geographical issues CONTINUITY OF SUPPLY cannot be compromised. When qualifying a new supplier, start with Small Orders and parallel sourcing with known good sources. As new suppliers demonstrate their capability, they earn more Spend