Purchase & Materials Managemnt - Why Is It Hard To Select The Right Supplier

TOPIC 8 -- SUPPLIER EVALUATION AND SELECTION Why is it hard to select the right supplier? Options are confusing Suppliers often promise what they think you want to hear. - Different capabilities at different costs Things are not always what they seem You too will need to look beyond the surface (beyond first impressions) to figure out each supplier’s true capabilities. Decision process You need to ask the tough questions and do your homework to get to the right answer. - Unannounced visits - See financial statements (especially for important products, critical components) - Suppliers should comply w consolidated financial statements Huge consequences A bad choice can mean production delays, defective products, lost profits, and a lower market share. Why are you searching for a new supplier? Contract Expiration - Need to verify that supplier is still the right choice New supplies entering the mkt Poor supplier performance - Might not have the right choices, Underperformance Innovation/ new need - Stay w innovation Supply market change - New entrants, New technology Practice Questions 1. Under which circumstance do you need to search for a new supplier? a. New product or service introduction b. New suppliers have entered the market c. Your current supplier overpromised and is underperforming d. Testing the market e. All of the above f. A and B only Answer: e Strategic sourcing matrix and relationships Type of Buy Management Strategies Routine Buys 80% of buys - Procurement card → company credit card Web catalogue Critical Buys 5-10% - Cross functional category team Competitive bidding Megociation (especially for strategic buys) Interactive, through, detailed supplier process Practice Questions 1. You are responsible for buying an item that has many capable and competent suppliers available and your spend is quite large for your company. How would this item be classified on the strategic sourcing matrix? a. Routine b. Leverage c. Critical d. Bottleneck e. It does not get classified Answer: b 2. An item that is purchased that has many suppliers available and is of low importance to your organization should have the following selection process characteristics . . .? a. Detailed b. Thorough c. Efficient d. Interactive e. None of the above f. All of the above Answer: c 3. Which of the following characterizes how you should manage routine buys? a. They are unimportant b. You should outsource them to the supplier c. You should spend a lot of your own time working on the purchase d. Use P-cards and catalogs to outsource to the end user e. None of the above Answer: d 4. Which of the following is true about critical buys? a. You want to automate and outsource supplier selection. b. They represent 80% of the buys within the organization c. You use a cross-functional category team d. They are managed by the end user e. None of the above are true about critical buys Answer: c What strategic considerations are important? Single Sourcing Multi-Sourcing • Allows volume consolidation • Encourages close relationships • Supplier brings innovative products and processes • Only need to synchronize with one supplier • Lowers freight costs • Competition among suppliers ensures price and service • Risk mitigation • Avoids too much dependence on one supplier • Better market scanning ability for new technologies or products • Possible synergies between suppliers Strategic choices that influence selection process CHOICE ISSUE SIZE Should the supplier be bigger, smaller, or about the same size as your organization? Smaller: Pros: A smaller supplier is more likely to be highly responsive to your needs. Cons: But, a smaller supplier might be TOO dependent on your business. Larger: Pros: A larger supplier is likely to have the capacity to match your growth, the scale to offer a low price, and advanced R&D. Same: Pro: A supplier of comparable size may have a compatible culture and have both the desire and capabilities to be a strategic partner. INTERNATIONAL OR DOMESTIC? Global Pros: more qualified suppliers. Cons: more work to find them. You also have to carefully evaluate their capabilities and commitment; inherently more risky → supply lines are likely longer. Working across cultures and regulatory issues is challenging. MANUFACTURER OR DISTRIBUTOR? Manufacturer: Pros: lower prices and better service—if you buy in large enough quantities. Cons: working directly with each manufacturer requires you invest more resources in supplier selection and management. Distributor: Pros: Buying from a distributor gives you access to a wider bundle of products and emerging technologies. BUYING FROM A RIVAL? Pros: Cons: can create disadvantage, are they strategically inclined to compete against you directly, con your stuff be easily copied? Your strategy (or your customers) may require you to buy from... 1. historically disadvantaged entities (women or minority-owned), 2. suppliers that employ sustainable practices, or 3. suppliers in a specific geography (e.g., to fulfill local content or buyback requirements) CSR Supplier Selection Process: 1. Supplier Identification a. Sources: i. Current suppliers ii. iii. iv. v. vi. vii. viii. ix. x. Purchasing database Previous experience Personal contacts Purchasing consortiums Directories Trade publications Trade shows Sales reps Internet 2. Evaluation a. Shorten long list -- goal is to find suppliers that deserve a second look b. Collect supplier info Criteria Description Price You'll find price on 99.9% of selection criteria lists—and on performance scorecards. In fact, you will be judged on your ability to manage purchase price variance. Price is often an "order loser"—i.e., if a supplier can't meet your needs, you disqualify it from further consideration. Quality Like price, quality is almost universally used in the supplier selection process. Quality is also an "order loser." Quality is typically measured as parts per million defective. Delivery Delivery is the third of the "Big 3" selection criteria. Delivery is often measured as percent on-time delivery or in terms of lead time. Delivery is also an "order loser." Tech Capabilities Do you need to be on the cutting-edge of technology? If so, you need to verify that your suppliers are effectively investing in R&D—and that their people are tech savvy. Responsiveness How dynamic are your volume and SKU requirements? If your needs change quickly, you need to assess suppliers' ability—i.e., capacity, inventory policies, logistics capabilities—to respond to your changing needs. You need to evaluate their commitment to you as a customer. Financial Stability If you are going to do the work to build a productive buyer/supplier relationship, you need to know that the supplier is financially healthy! Cost Structure Are you looking for a long-term partner? If so, make sure your supply partners possess competitive cost structures. Reach/ Scale Do you need a supplier that can provide materials to more than one facility? If so, you need to evaluate the supplier's network. Further, are you growing rapidly? Can your potential supplier scale its operations to meet your needs? Management strength Because your goal is to build a great team, you want to assess suppliers' management talent and worker capabilities. Cultural fit Good partners get along. Don't forget to assess cultural fit. Do you share common—or at least compatible—values and systems? c. Perform Systematic Comparison i. ii. iii. will you set mins on evaluation criteria? → above/below a certain level for acceptance Determine what criteria is the most important Determine how complex the approach will be (use the type of buy as a guideline) d. Visit top rated suppliers e. Establish approved list 3. Approval -- Defining a deal and getting a contract signed Competitive Bidding Solicit formal “bids” and select supplier that meets your needs. Reverse Auctions Form of competitive bidding—invite suppliers to bid for the contract online in real-time. Negotiation More expensive—Use negotiation when buying scenario is more complex or uncertain. 4. Performance Monitoring a. Create supplier scorecards i. Used to measure the metrics you used to decide on a supplier (e.g., price per unit, ontime delivery, PPM defective, technical capability). In Class Textbook Scorecard Activity Common Elements: - Price - Accessibility - Actual content/structure - Content Practice Questions 1. Which of the following is not one of the four steps in the supplier selection process? a. Performance monitoring b. Negotiation c. Evaluation d. Approval e. All of the above are steps in the process Answer: b 2. Defining clear key selection criteria help you to collect consistent and comparable data. Which of the following criteria are important to consider and compare? a. Price b. Reach/scalability c. Management Strength d. Cultural fit e. A and D only f. A, B, C, D Answer: f STRATEGIC SOURCING MATRIX IMPORTANCE LEVERAGE CRITICAL Make most $ with critical and leverage buys - Make sure the products run (critical) - Leverage buys make the company $ Suppliers: common and low risk Purchase Quantity: large volumes Approach: exercise buying power Suppliers: unique and high risk Purchase Quantity: large volumes Approach: work with suppliers and forge LT relationships ROUTINE BOTTLENECK Suppliers: common and low risk Purchase Quantity: small volumes Approach: transactional approach, don't waste time on these Suppliers: unique and high risk Purchase Quantity: small volumes Approach: seek guaranteed pricing and steady volume COMPLEXITY How do your suppliers view you as a customer? Long term attractiveness of account DEVELOPMENT Nurture relationship to grow the business - Supplier has incentive to nurture the relationship CORE Outstanding service (most important) NUISANCE Provide min service -- you don’t care if you keep that customer EXPLOITABLE Desirable and ideal targets for engagement and interaction Not desirable Keep business as long as service requests aren’t too high. Premium pricing Relative Value/ Profitability of Current Business - If suppliers view you as important, they will provide you more services Suppliers will always please their core customers FIRST → more important ROUTINE BUY Supplier Perception Action Nuisance Minimize investment in selection process— automate as much as possible. Look for another supplier that values you more. Exploitable Monitor market pricing trends to make sure you are not overpaying. Look for another supplier that values you more. Development Find out why you are attractive and ask: • “Should you increase business?” • “Can you leverage this relationship?” Core You’ve found a good match. Ask, Notes • “Does a long-term contract make sense?” • “Should you increase business?” LEVERAGE - Leverage buys are more important than routine - Higher volumes and low in complexity Supplier Perception Action Nuisance You’ve found a poor match and are likely to be frustrated. Look for new supplier that values you more—or change your expectations. Exploitable You’ve found a poor match—one that is likely to be adversarial. Look for new supplier that values you more Development You’ve found a good match, but don’t overplay your hand—you are not as important to the supplier as you might think! Core You’ve found a good match. Seek cost savings and premium service. Consider joint cost-savings projects. Notes Supplier wants to get as much $ out of you as possible → low long term attractiveness BOTTLENECK Supplier Perception Action Nuisance You’ve found a poor match—one that may lead to supply disruptions. Manage risk as you search for a new supplier. Exploitable You’ve found a poor match—one that is likely to be adversarial.Monitor performance closely as your seek new supplier that values you. Development You’ve found a good match, but supplier won’t guarantee delivery. Manage risk and look for new supplier that values you more! Core You’ve found a good match. Manage risks proactively and consider supplier development opportunities. CRITICAL - Need reliability and high customer service - Your reason for existing as a company How do you move from development to core? - Increase spend - Mutual dependence Walmart and 7th Generation Example - Did not view walmart as sustainable Notes Supplier Perception Action Nuisance You’ve found a poor match—disruptions and angst are likely. Change suppliers quickly or figure out how to become more attractive. Exploitable You’ve found a poor match—disruptions and angst are likely.Change suppliers quickly or increase mutual dependency. Development You’ve found a good match, but mutual dependence is missing. Figure out how to increase your spend with this supplier! Core You’ve found a great match! Explore opportunities for a strategic partnership and value co-creation. Notes 7th generation and Walmart during the recession → 2 strategies combine ** want all critical suppliers to view you as core customers Quiz Questions 1. How can you increase your attractiveness as a customer—i.e., become a customer of choice? a. Call the supplier to ask questions b. Tell the supplier what you can do for him c. Offer a transactional relationship d. Ensure that you are a source of learning e. None of the above 2. There are a number of strategic choices that influence how you should select suppliers (i.e., they require that you match your selection process to your sourcing strategy). These strategic choices include: a. Size b. Location c. Buying from a rival d. Corporate Social Responsibility e. All of the above f. Only A, B, & D 3. The approval stage of supplier selection parallels draft day in which of the following ways? a. You’ve done your homework and know who is qualified to sell to you b. You need to pick the best available supplier c. You always pick the right supplier d. Top management joins the process for small-dollar-value buys e. None of the above—i.e., the two are not comparable f. Only A & B 4. One way to depict the supplier selection process is by using the metaphor of a funnel? T/F 5. To find a supplier for a single sourcing strategy requires you to carefully screen and monitor potential partners that are highly competent and trustworthy. T/F 6. Trade shows are used in only a few industries as a way to connect with colleagues, check out the latest products and put together deals with suppliers. T/F 7. Given the following information, what is the supplier’s “grade” for the scorecard? a. 100 (A) b. 92 (A-) c. 85 (B) d. 83 (B-) e. 50 (F) 8. A sensitivity analysis allows you to ask, “Does it matter?” for each scenario. T/F 9. Which of the following is a valuable source of supplier information? a. Current suppliers b. Personal contacts c. Directories d. Trade shows e. All of the above are sources of supplier information 10. The highest scoring supplier is always the best supplier. T/F