NDEJJE UNIVERSITY

KAMPALA CAMPUS

FACULTY OF BUSINESS ADMINISTRATION

Supplier selection and Relationship Management

GROUP COURSEWORK

NAME REG. NO SIGNATURE

TAREMWA EVANS 17/2/318/W/305
NTENSIBE EMMANUEL 17/2/318/W/850
BALIKUDEMBE HERBERT 17/2/318/W/1146
MWESIGA THEMBO JOSAM 17/2/318/W/

LECTURER: MR. BAKABULINDI ANDREW

QUESTION
Supplier Selection/Evaluation Strategy

 Supplier evaluation and selection process

 Factors considered when selecting a potential Supplier
 Supplier Selection Criteria
 Sources of Information when conducting Selection
 Methods of Supplier Selection
 Drawbacks of Supplier Selection strategy
 Management challenges.

 Implications on management practice

SUPPLIER SELECTION AND EVALUATION STRATEGY

1.0 Introduction

Supplier selection is the process of selecting a supplier to acquire the necessary materials to
support the outputs of organisations. Selection of the best and/or the most suitable suppliers is
based on assessing supplier capabilities.

Supplier evaluation is a term used in business to refer to the process of evaluating and approving
potential suppliers by quantitative assessment. The aim of the process is to ensure a portfolio of
best-in-class suppliers is available for use. Supplier evaluation can also be applied to current
suppliers in order to measure and monitor their performance for the purposes of ensuring
contract compliance, reducing costs, mitigating risk and driving continuous improvement.

2.0 The supplier evaluation and selection process

Today the average company spends roughly half its revenue to purchase goods and services.
This makes a company’s success dependent on their interactions with suppliers. Supplier
selection is the process by which the buyer identifies, evaluates, and contracts with suppliers.
The next section presents the major steps involved in supplier selection.

First, the buyer must identify qualified potential suppliers. Next, the buyer must evaluate these
suppliers. Depending on the information request, suppliers respond by providing “bids” for the
contract, specifying an offer on the contract terms, such as price, leadtime, quality, etc.
Suppliers’ offers often evolve over the course of negotiation with the buyer. Then the buyer
determines which supplier or suppliers will be awarded a contract and subsequently monitors
the supplier during the life of the contract to support future supplier selection iterations.

Step 1: Identifying potential suppliers

To survive in the intensely competitive global economy, it is often critically important to not
only develop existing suppliers but also to discover new suppliers.

To avoid the dire outcomes of supplier non-performance, buyers typically take proactive steps to
verify a supplier’s qualifications prior to awarding them a contract. The primary goal of
“supplier qualification screening” is to reduce the likelihood of supplier non-performance, such
as late delivery, non-delivery, or delivery of non-conforming (faulty) goods. A secondary goal is
simply to ensure that the supplier will be a responsible and responsive partner in the day-to-day
business relationship with the buyer.

Supplier qualification screening involves many aspects, which include among others Reference
checks, Financial status checks, Surge capacity availability, Indications of supplier quality such
as ISO 9000, ability to meet specifications and buy in from internal customer(s).

Supplier qualification processes are costly and can be time-consuming. As described above, the
processes can involve travel to distant supplier sites. Interviews with suppliers and suppliers’
customers are time-consuming. Moreover, the entire process involves not only the buyer but
also internal customers throughout the buyer organization. Consequently, qualification can take
weeks or months — even for commodity-type parts such as printed circuit boards.

Creating a supply base

Suppliers who have passed the qualification requirements and are eligible for contract award are
commonly referred to as “pre-qualified” suppliers. If the buyer utilizes short-term con- tracts
and frequently re-procures the same item, it typically makes sense to establish a cohort of pre-
qualified suppliers who will compete for these contracts.

Even if the buyer uses long- term contracts for individual items (meaning contracts for individual
items are infrequently re-bid), it might still make sense to use a pre-qualified supply base: If the
supply base members can potentially supply many different items, they can compete to produce
whichever item’s long-term contract is up for re-bidding.

Finally, using a supply base not only reduces qualification screening costs but also allows for the
development of standardized contracts, terms and conditions for pre-qualified suppliers,
thereby streamlining administrative processes involved in contracting.

Step 2 Information requests to suppliers

Once the buyer has identified potential suppliers, the next step in supplier selection is to
formally request that the suppliers provide information about their goods or services. While there
is no agreed-upon terminology, generally the buyer makes one of three types of information
requests to suppliers. The request types, each appropriate for a different situation, are described
below.

Request For Information (RFI) is issued when the buyer seeks to gain market intelligence
regarding what alternatives and possibilities are available to meet the buyer’s needs. Typically
the buyer asks suppliers what goods and services they could potentially provide, what
differentiates them from other vendors in the marketplace, etc. With an RFI the buyer does not
state a particular intention to award a contract. However, since responding to an RFI is time-
consuming for suppliers, generally suppliers will only respond to the RFI if they expect that the
buyer will eventually issue an RFP or RFQ, which is discussed below.

Request For Proposal (RFP) is issued when the buyer has a sense of the marketplace and has a
statement of work which contains a set of “performance” requirements which it needs fulfilled.
For example, the RFP may describe a formed part with certain strength, flexibility, and fire
resistance requirements, but not specify the particular composition of the material. Suppliers
respond to the RFP with details on how they would satisfy the buyer’s performance
requirements and the price they would be willing to accept to do so.

Request For Quote (RFQ) is issued when the buyer can develop a statement of work that states
the exact specifications of the good or service needed. This is the case, for example, if the buyer
seeks a part made of a particular plastic and formed to a specific set of thickness, density and
shape specifications. RFQs are often used in conjunction with highly structured competitive
tendering processes.

RFQs are appropriate for procurement of items that are standard and well-known in the
marketplace. For example, in the electronics industry this would include commodity
components such as cables, connectors, and circuit boards.

Step 3 Setting Contract terms

The supplier selection process culminates in a contract between the buyer and one or more
suppliers. The information received from suppliers via the requests described step 2 ultimately
must be translated into formal contractual terms before contracting can occur.
A contract with a supplier specifies what the supplier should do and how they will be paid by the
buyer. At the highest possible level, contract terms relate to either monetary transfers (payment
terms) or how the contract will be executed (non-payment terms). Contracts can specify any
number of payment and non-payment arrangements.

Payment terms. In a fixed-price contract, the price term specifies what the supplier will be
paid regardless of the actual cost to execute its contractual obligations. In a cost- plus
contract, a formula is specified which determines how much the supplier will be paid; for
example, under a cost-plus contract the supplier could receive a fixed percentage (e.g.,
107%) of the total cost incurred, or simply receive payments for time and materials.

Non-payment terms. The contract can specify all kinds of details related to how the contract
will be executed, for instance, delivery quantities, delivery frequencies, delivery locations,
service level, quality level, technical specifications, duration of the contract, etc. Contracts where
goods must be transported typically assign “incoterms” defining the precise point at which the
buyer takes control of the shipment (and hence the associated costs and risks).

Step 4: Negotiation process

When making contract award decisions the buyer considers each supplier’s qualifications as well
as the contract terms they offer (e.g., price). Contract terms, on the other hand, can be
“negotiable” between the buyer and supplier. In a negotiation the buyer attempts induce
favorable terms from suppliers, and likewise the suppliers attempt to induce favorable terms
from the buyer.

For better or worse, negotiations often are viewed as zero-sum games where the buyer gains
what the supplier gives up. An extreme example of this is the take it or leave it offer
approach whereby a powerful buyer essentially dictates the terms to the suppliers. For instance,
the buyer might demand a certain price and simply refuse to consider the supplier unless they
agree to this price. Take-it-or-leave-it offers are rather draconian, and buyers may be reluctant
to utilize them for short-term gains if suppliers perceive them as unfair.

Competitive tendering is an alternative way to extract concessions from suppliers whereby

suppliers are played off one another. Typically, suppliers simultaneously submit bids (in
response to an RFP or RFQ). Competitive tendering approaches differ in the amount of
visibility that suppliers have regarding competitors’ bids.

Negotiation processes in practice may combine take-it-or-leave-it offering, competitive

tendering, and bargaining. Negotiations do not always take a zero-sum approach. The buyer
and supplier can potentially both benefit if they realize their incentives are aligned rather than
in conflict.

Step 5 Supplier evaluation and contract award

The buyer then uses this rank ordering, along with other business considerations, to determine
which supplier(s) will be awarded the contract.. Finally, after contract award the buyer can
monitor supplier performance and use this information during future supplier selection processes.

5.1 Supplier evaluation

The buyer begins the supplier evaluation process by identifying the “dimensions” it wishes to use
when evaluating suppliers. an extensive list of such Frequently appearing dimensions include
production capacity and flexibility, technical capabilities and support, information and
communication systems, financial status, and innovation and R&D.

Dimensions that appear with moderate frequency in the literature include quality systems,
management and organization, personnel training and development, performance history,
geological location, reputation and references, packaging and handling ability, amount of past
business, warranties and claim policies, procedural compliance, attitude and strategic fit, labor
relations record, and desire for business.

Once suitable dimensions are identified, the ability to rank order suppliers is crucial for reaching
an informed supplier selection decision. Rank ordering is simple when supplier bids are
differentiated by a sole dimension such as price.

This might be the case, for example, if the buyer has issued an RFQ for a highly standardized
component delivered in a certain quantity by a certain date and suppliers are asked to respond
with their price for the contract. However, rank ordering suppliers becomes complex when
bids must be evaluated across multiple dimensions. The challenge of supplier evaluation lies in
constructing this tradeoff in a way that accurately reflects the buyer’s preferences.

5.2 Contract award

Once the buyer has a sound methodology for evaluating suppliers, the process of contract
awarding can begin. During this phase the buyer determines which supplier or suppliers to
award a contract to. Supplier evaluation is a key ingredient in this process, but award decisions
can hinge on more than just how the buyer evaluates the supplier.

For example, even if suppliers are closely matched the buyer may choose to award the contract
to just one of them. Sole award contracting may be favorable if the scope of work is best
accomplished by a single supplier. For example, the contract may require significant capital
investments on the part of the supplier and/or buyer, creating strong economies of scale effects.
Sole-award contracting may also be used if it is unduly costly or risky to deal with multiple
suppliers.

Likewise, even if one supplier dominates another, the buyer might choose to give business to
both of them. Multiple-award contracting can be useful if the buyer wishes to diversify its
supply sources to mitigate disruption risks

In general, there are many considerations which might tip the scales in favor of one supplier or
another.

The buyer might deliberately favor incumbent suppliers to foster trust and loyalty or, for
example, to avoid the administrative costs of training a new supplier on the buyer’s invoicing
and payment procedures. Supplier location may also be a concern in a way not manifested in
logistics costs.

Regardless of which award criteria are used by the buyer, making such criteria transparent
makes it easier for the buyer organization to monitor its contract award decisions, to ensure
the reasons for contract award are sound (e.g., due to the merits of the bid). For example, a “low
price wins” rule makes it difficult for procurement managers to “cheat” the buyer organization
by negotiating a sweetheart deal with a supplier in return for a bribe
5.3 Supplier monitoring

Many contracts specify the provision of goods over an extended duration of time, ranging
from weeks to years. Monitoring supplier performance during the life of the contract has
several aims. For example, it supports quality if the buyer inspects incoming goods to ensure
they conform to quality specifications.

Monitoring also supports cost containment: if there is a problem with quality, it can be
identified and charged back to supplier. For supplier selection itself, however, monitoring is
most important in so far as it helps the buyer make more informed supplier selections in the
future.

In particular, during supplier evaluation the buyer may consider factors which influence the total
cost of doing business with the supplier. Such costs can include, for example, the conformance
and non-conformance costs which the buyer anticipates incurring during the life of the
contract (e.g., costs of inspections and defect correction, respectively).

3.0 Supplier selection criteria

We shall now examine briefly some of the different criteria that an organisation may use to
assess potential suppliers. Although it may not be possible to obtain all the relevant information,
whatever data that can be obtained will definitely help the buying organisation assess the
potential for a successful match.

1. Process and design capabilities: Suppliers should have up-to-date and capable products, as
well as process technologies to produce the material needed. Because different manufacturing
and service processes have various strengths and weaknesses, the buying organisation must be
aware of these characteristics upfront. When the buying organisation expects suppliers to
perform component design and production, it should also assess the supplier’s design capability.
One way to reduce the time required to develop new products is to use qualified suppliers that
are able to perform product design activities.

2. Quality and reliability: Quality levels of the procurement item should be a very important
factor in supplier selection. Product quality should consistently meet specified requirements
since it can directly affect the quality of the finished goods. Besides reliable quality levels,
reliability also refers to other supplier characteristics. For example, is the supplier’s delivery
lead-time reliable? Otherwise, production may have to be interrupted due to shortage of material.

3. Cost: While unit price of the material is not typically the sole criterion in supplier selection,
total cost of ownership is an important factor. Total cost of ownership includes the unit price of
the material, payment terms, cash discount, ordering cost, carrying cost, logistics costs,
maintenance costs, and other more qualitative costs that may not be easy to assess.

4. Service: Suppliers must be able to back up their products by providing good services when
needed. For example, when product information or warranty service is needed, suppliers must
respond on a timely basis.

5. Capacity: The organisation may also need to consider whether the supplier has the capacity to
fill orders to meet requirements and the ability to fill large orders if needed.

6. Location: Geographical location is another important factor in supplier selection, as it impacts

delivery lead time, transportation, and logistics costs. Some organisations require their suppliers
to be located within a certain distance from their facilities.

7. Management capability: Assessing a potential supplier’s management capability is a

complicated, but important step. The different aspects of management capability include
management’s commitment to continuous process and quality improvement, its overall
professional ability and experience, its ability to maintain positive relationships with its
workforce and its willingness to develop a closer working relationship with the buyer.

8. Financial condition and cost structure: An assessment of a potential partner’s financial

condition usually occurs during the evaluation process. Evaluation teams will typically evaluate
the different financial ratios that determine whether a supplier can invest in resources, pay its
suppliers and its workforce, and continue to meet its debt and financial obligations. These
elements are important in determining whether the supplier will continue to be a reliable source
of supply, and that supply will not be disrupted.

9. Planning and control system: Planning and control systems include those systems that release,
schedule and control the flow of work within an organisation and also with outside parties. The
sophistication of such systems can have a major impact on supply chain performance. For
example, how easy to use is a supplier’s ordering system, and what is the normal order cycle
time? Placing orders with a supplier should be easy, quick and effective. Delivery lead time
should be short, so that small lot sizes can be ordered on a more frequent basis to reduce
inventory holding costs.

10. Environmental regulation compliance: The 1990s brought about a renewed awareness of the
impact that industry has on the environment. As a result, a supplier’s ability to comply with
environmental regulations is becoming an important criterion for supply chain alliances. This
includes, but is not limited to, the proper disposal of hazardous waste.

11. Willingness to share technologies and information: With the current trend that favours
outsourcing to exploit suppliers’ capabilities and to focus on core competencies, it is vital that
organisations seek suppliers that are willing to share their technologies and information.
Suppliers can assist in new product design and development through early supplier involvement
to ensure cost-effective design choices, develop alternative conceptual solutions, select the best
components and technologies, and help in design assessment. By increasing the involvement of
the supplier in the design process, the buyer is free to focus more attention on core competencies.

12. Longer-term relationship potential: In some cases, an organisation may be looking to develop
a long-term relationship with a potential supplier. This is particularly true if the supplier is in the
‘critical’ quadrant, and the category of spend is high volume and critical to the organisation’s
business. This approach requires that the parties share their mutual goals, establish metrics to
guide the relationship and develop a series of ongoing discussions on how issues and conflicts
can be resolved in a mutually beneficial manner. These relationships may also involve joint cost-
savings projects and new product-development efforts.

13. Supplier selection scorecards: During the selection stage, sometimes organisations need a
structured way to evaluate alternative suppliers. This can be particularly hard when the criteria
include not just quantitative measures (such as costs and on time delivery rates) but other, more
qualitative factors, such as management stability or trustworthiness. A supplier selection
scorecard may be used as a decision support tool. The evaluation team will assign a weight to the
different categories and develop a numerical score for each supplier in each category, thereby
developing a final performance score.
It should be mentioned here that the need for assessment does not end with the selection
decision, however. After the buyer-supplier relationship has been established, buyers also must
track supplier performance over time. The ability to rank suppliers across multiple criteria can be
especially helpful in identifying which suppliers are providing superior performance and which
are in need of some improvement.

4.0 Sources of information when conducting selection

Every organisation maintains a list of vendors, trade group-wise whom they approach for their
need of materials. This list is under constant review. Unsatisfactory suppliers are eliminated and
new suppliers are added to enhance competition.

Also new suppliers have to be found for newer materials required on ever expanding business.
An important function of the purchase research section will be to obtain this information from
the following sources and keep a classified record for reference when necessary and they may be
obtained from the following sources:

1. Primary data field research that can use one or more approaches, such as observation, analysis
of internal records such as sales trends, trade missions to suppliers’ operations and
questionnaires. Trade association conferences offer a good opportunity to network and learn
more from other people who know a lot about what is going on in the industry.

a) Enquiry

This is a simple method of ascertaining availability and price of materials through open offers. It
is adopted when there is no room for competition on account of (a) the value being very small,
(b) the materials being of a proprietary nature, (c) the policy being to buy only from one
particular firm, (d) the source of supply being limited or not established as in the case of
machined components and fabricated parts. The buyer may, however endeavour to obtain price
reduction by negotiation. The enquiry form (form7) is simpler then the tender form (form 8) but
both call for price, terms of payment, delivery time, etc.
b) Personnel from other departments of the company:

Personnel from other departments of a firm can often provide purchasing with helpful
information about prospective suppliers. Through their associations in professional
organisations, civic associations, and social groups, these employees often learn about
outstanding suppliers.

Scientific, technical and research personnel who use sophisticated materials or services always
have many valuable suggestions to make regarding possible sources of supply. From their
attendance at conventions and trade exhibits, and from their discussions with associates, these
personnel are particularly well informed regarding new products, new methods and new
manufacturers.

c) Exchange of information between similar companies:

If satisfactory trade relations are maintained, even one’s own competitors will part with the
information he has.

2. Secondary data statistics and annual reports issued for supplier companies. Trade journals
provide recent updates to what is happening in the industry. News headlines, trade websites and
libraries also provide multiple leads for further information. Investment analysis reports, as well
as interviews, can provide very good information on what is happening in certain industries
where they are investing.

a)Trade directories:

National and foreign directories are available which give classified information of suppliers
industry wise. Very detailed information is available there in regarding names and addresses of
manufacturers, their regional and branch offices, their authorised agents and their range of
products.

b). Newspaper advertisements:

Newspapers columns are full of advertisements from various firms indicating the items of stores
which they manufacture, import, and stock or specialise in.
c. Catalogue, price lists etc:

Prices obtainable from catalogues and price lists are generally not final and are subject to
confirmation at the time of placing the order. Catalogues and price lists should be properly
classified and arranged to enable easy reference. Either they could be kept according to
commodity groups as such as pipes and fittings, tools, alloy steel, abrasives, etc., or numbered
serially and covered with index cards or lists prepared according to commodity groups.

If necessary, a supplier wise card index or list may also be maintained to facilitate locating
catalogues of various firms. The card or list will be arranged alphabetically and will show
supplier’s name, particulars of their catalogues and the serial number.

d. Trade journals:

Most leading companies advertise in trade journals like the Indian Trade Journal. Sometimes
excellent articles appear in them regarding specific industries. Valuable information can be
obtained from such journals.

e) Advertised tender:

Tender is the process of ascertaining availability and price of materials in sealed covers which
are opened and scrutinized, at a predetermined time by a tender committee. It is implied that the
materials covered by the tender should give scope for competition.

The tender system induces the bidders to quote the lowest Price, safeguards the interests of both
the buyer as well as that of bidder, ensures impartially and fairness, inspires confidence in the
suppliers and leaves no room for malpractice such as favouring a particular bidder or tampering
with prices in the purchase section.

f) Yellow pages:

Another commonly known directory is the classified yellow pages section of telephone
directories. This source of information is frequently of limited value to industrial buyers because
local telephone books list only local companies.
However, buyers can readily obtain telephone books for all major cities from the telephone
company. The size and capability of companies are also difficult to determine, as management
and financial data are normally not included in the advertisements.

The yellow pages do, however, have the virtue of being well indexed. Also, they can serve as a
useful starting point if other sources have proved fruitless, and if local sources are desired.

3. Government sources, e.g., abstracts of statistics, economic trends, employment gazette,

business monitors, central bank reports, etc.

4. Non-government sources including chamber of commerce, professional associations, press

reviews, economic forecasts, etc. another important source that may fall into this category is the
Trade exhibitions and fairs:

Visits to exhibitions and fairs should give valuable information regarding potential suppliers.
Such exhibitions and fairs are held industry wise and also for specific purposes, e.g., import
substitution. Some such exhibitions are held regularly at specific intervals when available
information can be updated.

5. Trade consultants who can provide information, but they are very often costly.

a) Salesmen:

Salesmen are excellent sources for supply and material information. Not only are they usually
well informed about the capabilities and features of their own products, but they are also familiar
with similar and competitive products as well.

By the very nature of their specialised knowledge, sales people can often suggest new
applications for their products which will eliminate its search for new suppliers. From their
contacts with many companies, sales men and sales women learn much about many products and
services and all of this information is available to the alert, receptive buyer.

This is a key reason why sales personnel should always treated courteously and given ample time
to make their sales presentations. To deny them this opportunity is to risk the loss of valuable
information, including information concerning new and reliable sources of supply.
6. Existing suppliers and customers with the power of snowball sampling where you can be
referred to other experts.

The location of potential useful sources of supply is a major responsibility of the Procurement
function and can be a huge challenge today with the increasingly complex buyer’s needs in view
of technological advances, increasing ‘concentration’ in supply markets with continuous trends
of takeovers and mergers, and increased specialisation among manufacturers with a greater
proportion of their needs outsourced.

The good news is that the internet has revolutionised organizations’ ability to locate and collect
information on potential suppliers. Sources of information on certain potential suppliers can be
collated from previous internal recorded performance, annual reports, catalogue library,
publications, trade directories, exhibitions, other buyers, sourcing agents, distributors, embassies,
trade consultants, existing suppliers, Customers and colleagues.

There are multiple sources of market and supplier information available. However, the reputation
of a particular source must also be investigated and ascertained. The key here is to triangulate,
which means that the buyer needs to explore, compare and contrast data from multiple sources
before he or she can validate it.

The whole point of conducting market research is to understand the prevailing market conditions
and the ability of current or potential new suppliers to effectively deliver the product or service.
In this respect, supply market intelligence becomes one of the most important and critical
stepping stones for an effective sourcing strategy. As one manager noted, “Supply market
intelligence may be the only competitive advantage of the future!

5.0 SUPPLIER SELECTION METHODS

Supplier selection methods are the models or approaches used to conduct the selection process .
The methods chosen are extremely important to the overall selection process and can have a
significant influence on the selection results. It is important to understand why a firm chooses
one method (or a combination of different methods) over another.

Usually when a company sets out to develop or choose a supplier selection method, the result is a
combination of several different methods with different strengths suited to meet the company’s
specific selection needs. Therefore, it is important to explore a range of different selection
methods and to discuss their different applications.

METHODS FOR PREQUALIFICATION OF SUPPLIERS

Prequalification is the process of reducing the set of all suppliers to a smaller set of acceptable
suppliers. The various methods available under this category are:

A. Categorical Methods

Basically, categorical methods are qualitative models. Based on historical data and the
buyer's experience, current or familiar suppliers are evaluated on a set of criteria. After a
supplier has been rated on all criteria, the buyer gives an overall rating. The primary
advantage of the categorical approach is that it helps structure the evaluation process in a clear
and systematic way.

B. Data Envelopment Analysis (DEA)

DEA is a classification system that splits suppliers between two categories, ‘efficient’ or
‘inefficient’. Suppliers are judged on two sets of criteria, i.e. outputs and inputs. DEA considers a
supplier to have a relative efficiency of 100% if he produces a set of output factors that is not
produced by other suppliers with a given set of input factors. Weber et al. [27], [28], and [29]
have primarily discussed the application of DEA in supplier selection in several
publications.

C. Cluster Analysis (CA)

CA is a basic method from statistics which uses a classification algorithm to group a number of
items which are described by a set of numerical attribute scores into a number of clusters such
that the differences between items within a cluster are minimal and the differences between
items from different clusters are maximal. This classification is used to reduce a larger set of
suppliers into smaller more manageable subsets.

MULTI ATTRIBUTE DECISION MAKING (MADM) TECHNIQUES

A vendor selection problem usually involves more than one criterion and these criteria often
conflict with each other. So MADM techniques are implemented to solve the problem. Some
of the MADM techniques are:

A. Analytical Hierarchical Process (AHP)

Analytical Hierarchical Process (AHP) is a decision-making method developed for prioritizing

alternatives when multiple criteria must be considered and allows the decision maker to structure
complex problems in the form of a hierarchy, or a set of integrated levels. This method
incorporates qualitative and quantitative criteria. The hierarchy usually consists of three
different levels, which include goals, criteria, and alternatives. Because AHP utilizes a ratio scale
for human judgments, the alternatives weights reflect the relative importance of the criteria
in achieving the goal of the hierarchy

B. Analytic Network Process (ANP)

Analytic Network Process (ANP) is a comprehensive decision-making technique that captures

the outcome of the dependence and feedback within and between the clusters of elements.
Analytical Hierarchy Process (AHP) serves as a starting point for ANP. Analytical Network
Process (ANP) is a more general form of AHP, incorporating feedback and interdependent
relationships among decision attributes and alternatives. ANP is a coupling of two parts, where
the first consists of a control hierarchy or network of criteria and sub- criteria that controls the
interactions, while the second part is a network of influences among the elements and clusters .

C. Total Cost of Ownership (TCO) Models

TCO-based models for supplier choice basically consists of summarization and quantification of
all or several costs associated with the choice of vendors and subsequently adjusting or
penalizing the unit price quoted by the supplier. Total Cost of Ownership (TCO) as stated by
Ellram [33] is a methodology and philosophy, which looks beyond the price of a purchase to
include many other purchase-related costs.

D. Technique for the Order Performance by Similarity to Ideal Solution (TOPSIS)

Another favorable technique for solving MADM problems is the TOPSIS. According to the
concept of the TOPSIS, a closeness coefficient is defined to determine the ranking order of all
suppliers and linguistic values are used to assess the ratings and weights of the factors.
TOPSIS is based on the concept that the optimal alternative should have the shortest distance
from the positive ideal solution (PIS) and the farthest distance from the negative ideal solution
(NIS) .

E. Multiple Attribute Utility Theory (MAUT)

The MAUT proposed by Min, H. is also considered a linear weighting technique. The MAUT
method has the advantage that it enables purchasing professionals to formulate viable sourcing
strategies and is capable of handling multiple conflicting attributes. However, this method is only
used for international supplier selection, where the environment is more complicated and
risky.

F. Outranking Methods

Outranking methods are useful decision tool to solve multi- criteria problems. These methods are
only partially compensatory and are capable of dealing with situations in which imprecision
is present. Lot of attention has been paid to outranking models, primarily in Europe. However,
so far, in the purchasing literature there is no evidence of applications of outranking models in
purchasing decisions.

Fuzzy decision-making approach

Tung and Torng [3] presented a fuzzy decision-making approach to deal with the supplier
selection problem in supply chain system. In this work linguistic values are used to assess the
ratings and weights for various factors. These linguistic ratings can be expressed in trapezoidal
or triangular fuzzy numbers.

Then, a hierarchy multiple criteria decision-making (MCDM) model based on fuzzy-sets

theory is proposed to deal with the supplier selection problems in the supply chain system.
According to the concept of the TOPSIS, a closeness coefficient is defined to determine the
ranking order of all suppliers by calculating the distances to the both fuzzy positive-ideal
solution (FPIS) and fuzzy negative-ideal solution (FNIS) simultaneously.
6.0 FACTORS CONSIDERED WHEN SELECTING A POTENTIAL SUPPLIER

Reference checks. The buyer may contact previous customers and ask about the supplier’s
delivery performance, adherence to contract terms, what (if any) problems arose and how
they were resolved, etc.

Financial status The buyer may use published supplier ratings (e.g., Dunn and Bradstreet) to
determine the supplier’s financial status and likely financial viability in the short to medium
term. For example, if the supplier has recently assumed significant debt, this may raise red
flags about the possibility the supplier will declare bankruptcy before fulfilling its obligations to
the buyer.

Surge capacity availability. The supplier’s capacity to increase delivery quantities within short
lead times is important as the buyer may be uncertain about their exact quantity needs over the
life of the contract. This is particularly true for long-term contracts where demand for the
buyer’s product may be heavily tied to unforeseen market events (e.g., demand for an airplane
manufacturer’s products are highly dependent on the overall economy, which in turn periodically
goes through periods of growth and contraction). Surge capacity is available when a supplier
has access to second or third shifts, overtime, underutilized facilities, etc.

Indications of supplier quality. The buyer might require that suppliers have ISO 9000
certification (or similar), indicating that the supplier has policies, procedures, documenta- tion,
and training in place to ensure continuous adherence to quality standards. However, in some
cases the certification documents can be misleading and/or easily forged [4]. To actually see if
an adequate level of quality is achievable, the buyer may have to look deeply into the supplier’s
organization to ensure the supplier is capable and competent to meet the buyer’s specifications.

Ability to meet specifications. To rigorously check the supplier’s capabilities the buyer might:
(i) Request samples of supplier products and test them to ensure conformance to the buyer’s
requirements. (ii) Visit the supplier’s production facility and interview line workers and
engineers to ensure that all members of the supplier team understand the critical features of the
product in their charge. For example, a buyer seeking to purchase tires from a supplier may
interview the design engineers to ensure they understand each aspect of the tire’s design (for
instance, the role of gum strips in preventing tread separation at high speeds). (iii) Audit the
production facilities to ensure that production can and will only proceed in a manner approved
by the buyer. For instance, the buyer may require the supplier to restrict their production to
small batch sizes in order to prevent contamination outbreaks from spoiling the entire
production run.

Buy-in from internal customer(s). Because the buyer typically acts on behalf of an internal
customer within the buyer’s organization, buy-in from this internal customer is a crucial step
prior to contracting. For example, suppose the buyer is purchasing a complex circuit board on
behalf of the engineering department (which owns responsibility for this component). To
ensure that the internal customer has confidence in the supplier and is willing to work with the
supplier, the buyer will set up meetings between the buyer firm’s engineers responsible for the
part and the supplier’s engineers who would be responsible for producing it.

7.0 DISADVANTAGES OF SUPPLIER SELECTION STRATEGY

Selection

Selecting one or a few suppliers for dedicated use can greatly reduce the cost of common items
your organization needs. If you only require a select few items that are unlikely to change, then
exclusive arrangements have few drawbacks. However, having limited suppliers also means
restricting your selection. If other suppliers offer a more diverse array of products that yours
don't, you may be cut off from getting the things that you want and need.

Customer Service

Just like you can depend on steady supplies and better prices from an exclusive supplier, the
supplier can depend on your business. Such a dependable arrangement can also remove the
impetus for responsive service and concern. A supplier that knows you're a guaranteed customer
may not work as hard to keep your business as it did to get it. Suppliers without guaranteed
repeat business have more incentive to serve customers.

New Technologies
Certain industries are particularly affected by innovation. Medicine, for example, takes
advantage of new medical equipment technology and pharmaceuticals all the time. Likewise,
different companies come up with new products all the time, and no one supplier holds all the
latest advancements. Therefore, medical providers who form exclusive arrangements may have
difficulty obtaining the new items they most desire. This holds true in any industry where
advances in technology and design affect business operations and competitiveness.

Mergers

During the course of a contract period, your supplier may undergo changes. A sale or merger
could mean that your supplier joins a new parent company or merges with a competitor.
However, many contracts carry over. You may find yourself dealing with a different supplier
than you had originally signed with, or that the way your supplier does business has changed
unexpectedly. In many cases, the only way out of a bad arrangement is to wait for the contract to
expire.

8.0 IMPLICATIONS ON MANAGEMENT PRACTICE

Users should begin by developing a common, in-house understanding of their specific issues and
objectives. This is by far the most difficult task in vendor selection and building a control
system. People need to sit down, truly think about their manufacturing needs, and develop cross-
functional teams to seek common agreement on their requirements. This understanding can then
direct research on potentially useful systems and suppliers. “this is because there’s a natural
tendency in these fast-paced times to sometimes sacrifice the time needed to properly define
manufacturing problems and requirements.

To lessen vendors’ superficial similarities, users must learn as much as possible about them and
their systems. To aid this research, draft clear, complete specifications, and even improve
suppliers’ understanding. users must form detailed definitions of an ideal control system’s
capabilities, and then tailor those definitions to fit their application’s specific needs. These
tailored definitions can be used to draft specifications that help resolve some of the usual
differences in suppliers’ proposals and bids.
Seek to maximize network and control system lifecycles and preserve capital investment by
basing new purchases on their ability to extend the typical control system lifecycle; reconcile
disparate legacy systems and draft a component replacement schedule; and require that suppliers
provide “keep current” strategies for their systems. These strategies are so important because
maintenance affects a control system’s total cost of ownership. Longer lifecycles mean users
need to know even more about prices they’ll likely pay in the future.

Secure fair prices by using specific system requirements to help gather prevailing market data,
and then factor this price data into individual systems’ specifications.

Prevent project costs from escalating by asking suppliers to commit to long-term pricing
strategies.

When evaluating systems, components, and suppliers, evaluate how closely they meet
specifications and how well they’ll be able to boost network or control system performance.
Rather than worry about who is cheapest. Be concerned with who delivers the most value to your
system’s lifecycle because no No supplier will satisfy every requirement, but decisions are made
on which delivers the best available solution.

To get a project’s team members to assume ownership of the selection process, emphasize the
learning process they used to define network or control system needs, objectives, and commonly
agreed on requirements. Also, seek to divide a project into separate tasks that can be assigned to
individual team members.

To help make a team creative and effective, management should support the team’s need to
understand details of the project, but the team shouldn’t have to create detailed descriptions of
each system. “Focusing on the user’s project details, rather than each vendors’ system details,
can save users on the selection process and give them a better solution.

Using its detailed requirements and specifications, the project team can also document its
decisions during the selection process and explain its reasoning to management. Consistent
documentation then allows suppliers to be rated quantitatively, and provides an audit trail of the
team’s decisions.
Develop and use specifications that are rigorous enough to form the basis for actual purchase
orders. This will also aid vendor understanding.

Lastly the procurement team and management can repeat this selection process to aid continuous
improvement, and help evaluate how well long-term suppliers are meeting requirements in
addition to using this process to help satisfy traditional due diligence responsibilities.

In conclusion Strategic sourcing plays a critical role in supply chain planning. Supplier selection
represents one of the most important functions to be performed by the purchasing department
that determines the long-term viability of a company. The supplier selection is a multi-criteria
problem, which includes both qualitative and quantitative criteria. In order to select the best
suppliers, it is necessary to make a tradeoff between tangible and intangible criteria, some of
which may conflict.

7.0 DRAWBACKS OF SUPPLIER SELECTION STRATEGY

Too much or too little in the "Request for" documents

Whether it is a request for proposal, information or quotation (RFP/RFI/RFQ), there is the

temptation to either over- or under-specify requirements. When a company provides too little
detail in the RFx they run the risk of buying a solution that fails to deliver the needed
functionality. The provider meets the letter of the requirements but it turns out the capability
delivered is not sufficient to actually do what is needed.

The flip side is when the company provides an overly detailed specification — not just for what
needs to be done but also exactly how it has to be done, and for every single element that
requires customization or an exception. This most typically occurs when technical staff are the
sole people involved in the process and they focus on the bits and bytes, not the people and
process.

Not getting enough organizational participation.

Sometimes, businesses leave the specifying process to the technical staff and fail to involve a
large enough cross-section of the organization. This can cause the team to miss critical usability
requirements and process flow elements, and also contribute to product backlash. Involving users
from multiple levels and all affected departments in the process typically results in greater buy-in
to the final choice. No matter how exceptional a product is, if people don't use it — or use it
begrudgingly — it will not deliver maximum (or any) value.

Buying a "product" instead of a "solution".

This problem can manifest itself in many ways. One instance is when a company buys a solution
without considering who is going to help implement it. While some product or solution can be
entirely implemented with local internal resources, most will require either corporate or external
resources.

For example buying the greatest software in the world is great, but if you can’t get skilled
implementers the actual implementation may take far longer, cost far more or deliver far less
than expected. Another way this issue can manifest itself is when the company buys the perfect
product, but the vendor is so small it can’t provide the proper level of support. Or, the vendor’s
business may be so precarious that it might not even be in business by the time you get around to
rolling out the technology to the last plant.

Affected by Mergers and acquisitions

Sometimes the vendor may have to sell itself to a larger firm, one that is not a traditional supplier
to the business area being served, and whose technology direction is not the same as your current
or future needs. No company is immune from mergers and acquisition activity, thus this calls for
proper due diligence can minimize the risks of disruption during project rollout.

Not buying on Total Cost of Ownership (TCO).

Selecting the lowest initial price is almost always a recipe for problems — and the most common
mistake. Maintenance costs, installations as well as implementation and training costs may be a
real shock over the lifetime of the product. This is because they may add up to make a service of
product from a certain selected vendor to be every expensive.

Forgetting about the future.

Nothing lasts forever. When purchasing manufacturing applications companies sometimes focus
on their immediate needs and fail to consider how their businesses might change over the next
ten years. Or they select a solution that is extremely robust and functional but is built on the last
decade's technology platform.

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