CHAPTER SEVEN

7. SELECTION OF SUPPLIERS
A good supplier is an invaluable resource to organization requiring its products or
service. Suppliers make a direct contribution to a firm’s success; by assist their customers
with product development, value analysis, and timely delivery of the desired level of
quality. Good buyer seller relations facilitate the buyer’s efforts to gain superior
performance, extra service, cooperation on cost reduction programs and a willingness to
share in new processes and procedures.
7.1. Benefit of Maintain Good Supplier
Selection and management of the right supplier is the key to obtaining the level of
quality, on time and at the right price. It is a key decision in supply management process
as supplier performance, influences the productivity, quality and competitiveness of the
buying company. They must coordinate closely with marketing and new product
development to aware any possible shifts in product lines and product technology
changes.
Buyers must take supplier oriented actions in order to satisfy this responsibility.
 Develop and maintain available supplier base
 Address the appropriate strategic and tactical issues.
 Ensure that potential suppliers are carefully evaluated and that they have the
potential to be satisfactory supplier partners.
 Decide whether to use competitive bidding or negotiation as the basis of
source selection.
 Selects the appropriate source.
 Manage the selected supplier to ensure timely delivery of the required
quality at the right price.
 Changing market condition and changing technology that affect the buying
process require adaptation on the part of buyers & sellers
 7.2 Factors in Supplier Selection
The aim of careful vendor selection is to find the one most satisfactory source or a group
of alternative sources with adequate and reasonably comparable qualifications.
A. Geographic location as an important consideration.
B. Internal facilities that mean technological development and
interest in helping with latest trend.
C. Labor relations in morale of the workers, its policies.
D. Plant visitation; includes,
- Facilities of machinery, layout, shipping room, receiving room.
- Personnel qualification, degree and type of supervision by supervisors.
- Housekeeping plant maintenance and general cleanliness.
- Procedures manner of process an order, establish efficiency.
- Production specialization select areas of production in which suppliers
tend to specialize.
- Availability of reserve facilities in the plant.
The buying company must consider factors in the selecting sources of supply. Some of
these factors are:
* Early Supplier Involves (ESI); purchasing studies indicated that when suppliers
are involved early in the buyers design process, they can apply their expertise on
material specification, tolerances, standardization, order sizes, process changing in
supplier’s performance, packaging, inventory, transportation, assembly changes in
buy’s plants.
Early supplier involvement is an accepted way of life at many progressive
companies.
- get supplier inputs before the design process
- capitalize on the latest technology
- Save time since design cycles are getting shorter.
- Let the supplier know that it is part of the team.
* Number of suppliers; The major argument for placing all of a firm’s business with
one supplier is that in times of shortage, this supplier will give priority to needs of a
special customer.
 Single source may be justified when;
@ Quality consideration dictates.
@ The buyer obtains more influence clout with the supplier.
@ The quality, control, & coordination required with just-in-time
manufacturing require a single source.
@ Total system inventory will be reduced.
@ Improved interdependency and risk sharing result.

Dual or multiple sourcing may be appropriate:

- To protect the buyer during times of shortages, strikes,& emergencies.
- To maintain competition and provide a back-up source.
- To meet local content requirements for international manufacturing
location.
- To meet customer’s volume requirements.
- When technology path is uncertain.

 Buying locally; local buying sometimes can be justified solely on an

economic basis. Local suppliers also maintain and finance a well
balanced inventory of materials for continuing local user. Working with
local sources of supply and encouraging them to be capable suppliers a
part of progressive in purchasing.
 Buying internationally; reason of purchase foreign goods:
- Obtain the level of quality for international buying quality.
- Intensive competition, international market manufacturer procedure a
quality product.
- International sourcing generates expenses beyond those normally
encounter domestic.
 Share of supplier’s business; to maintain in a buyer seller relationship
and long run activities.
 Ethical consideration; buyers must be aware of potential conflicts of
interest when selecting suppliers. Conflicts always avoided in all source
 selection decisions. Buyers keep themselves as free as possible from
unethical influences in their choice of suppliers.
 Reciprocity; when buyers give preference to suppliers that are also
customers, they are engaging in suppliers. Legal buy from one’s
customers at fair market prices, without economic threat, and without
restricting competition.
Sources of supplier information
Source of supplier information are also available in the economy work. Information is a
resource to utilize a proper.
1)Supplier purchasing information file: purchasing and supply management
department should keep supplier information files on past and present suppliers which
includes; the name of each supplier, list of materials available from each supplier’s, the
supplier delivery history, the suppliers quality record, the supplier’s overall desirability
and general information concerning the suppliers plant and management. In addition to a
department file, buyers usually maintain a personal supplier file for their own use.
Supplier information files are important because many purchasing operations are
repetitive, hence, it would be poor management indeed if buyers spent time repeatedly
recapturing information, which was once available to them but had been needlessly lost.
2) Supplier catalogs: because catalogs are a commonly used source of supplier
information, many purchasing departments maintain a materials they need, potential
sources of supply, occasion and to estimate price. Large firms employ full time librarians
for indexing &keeping their catalogs up to date. Without an indexing system, using
manufactures catalogs can be excessively time consuming.

3) Trade registers and directories: contain information on the addresses, number of

branches, and affiliation of all leading manufactures. Financial standings of firms are also
frequently given. The registers are indexed by commodity, manufactures, and trade name
or trade mark description of the items.
4) Trade journals: another excellent source of obtaining information about possible
suppliers. Advertisements are often a buyer’s first contact with potential supplier & their
products. Trade journals are available for more specific information about specific
industries.
5) Filing of mailing pieces: many mail advertisements are worth saving. These should be
given a file number, dated, and indexed by the name and number of each publication.
When buyers seek anew source, they can refer to the index and review the appropriate
brochures and booklets. This information, which includes company name, address,
officer, local representatives and principal products, can be kept in a set of loose leaf note
books or in a computer file. By referring to these standardized data, buyer can obtain
immediate, current information about potential new sources.
6) Sales personnel: sales personnel are excellent source for information about suppliers
and materials. Not only are they usually well informed about the capabilities and feature
of their own products, but they also familiar with similar and competitive products as
well by the very nature of their specialties knowledge, sales people can often suggest new
application for their products, which will eliminate the search for new supplier.
7) Trade exhibits: regional and national trade shows are still another way by which
buyers learn about possible source of supply. The use of exhibits as a means of sales
presentations increasing; some of these are;
*Exhibits provide an excellent opportunity for buyers to see various new products and
modifications of old products.
* They also after buyer’s opportunity to compare concurrently similar products of
different manufactures.
* They offer the buyer the opportunity to compare prices of supplier’s products.

8) Company personnel: personnel from other departments in a buyer’s firm can often
provide purchasing with helpful information about prospective suppliers. Through their
association in professional organizations, civic associations, and social groups, these
employees often learn about out standing suppliers.

Scientific, technical, and research personnel who use sophisticated materials or services
always have many valuable suggestions to make regarding possible source of supply.
These personnel are particularly will informed regarding new products, new methods,
and new manufacturers.
9) Other purchasing & supply management department: purchasing & supply
management departments in other firms can be helpful source of information regarding
suppliers. Information exchanged among individuals from these departments can be
mutually beneficial for all participating companies; therefore this source of information,
although not very common, should be actively developed.

Process of supplier selection

The process of selection usually starts with a requisition which informs purchasing that
need to be bought, existing source of supply whose performance is satisfactory.
There are four stages in the process of source / supplier selection.
A) Survey stage; the starting point is the need for a material or product. The exact
specifications may or may not e fixed, but the general nature and purpose of the product
are known.
- What is available on the market?
-Who makes such a product, or who can make its?
- Who can supply it most satisfactory and most economically?
At survey stage all possible source for a product are explored. Gather information from
different source; trade journals, trade directories, buyer files, sales person interviews.

B) Inquire stage; involves prequalification of potential source, which narrows the field
from possible source to acceptable source. Directed toward developing more specific
information on:
- Vendors’ production facilities and capacity
- Financial stability
-Product quality
- Technical competence
 - Manufacturing efficiency
- General business policies
- Position in the industry
- Progressiveness
- Interest in the buyer’s order
- Cooperative attitude.
The aim at this point those suppliers who are capable of producing the item in the
required quality &quantity, who can be relied on as a continuous source of supply under
all condition, who will keep their delivery promise and other service obligations and who
are competitive on price.
C) Negotiation and selection stage; leads to issuance of the initial order. The selection
decision can be arrived at in a number of ways. These include published price lists,
competitive bidding, and negotiation. Regardless of the method used for selecting the
supplier, some negotiation will take place requiring additional discussions with the
selected supplier. These discussions ensure that the supplier understands contract
conditions concerning delivery, packing and payment issues.
D) Experience stage; involves following up to ensure that the supplier met the terms and
condition of the contract conformance to specifications, on-time delivery, and making the
buyer aware of any changes at the supplier facility. Experience stage is rating and
evaluating supplier performance. Performance rating provides feedback to supplier on
their performance. This stage is contract administration and supplier evaluation.
Some Supplier Selection Criteria

 Competitive price
 Ability to meet specification & standard
 Product and service quality
 Product yields and durability
 Reliable delivery methods
 Quality control methods and practice
 Technical abilities and leadership
 Ability to provide niche or unique product offering and design concept
 Financial stability & credit strength
 Compatibility with existing products
 Adequate distribution/ warehousing facilities and resources
 Spare parts availability
 Warranty, insurance, and bonding provision
 Proven performance and experience ( quality references in & out of industry
preferred)
 Sales/ service support resource available during prime hours of a business.

Local Buying and National Buying

Local Buying
Local buying some times can be justified solely on an economic basis. A local supplier
often can furnish small quantities of material at lower price than could be obtained from
distant source. Local supplier also can maintain and finance a well balanced inventory of
materials for continuing local users. Working with local source of supply and
encouraging them to be capable suppliers is a part of purchasing progressive. Local
supplier often can be made more effective if buyer from several firms coordinate their
requirements. The geographical location of the suppliers is a matter of real significance to
purchasing. Just-in-time manufacturing require dependable source of defect free materials
which arrive with in very right time frame.

Suppliers to JIT customers are meeting their requirements in three ways;

 They are locating close to their customers.
 Suppliers are implementing responsive manufacturing system.
 They are taking aggressive action to control the transportation of their
material to their customer.

Advantage of local buying;

1. Closer cooperation between buyer and seller is possible because of
geographical proximity.
- JIT deliveries are facilitated.
- Frequently a local source can ready better service to the buyer because of its
personal knowledge of the buyer’s needs or this information can be personally
communicated to the suppliers.
2. Delivery dates are more certain since transportation is only a minor factor in delivery.
- Prompt deliveries are possible because of the short distance involved or the
possibility of truck transportation.
3. Lower prices can result from consolidated transportation and insurance charges.
- A local buyer’s orders in the same shipment.
- Saving of frequent cost as the result of shipment consolidation and short
distances.
4. Shorter lead time frequently can permit reduction or the elimination of inventory.
- In effect, the seller producer just in time or carries the buyer’s inventory.
1. Rush orders are likely to be filled faster.
2. Disputes (between the buyer and seller) usually are more easily resolved.
3. Implied social responsibilities to the community are fulfilled.
- This is the goodwill that local buying install in the community in
which both the buyer and seller are located.
- This support of local enterprise, the buyer is strength the economic base
of his/her community.

National Buying
Multiplan Company will do some of its purchasing through a nation wide contract. Such
a contract is normally negotiated by corporate purchasing staff and its purpose is to
supply the over all company; purchasing strength, through consolidation of requirements
to the task of minimizing cost. Once
The national agreement has been signed, the individual plant purchasing managers are
notified also its existence and how they may proceed to place orders (releases) against the
master agreement.
Advantages of national buying
 National source, as a result of the economics of scales, can in some
situation be more efficient than local suppliers and offer higher quality
or better service at lowest price.
 National companies often can provide superior technical assistance.
 Large national companies have greater production capacity and therefore
greater production flexibility to handle fluctuating demands.
  Shortages are less likely with national companies because of their
broader market.

Buyer should give careful consideration to both the advantages and disadvantage of
buying locally and buying nationally. In those situations, economical and technical
considerations justify in the selection of source.

Supplier Performance Evaluation

The use of supplier performance evaluation system is on the rise. Many progressive
buying organizations monitor their major supplier’s performance at both a contract and
an aggregate level. This information is used to control a supplier’s contract performance,
and it is also used during source selection for follow up procurements to ensure that only
satisfactory performers are considered. It is important to monitor and assess the supplier’s
over all performance the purpose is to enhance the relationship and there by control
performance. Many evaluation teams use a three to six month moving average for the
aggregate evaluation of a supplier performance. Usually the most important measure of a
supplier’s service is his/her record of performance in transactions. Increasing attention
has been directed to determining objective standard and procedures to evaluate and
compare existing suppliers. Objective of evaluation and rating vender performance has
gained considerable acceptance in purchasing departments of all types in recent years.
Consideration in good purchase are quality, price, service (delivery).
 Three evaluation techniques have been derived.
@ The categorical method
@ The weighted- point method
@ The cost-ratio method.

The Categorical method

This method is least precise of the evaluation techniques. For each major supplier, each
evaluator prepares a list of performance factors, which are import ants to him or her. It
relies heavily on the experience and ability of the individual buyers. Each supplier is
assigned an over all group evaluation, usually expressed in simple categorical terms.
 Under this method the buyer:
- Keep a record of all vendors and their products
- Assigns a grade indicating performance in each area.
The evaluation lists are given to all departments involved with the supplier’s good such
as quality control, production and receiving department. At periodic evaluation meetings,
the buyer discusses the rating with representative of these departments.
This method or system
 Is non quantitative that it relies heavily on the memory and
judgment of the individuals doing the rating.
 Provides a means of systematic record keeping of performance
criteria.
 Requires minimum of performance data and is inexpensive.
The weighted-point method
The weighted point is a more comprehensive mathematical vendor-rating formula used
by many purchasing departments. It is designed to provide a comparative evaluation of
vendor performance in any case in which an item is procured from two or more sources.
Under this method the performance factors to be evaluated (offer various aspects of
quality, service &price) are given weights. The weights selected in any specific situation
represent buyer or buying team judgments concerning to the relative importance of
respective factors. After performance factors have been selected and weighted, a specific
producer is developed to measure actual supplier performance on each factor. Supplier
performance on each factor must be expressed in quantitative teams. To determine
supplier’s overall rating, each factors weight is multiplied by the supplier’s corresponding
performance number, the results; for each factor are then totaled to get the supplier’s final
rating for the time period in question.

Quality= Number of acceptable X %

Total received

Price= Lowest net price x %

Net price

Service = Received as promised X %

Total received
EXAMPLE
Vendor A has delivered 58 lots during the past year, of which two were rejected. Price of
this vendor is $ 1.07 per unit. Of the 58 lots delivered, 55 were received as promised.
Vendor B, who furnished 34 lots during the same period, was the lowest price supplier at
$ 0.93 per unit. However four of the lots were defective. Also vendor B was late with five
deliveries. Weights quality (40%), price (35%)& service (25%). Show rank order
preference of each.

Solution

Quality= Number of acceptable lots X 40 %

Total received

Price= Lowest net price x 35%

Net price

Service = Lots Received as promised X 25%

Total received

Vendor A vendor B

Q = 56 X 40% Q = 30 X40%
58 34

= 38.6 = 35.3

P = 0.93 X 35% P = 0.93 X35%

1.07 0.93

= 30.4 =35

S = 55 X 25% S = 29 X 25%
 58 34
= 23.7 = 21.3

Vendor A = 38.6+ 30.4+ 23.7= 92.7%

Vendor B = 35.3 + 35+21.3=91.6%

 Vendor A is more satisfactory source.

Cost- ratio method

This method attempts to capture costs associated with actual supplier performance in the
areas of quality and delivery. It is the most comprehensive in term of a total cost
approach to purchasing. Cost uniquely associated with quality delivery and price is
determined for each supplier. This total is then totaled to produce an overall cost ratio.
Quality costs include rework, rejection processing, and the like. Delivery costs include
production downtime, expediting cost, higher price substitutes. The adjusted price for
each supplier in a particular commodity is then compared.

Quality cost ratio= total quality cost for item

Total value of purchases for item

Delivery cost ratio= total delivery cost for item

Total value of purchases for item
 EXAMPLE
Supplier A = $ 50 unit Supplier B = $ 51 unit
Quality cost ratio = 3% Quality cost ratio = 1%
Delivery cost ratio = 2% Delivery cost ratio =1%

Total cost ratio (supplier A) $ 50 + (3%) (50) + (2%) (50)=52.50

Total cost ratio (supplier B) $ 51 + (1%) (51) + (1%) (51)=52.02

Therefore supplier b is better because lowest pric