Supplier Measurement Decisions * Delivery performance: * Quality performance * Cost reduction * Corporate social responsibility * Reliability * Buyer /seller compatibility * Financial stabilitychallenges of supplier performance measurements Different systems ie paper and electonic procurement Lack of management commitment Difficult to get desired KPIs Differing organizational culture Globalisation Lack of enough funds It is time consumingImportance of supplier performance measurements Helps in avoiding supply chain risk Improve Supplier Performance Basis for establishing long term relations Basis for paymentDelivery performance: Quality performance Cost reduction Corporate social responsibility Reliability Buyer /seller compatibility Financial stability. challenges of supplier performance measurements Different systems ie paper and electonic procurement Lack of management commitment Difficult to get desired KPls Differing organizational culture Globalisation Lack of enough funds It is time consumingTypes of Supplier Measurement Techniques Categorical approach * Acategorical system is the easiest and mast basic measurement system to put in place, but it is also the most subjective as far as measuring supplier performance. * This systern requires the assignment of a rating evaluation for each selected performance category.The buyer assigns a preferred (+), unsatisfactory (-) and neutral (0) rating for each selected attribute to each of the suppliers whose performance is being measured. The ratings are then totaled for each supplier and a comparison is made of the total scores to reveal the highest rated supplier. E.g.a supplier with two preferred (++), one unsatisfactory (-) and one neutral (0) would equal to one positive (+)MIPOUUCUIOL Index numbers are a specialized type of average designed to measure the relative change in the level of a variable with respect to time, geographical locations, etc. They are used in economics to measure trends in a wide variety of areas i.e. annual income and profits, cost of living, industrial or agricultural production , exports, imports etc. The following are some of the important characteristics of index numbers; 1. Index numbers are a special type of average. 2. The index numbers are expressed in terms of percentages to show the extent of relative change. 3. They are used to measure the changes in a variable or a group of related variables with respect to time, space for example a variable can be price of wheat and group of variables can be price of sugar, price of milk and price of rice. 4. — The technique of Index number is used to compare the levels of a variable between two time periods or the levels of the variable at different places in the same period of time. oe ee eeeeceeImportance of index numbers Index numbers are indispensable tools of economics and business analysis. The following are the uses of index numbers; 1 2. as 4. 5. 6. 7. 8. Comparison purposes Forecasting Formulation of economic policies Decision making Planning Index numbers are economic barometers(indicators) Index numbers are used in studying trends and tendencies EteSteps or problems or factors considered during the construction of index numbers Definition of purpose The purpose of the index numbers should be clearly defined . Since different index numbers are prepared with specific purposes and no single index number is ‘all purpose’ index number, itis important that the purpose of index numbers is rigorously defined. All other steps depend on the purpose of index numbers. Difficulty in defining the purpose. Selection of a base year The base year is defined as the year with reference to which the price changes in the other years are compared and expressed as percentages. There are two important guidelines to consider in choosing the base year; "The base year should be a year of normal and stable economic conditions i.e. it should be free from abnormalities like wars, floods ,earthquakes, depressions among others . = The base year should not be too distant in the past i.e. the base year to be selected should be relatively close to year being studied(current year). The base year can be selected in two ways that is through fixed base method and through chain base method. Difficulty In selecting the base year. e eoceeee eeCont Selection of commodities or items Commodities to be selected depend upon the objective of the index number to be constructed. Since all commodities cannot be considered for construction of index numbers, only representative commodities should be selected depending on the purpose of the index numbers. Difficulty in selecting commodities or items. Obtaining price quotations This step involves collecting the prices for the commodities selected. Both the current year and the base period prices are collected. While collected prices, the following should be considered; © Selection of wholesale or retail prices depends on the type of the index number to be constructed. © Prices are collected from those places and shops where a particular commodity is traded in large numbers. * Inselecting the individuals and institutions who would supply price quotations from time to time ,it should be ensured that they are unbiased and reliable. © Published information by reliable agency regarding the price quotations can be used. © Prices collected from different places should be averaged. Difficulty in selecting or obtaining price quotationCont Choice of average arithmetic mean, geometric mean ,mode, median) The index numbers are a sp ed type of average and therefore there is need to choose a suitable average to be used in the construction of index numbers. The mode, median are almost never used in the construction of index numbers. The arithmetic mean is commonly used because of ity unlike geometric mean though theoretically itis the best for this purpose. Difficulty in selecting the average Choice of weights This steps involves selecting, appropriate weights to be assigned to various commodities for construction of index numbers. The weights are assigned to commodities according to their relative importance i.e. more weights are assigned to those commodities that are more important than those of less importance. Difficulty is selecting the weights Selection of appropriate formula or method The choice of the method depends upon the availability of data regarding the prices and quantities of the selected commodities . The methods of constructing index numbers are divided into two categories i.e. unweighted index numbers and weighted index numbers. Difficulty in selecting the method or formula . eoceeceeeeTypes of index numbers 1. Price index number This compares the price of the of the commodity in a given period to the price of the same commodity at a particular point of time but in the past. It is used to measure the relative change in the price of commodity over a period of time. Price index(p) = px 100 ,where P,is price in the current year and P, is price in the base year 2. Quantity index number ‘This compares the quantity of the given commodity in a given period time to its quantity at a particular point of time but in the past. It measures the relative change in the quantity of the commodity over a period of time. Quantity index(q) = S.x100,where 0 q,is quantity in the current year and q, is quantity in the base yearCont 3. Value index number This compares the change in the monetary value of commodities between two time periods i.e. the current and the past periods. value index = Pal x 100 PodoMethods of CONSCTFUCTING OF IIUEA INVITING! > The methods of constructing index numbers can broadly be divided into two classes namely; Unweighted index numbers/ unweighted indices 1. Simple aggregate of prices 2. Simple average of price relatives Weighted index numbers/weighted indices 1. Weighted aggregate of prices R 2. Weighted average of price relativesa. Laspeyre’s price index b. Paasches’ price index c. Fisher's ideal price index Laspeyre’s method (Laspeyre’s price index) In this method, base year quantities are taken as weights. The formula for constructing the index 1s; Pp o1= BE140x100 P1= price in the current year Po=Price in the base year o=quantity in the base period °Cont Unweighted index numbers. It is where the weights(quantities) are not attached (assigned) to various commodities used for construction of index numbers. They are divided into; 1. Simple aggregate of prices method Under this method, the total of prices for all commodities in the current year is divided by the total of prices for these commodities in the base year and the quotient is multiplied by 100. Symbolically; Poi = ad x100 Where, YP, =Total of current year prices for various commodities. SP, = Total of base year prices for various commodities.Cont Example 1 From the following data, construct an index number of prices, by simple aggregative method, for 1982 taking 1981 as base. Milk Litre 2.00 2.50 Butter | Kg 12.00 15.00 Cheese | Kg 10.00 12.00 Bread ‘One 2.00 2.50 Eggs Dozen 4.00 [5:002. Simple Average of Price Relative method * The formular to use under this: Pa XG, x 100 °Poi = neCont Example 3 From the data below, calculate the index number of prices for 1982 with 1972 as base using the laspeyre’s method. Quantity 6 5 oO/O|oaPo1=2P190y 199? Poi=20x190* Po1=1.25xX100 » Po1=125 XP04 160Cont’ Paasche’s method (Paasches’ price index) In this method, the current year quantities are taken as weights. The formula for constructing this index is ; P, dq esr X100Cont Commodity Po Q. Py a P.Q, PoQs A 2 8 4 6 12 24 B Sia 6 5 25 30 c 4 | [5s [10 {40 50 p a EE me [26 26 103 130 Poy=2P1915199 =P041 Por=18%x199 Po1=1.2621%100 Po1=126.21Cont Fisher’s ideal index This method is the geometric mean of laspeyre's and Paasche's indices . It is the square root of laspeyre's and Paasche's indices. The formula for constructing the index is; The Fisher’s method is formula is known as ideal because; « Its takes into account prices and quantities of both current year and base year « It use geometric mean which , theoretically, is the best average for constructing index numbers. ° Ete.Cont Example 5 Construct index number of prices for the 1980 with 1979 as base using the Fisher’s Ideal Method. & Quantity Quantity A 20 8 40 B 50 10 60 c 40 15 50 10 D 20 20 20 15Cont 2. Weighted Average of price Relatives P = X 100) Poo on = Poo =PV =( Pi = or Po= a ,where p= ( oo x 100) and V= poqo This method is also known as family budget methodCont Example 6 calculate consumer price weighted average of price relatives method for the year 1986 with 1985 as base for the following data; A 100 3 12 B 25 6 3 ¢ 10 3 % D 20 10 25Cont Tee ced ya (x 100) orP Ua A B q 10 15 | 300.00 | 50 15000 D 20 10/25 [250.00 |200 50000 = P1 _ (ZG X 100) Podo _ 205000 Po = —Spao” Por 1200” Por = 170.83Cont Quantity index numbers/volume index number 1 Simple aggregate quantity index ; Myc Ex 100 x 100} 2. Simple average of quantity relatives q9;2 ——— a Bie 209] 3. Laspeyre’s quntity indexsq,,, _¥ 44 Pox 100 X40 4. Paasche’s quantity index Gore bars x06 Fisher's ideal quantity index ;q., = x100 ZdoPo LIoP1Cont Revision question Using the data in the table, calculate the quantity indices for 2019 with 2016 as base using the different methods above. 2016 2019 commodity Price Quantity Price Quantity Pepper 2500 5 760 6 ‘Sugar 1000 21 1200 37 Recipes 4200 sO 1000 90 Salt 1800 37 300 55 tomatoes 6000 60 1720 100