Supplier evaluation and development

From Supply Chain Management Encyclopedia

Russian: Оценка и развитие поставщика

Supplier evaluation and supplier development may be throught of as a two-step process toward the improvement of the sourcing and purchasing function. The importance of sourcing is driven by the fact that in many manufacturing businesses, the cost of purchased materials often accounts for up to 50% of the cost of goods sold.^[1] Supplier evaluation is essentially a system for scoring the competencies of suppliers so that buyers are able to select more qualified vendors. Supplier development is a tool to encourage suppliers to engage in continuous quality and process improvement so that key performance metrics of the firm's supply base (e.g., lead time) continually improve. A review of 76 research papers studying supplier evaluation revealed that the most important evaluation criteria were:

• Product quality
• Delivery: e.g., lead time; on-time delivery
• Cost (or price)^[2]

In addition to these critical supplier evaluation criteria, a number of other important factors have been identified. These include:

• Supplier flexibility: The extent to which a supplier can handle various changes including alterations in units ordered and in-transit adjustments to destinations without sacrificing cost and quality
• Lot size requirements and frequency: Higher minimum lot sizes requirements and low frequency may affect inventory carrying cost as both cycle and safety stock may increase
• Financial stability of the supplier: This is of great importance for critical parts/materials, especially when the planned or actual number of suppliers is low. The importance declines for common inputs or commodities when the available pool of suppliers is large
• Supplier information coordination skills: Capabilities in both the form of communication (e.g., EDI) and in the substance (e.g., the ability of a supplier to integrate the buyer's production plans into their schedules) is of importance. More integrated coordination drives down various functional costs and provide additional revenue opportunities. For example, supply chain coordination at various levels may:
  • Reduce costs: The bullwhip effect may be controlled, thereby driving down safety stock and inventory carrying cost
  • Increase revenue: Better coordination allows more effective matching of supply to demand (e.g., through CPFR), thereby reducing forced markdowns and the cost of lost sales
• Supplier engineering/design skills: Suppliers that are able to share design expertise influence total cost as expertise may be applied to designing products for manufacturability^[3]

Supplier Development

Supplier development may be defined as "any effort of a firm to increase performance and/or capabilities to meet the firm's short- and long-term supply needs."^[4] From a study of 527 purchasing managers, a rank order of the five most frequently used supplier development tools (out of 14 tools) were:

• Provision of feedback to suppliers on supplier evaluation results
• Site visits by supplier personnel to buyer facilities to better understand the use of the parts, materials, and/or components
• Site visits by buyer personnel to supplier facilities help improve supplier performance
• Written or verbal requests by the buyer to the supplier indicating improved performance requirements
• Promise of future benefits.^[4]

The 14 tools were grouped into three factors of supplier development:

• Direct firm involvement: e.g., site visits
• Incentives: e.g., promises of more business
• Competition: e.g., use of multiple vendors

The same research indicated that managers believed that defect rates, on-time delivery, lead time, and the perfect order rate had all improved due to supplier development programs. Also, managers perceived that the long-term orientation of the exchange relationship with the vendor had increased due to supplier development programs. Other research has also provided a link between supplier development programs and performance. Supplier incentives and supplier evaluation associate with more direct involvement (e.g., site visits), which in turn associates with improved supplier performance.^[5] The greater the commitment of the buyer to the seller and the greater the extent to which the buyer and seller share similar values, the better the cost reduction by the buyer. The presence of supplier development programs also predicts improvements in product quality and supplier delivery performance.^[6] Furthermore, higher asset specificity (see outsourcing) in terms of direct involvement with a specific supplier (meaning that such efforts have little value with another supplier), the more the buyer trusts the supplier, and the more the supplier applies strategic resources to the relationship with the buyer, the better the supplier performance: e.g., lead time, quality levels.^[7]

In practice, a large number of businesses operate supplier development programs. For example, Intel sourced locally when entering the Malaysian market in 1972 and thus embarked on a seven step supplier development program that started with indentifying capable and willing suppliers and ended with a supplier acquiring global supplier status.^[8] The international importance of supplier development is reflected by the publication by the United Nations of a Guide to Supplier Development to assist contractors in developing countries to acquire supply arrangements with large multinational enterprises.^[9]. At a national level, many countries enact local content rules as a condition of market access. For example, Russian Decree 166 (of 2005)^[10] provided various economic incentives to automobile manufacturers loacted in Russia to increase local content. These sorts of initiatives not only encourage established foreign suppliers to invest in the host country, but also lead the manufacturer to develop local suppliers to meet quality, delivery, and cost requirements.^[11] Furthermore, a range of supplier development programs are designed to further social justice, often in response to government legislation or from pressure by socially oriented non-government organizations. In the United States, many businesses develop suppliers that are minority- or women-owned. Ford recently announced that its sourcing from tier-one minority- and women-owned business increased from US $2.7 billion in 2009 to US $4.1 billion in 2010.^[12] In many instances, the issue is not one of supplier development to meet social justice standards, but rather of screening out substandard suppliers that do not meet social justice norms. For example, various companies monitor suppliers, with varying levels of exctitude, to ensure, among others, prohibitions against child labor and environmentally damaging practices.

References

1. ↑ http://www.handsongroup.com/lean-articles/lean-supplier-evaluation-checklist
2. ↑ Thanaraksakul, W. and B. Phruksaphanrat (2009), "Supplier Evaluation Framework Based on Balanced Scorecard with Integrated Corporate Social Responsibility Perspective," Proceedings of the MultiConference of Engineers and Computer Scientists, Volume 2, March 18-20, Hong Kong
3. ↑ Chopra, S and P. Mendl (2007), Supply Chain Management: Strategy, Planning and Operation, Upper Saddle River, New Jersey: Pearson.
4. ↑ ^{4.0 4.1} Krause, D.R. (1997), "Supplier Development: Current Practices and Outcomes," International Journal of Purchasing and Materials Management, 33(2), 12-19.
5. ↑ Krause, D.R., T.V. Scannell, and R.J. Calantone (2000), "A Structural Analysis of the Effectiveness of Buying Firms' Strategies to Improve Supplier Performance," Decision Science, 31 (1), 33-55.
6. ↑ Krause, D.R., R.B. Handfield, and B>b> Tyler (2007), "The Relationships between Supplier Development, Commitment, Social Capital Accumulation and Performance Improvement," Journal of Operations Management, 25 (2), 528-545.
7. ↑ Humphreys, P.K., W.L. Li, and L.Y. Chan (2004), "The Impact of Supplier Development on Buyer-Supplier Relationships," Omega, 32 (2), 131-143.
8. ↑ http://www.rvr.aim.edu/fckeditor2/userfiles/file/publications/Intel%20Case%20Book/13_C%20Intel%20SCM%20Malaysia%20CAse.pdf
9. ↑ http://www.unido.org/fileadmin/import/9607_GuidetoSupplierDevelopment.pdf
10. ↑ http://www.rotobo.or.jp/events/forum/presentation/1-4-01Babiner.pdf
11. ↑ http://www.just-auto.com/interview/fords-man-in-st-petersburg_id92523.aspx
12. ↑ http://targetmarketnews.com/storyid05161102.htm