Supplier Performance Evaluation

A Partnership Approach
To Quality
An Analysis Of Supplier Evaluation

 By Becoming More Competent In

Supplier Evaluation, Firms Can Expect
A Number Of Financial And Non
Financial Benefits

 Each Particular Quality Sought In A

Supplier Provides A Different Type Of
Benefit
 Benefits – Technical Capabilities
 Selecting Suppliers That Are Technology
Leaders Rather Than Followers

 Translates Into Ability For Buying Firm To

Be A Technology Leader

 Both Sides Are More Likely To Continually

Improve Products & Equipment
Benefits – Quality & Reliability

 Suppliers Who Provide Products That

Meet Requirements On The First
Delivery And Every Delivery

 Save Time And Money On Inspections

 Eliminate Costs Associates With

Discrepant Materials
 Benefits - Delivery
 Exceptional Delivery Eliminates Waste
 Inventory Costs

 Storage Expenses

 Costs Of Transferring Materials

 Reduces Downed Production Costs

 Saves Unnecessary Transportation Costs

Benefits - Flexibility

 Suppliers Offering Flexibility Provide

 Seize Opportunities Or Avert Crises Due

To Last Minute Changes

 Survive Unavoidable Changes

Benefits – Fair Price

 Suppliers Offering Fair Price

 Provide Buyers Cost Reduction

 Provide Themselves A Fair Profit

Fair Price - Considerations

 Suppliers Earning Lower Profit

Margins Than Competitors

 Likely To Cut Corners

 Exit The Business

Benefits – Cost Control

 Change To More Cost-Effective

Designs

 Reduce Packaging Costs

 Economic Lot Quantities

 Benefits - Familiarity

 Selecting Responsive Suppliers Results In

Benefits When Issues Arise

 Supplier Knows Buyers Business Well

Enough To Resolve Issues Properly

 Buyer Knows Who To Call When Time

Is Of Extreme Importance
Benefits – Financial Stability
 Selecting Firms With Financial And
Business Stability Increases
Likelihood Than The Partnership Will
Survive Through Tough Times

 Firms That Are Financially Stable Are

Likely To Offer Long Term
Relationships, Quality Products And
Development Services
Costs
 A massive Commitment Is Required
By Both Buyers And Sellers To
Achieve A Truly Valuable Relationship

 Suppliers’ Engineering Team And

Buyers Product Engineers Must Be
Integrated Into The Decision making
Process
Costs
 Firms Can Become Captive To Their
Strategic Supply Partners Due To
Excessive Switching Costs

 Firms Run The Risk Of Partners

Leaking Information Gained From A
Long Term Buyer-Supplier
Relationship
The First Steps
 Determine Attributes To Be Considered

 Focus On What Is Most Important

 Some Attributes Are Easy To Measure

 Some Are Not

 Consider Total Costs

The Metrics
 Quality Level

 Service Level

 Correct Quantity

 On-Time Delivery

 Price/Cost of Product
More Metrics

 Willingness To Share Sensitive Info

 Presence Of Certification Or Other

Documentation

 Flexibility To Respond To Unexpected

Demand Changes
& More Metrics

 Communication Skills, Systems

 Quick Response Time In Case Of

Emergency, Problem Or Special
Request
& Even More Metrics

 Willingness To Change Their Products

And Services To Meet Your Changing
Needs

 Willingness To Participate In Your

Firm’s New Product Development And
Value Analysis
Supplier Evaluation

Common Approaches
Most Common Approaches

 Categorical System

 Weighted Point Average System

 Cost-Based System
Categorical System

 Chose Attributes Most Important To

The Particular Situation

 Assign Preferred (+), Neutral (0)Or

Unsatisfactory (-) For Each Selected
Attribute To Each Supplier
Categorical System
 Total Ratings For Each Supplier

 Example: Two Preferred (++), One

Neutral (0) & One Unsatisfactory (-)
Equals One Positive (+)

 Comparison Of Total Scores Reveals

Highest Rated Supplier
Categorical System

 Easiest Approach To Implement

 Suffers From Subjectivity

 Lacks Detailed Insight Into Supplier’s

True Performance Because All
Attributes are Weighted Equally
Categorical System

 Team Members Assign Ratings

 Involves Perceptions Rather Than

Qualitative Data
Weighted Point Method

 Select Relevant Attributes

 Assign Each Attribute A Weight Based

On Importance

 Team Reaches Consensus To

Minimize Subjectivity
Weighted Point Method

 Weight For Each Attribute Multiplied

By The Performance Score That Is
Assigned To It

 Total Weighted Scores To Determine

Final Supplier Rating
Weighted Point Method

 Often Used

 Highly Reliable

 Combines Qualitative and

Quantitative Data
Weighted Point Method

 Change Weights Or Performance

Categories Depending On Strategic
Priorities Of The Firm

 Sometimes Difficult In Practice

Cost Based System

 Quantify Additional Costs Associated

With Poor Supplier Performance

 Calculate Cost Of Doing Business By

The Supplier Performance Index (SPI)
Cost Based System

 Calculated For Each Item Or

Commodity Provided By A Supplier

 Base Value = 1
Cost Based System

 SPI = (Purchase Price +

Nonperformance Cost) / Purchase
Price

 The Closer SPI Is To 1, The Better

The Supplier
Cost Based System

Benefits:
 Ability To Source Based On Total Cost
Consideration

 Methodology To Increase Supplier

Accountability And Control

 Equitable & Consistent Evaluation Tool

Cost Based System
 Benefits:
 Definition Of Supplier Performance
Expectation

 Communication Of Firm’s Buying

Priorities To Suppliers

 The Ability To Perform Sourcing Risk

Assessment
Cost Based System
 Benefits:
 Enhances Internal Communication For
Reporting Sourcing Information

 Ability To Provide Positive Supplier

Reinforcement

 Basis For Supplier Award System

Cost Based System

 Least Subjective

 Quantifies Total Cost Of Doing

Business By Considering
Nonperformance Costs
Cost Based System
 Difficulties:
 Complexity

 Requires Well Developed Cost

Accounting System

 Difficult To Identify Costs Of Supplier

Nonperformance
Other Methods Of Evaluation

 Statistical Analysis

 Total Cost Of Ownership

Total Cost Of Ownership (TCO)

 Similar To Cost Ratio System

 More Comprehensive

 Considers Costs Associated With

Quality, Delivery And Service
TCO Method
 Considers Costs Of Non Value Added
Activities
 Service Costs

 Receiving Costs

 Inspection, Rework Reject Costs

 Failure Costs

 Administrative Costs
TCO Method

 Proactive

 Comprehensive

 Examines Issues Outside Of

Supplier’s Cost Structure
TCO Method

 Complex To Implement & Maintain

 Consumes A Great Deal Of Time

TCO Method

 Frequency Of Assessment:

 Monthly

 Quarterly

 Annually (Most Common)

TCO Method

 Frequent Supplier Meetings Facilitate

 Prevention Of Inefficient Practices
 Continuous Improvement

 Beneficial Only If Both Sides

 Cooperate
 Provide Necessary Inputs
Supplier Evaluation

Getting Started
When Is An Evaluation Appropriate?
 Type of Product

 Expected Price

 Quantity

 Complexity

 Potential Impact on End Products

Initial Supplier Meeting

 Product’s Application

 Availability

 Pricing

 Technical Issues
Gather Preliminary Data

 Completed Supplier Survey

 Copy of Quality Manual or a Written

Description of Quality System

 Company Financial Data

Preliminary Evaluation

 Organizational History and

Background
 Critical Material or Labor Issues

 Technical Support Issues

Preliminary Evaluation

 Computer Systems Capabilities

 Warehouse and Inventory

Capabilities
 Transportation and Delivery Issues
Supplier Facility Tour

 Employees’ Knowledge and

Understanding of the Supplier’s
Quality Policy

 Extent and Adequacy of Operating

Controls to Ensure Consistent Quality
Supplier Facility Tour

 Production Methods and Efficiencies

 Extent of Reserve Production Capacity

 Location and Extent of Production

Bottlenecks
Supplier Facility Tour

 Plant Equipment’s Age, Cleanliness

and Suitability for the Products
Considered

 The Facility’s Overall Housekeeping

 Working Conditions and Turnover

Supplier Facility Tour

 Use of Safety Equipment

 Harmonious Working Relationships

Between Operating Personnel and
Management
Supplier Facility Tour
 Manufacturing
 Assembly
 Final Inspection
 Inventory Control
 Packaging
Supplier Facility Tour

 In-Process Inspection

 Tooling

 Production Control

 Shop Floor Control

Supplier Facility Tour

 Surplus & Scrap Staging

 MRB Bonded Storage

 Research & Development

Supplier Facility Tour

 Order Entry

 Documentation Control

 Training & Development

 Information Services
Supplier Facility Tour

 Purchasing

 Shipping & Receiving

 Receiving Inspection

 Stores
Approval Process Steps

 Place Initial Order

 Pass First Article Inspection

 Contingent Approval

 3 Production Orders With No Issues

 Added to Approved Supplier List

After Approval

 All Deliveries Subject to Receiving

Inspection

 Discrepant Material Reports

(DMRs)

 Corrective Action Requests (CARs)

Annual Performance Evaluation

 Sourcing Review Team

 Purchasing

 Procurement Quality Assurance

 Engineering

 Manufacturing
Rating System

 Objective: Based on Data &

Documentation (Max=100 points)

 Conformance: 50 Points

 Delivery: 25 Points

 Service: 25 Points
Conformance: Start With 50 Points
 Points Are Deducted As Follows

 DMR / Use-As-Is: -2 Points

 DMR / Return to Supplier: -3 Points

 Second DMR for Same Non-

Conformity: -4 Points
Conformance: Point Deductions

 Corrective Action: CAR Causes No

Initial Deduction of Points. No
Written CAR Response: -3 Points

 Continuation of Same Non-Conformity

After CAR Response: -10 Points
Delivery: Start With 25 Points

 All Deliveries Support Build Plan:

No Point Deductions

 Each Incident Which Impacts Build

Plan: -5 Points
Service: 0 to 25 Points

 Responsive to Changes in Demand and

Schedule

 Communication / Keeps Agent Informed

 Technical Support / Samples

 Continuous Improvement
Subjective Consensus Points

 Up to 20% (5 Points) Can Be Added

or Subtracted Based on a Consensus
Agreement of the Evaluation Team
That Such an Adjustment Is
Appropriate
Case Study SolarWorld (SWIA)

 70-100 Points: Approved

 Less Than 70 Points

 Disapproved
 CAR Issued
 Re-Review After 3 Months
 If No Improvement: No New Orders
How Measurements Are Used
 Ratings Data Valuable Only If Both
Sides Use It To Improve Their
Partnership
 Track Performance Of Supplier
 Identify Supplier Improvement
Opportunities
 Develop Supplier
 Benchmark Suppliers Against Best
Practices
Supplier Performance Ratings

Using Scores In Bid Evaluations

Case Study: Graphite Rebid

 Graphite Rebid In 1999 & 2005

 Used Weighted Bid Evaluation As

Secondary Screening Technique
Bid Evaluation Strategy

 Bid Tabulation Prepared (Actual Bid

Prices)
 Actual Bids: Low and 2nd Low Bids
Highlighted for Each Item
 Any Supplier with <3 Marked Items
Eliminated

 Remaining Bidders Evaluated

Based on Weighted Bid Pricing
Bid Evaluation Strategy
 Weighted Bid Evaluation to Determine
Final Qualified Bidders

 Best Bid Determined

 Low Cost Per Run
 Best Bid Based on Material Grade
 Quality & Technical Considerations May
Override Commercial
Why Use Weighted Bids?
 Supplier Performance Issues Cost
Money
 Lost Production Causes Significant
Financial Impact
 Purchasing Replacement Parts
Increases Costs
 Domino Effect Causes Losses in
Camarillo Plant
 Impacts on Customer Deliveries Cost
Reputation, Lost Market Share
Weighted Bid Evaluation
 Bid Weighting Factor = Reciprocal of
Supplier Performance Score

 Supplier A: Score = 90 Points

_1_= Factor x Actual Bid = Weighted Bid
.90 1.11 x $100 = $111

 Supplier B: Score = 70 Points

_1_ = Factor x Actual Bid = Weighted Bid
.70 = 1.43 x $95 = $135
Are the Weighting Factors Fair?

 All Graphite Suppliers Have Same T&C,

Performance Expectations

 All Graphite Suppliers Treated Similarly

During PO Term

 All Graphite Suppliers Performance

Reviews Held on Same Day to Ensure
Equal Treatment/Scoring
What Did We Accomplish?
 Cost Reduction for Purchased Parts

 Consistent On-Time Deliveries

 Significantly Reduced Machine

Downtime

 Improved Hotzone Performance