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5 (9th September, 2011) Lecture Contents about: Suppliers Evaluation and Selection Book Chapter #. 10
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Strategic Sourcing
Strategic Souring is about linking Sourcing
mission critical.
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Strategic Sourcing
Issues to address:
Should we use single source, dual source, or more than
two?
medium or large?
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Interviewing with the salesperson of the supplier Catalogs published by the vendors Trade Directories
Classifies suppliers according to the products they make Includes names of company personnel, financial status, and location of sales offices
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Information sources
Trade Journals or Business Magazines
These are oriented towards specific industries
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Types of Suppliers
In the search for suppliers, all available types (that
and
foreign
considered.
community relations and goodwill must be weighed when selecting various types of vendors.
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Local vs. National Suppliers There are also considerations that favor national
suppliers:
1. National concerns may offer lower prices because of their ability to produce in mass quantities for large numbers of customers. 2. Technical assistance may be better from large firms that provide extensive research and development support. 3. Continuity of supply may be more certain with larger-volume producers, which exercise considerable raw material purchasing power and maintain large inprocess and raw materials inventories.
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disadvantages.
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unprofitable, considering the expenses involved, and charge a premium price to compensate.
4/20/12 SZABIST. MBA Fall-2011. For instance, distributors are able to ship quickly 1212
inventory levels.
inventory, and the buyer can utilize it, making smaller, more frequent buys.
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Foreign Sources
The increasing industrialization of third-world
countries, coupled with lower labor costs, has made foreign purchasing increasingly attractive in recent years.
The quality problems formerly associated with
foreign goods have in many instances been transformed into quality standards that challenge domestic firms.
However, theSZABIST. MBA of foreign sources drawbacks Fall-2011. 4/20/12
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Foreign Sources
The first problem is long lead times. In addition to the actual travel time of the goods,
few avenues of recourse if the supplier makes a mistake. 4/20/12 SZABIST. MBA Fall-2011. 1515
Foreign Sources
Another problem is currency fluctuation. With such long lead times, the price agreed upon
may rise or fall between purchase and payment simply because the foreign currency exchange rate fluctuates against the buyer countrys currency.
and the supplier will often handle most of the import details.
4/20/12 SZABIST. MBA Fall-2011. 1616 Information about foreign sources can be obtained
JIT and blanket orders lead to single sourcing. In other instances the total amount needed may be
too small to justify splitting the order among suppliers because it would increase per-unit handling and processing costs.
4/20/12 SZABIST. MBA Fall-2011. 1717 Other purchases that encourage the use of a single
Single vs. Multiple Sourcing In most cases, however, the buyer who utilizes
multiple suppliers has greater assurance of uninterrupted supply in the event of fire, flood, or strikes, which might disrupt the operations of a single plant.
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questions about how many suppliers to use and on what basis to allocate the business.
Although these questions cannot be answered
universally, these decisions are influenced primarily by the amounts required, the relative size of the suppliers, and their past performances.
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specialized meaning, referring not only to the total amount required but also to the schedule according to which the goods must be received. 4/20/12 SZABIST. MBA Fall-2011. 2020
desired quantity during the specified period, but could not supply this quantity on specified dates, would not be a satisfactory supplier.
In purchasing, price is meaningless when
desired quality and quantity and is accompanied by sufficient useful services. 4/20/12 SZABIST. MBA Fall-2011. 2121
Location
The geographical location of the supplier is an
more and greater risks of interruption by accidents, strikes, and acts of nature.
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number of small orders from a given geographical region and combining them into one shipment, thereby economizing on freight by obtaining the full-car rate rather than the much higher less-than-carload (LCL) rate.
branch warehouses that act as distributing points for shipments originating at the home plant.
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Reserve Capacity
The reserve facilities of a supplier are another
business booms.
A supplier with an adequate reserve of
Inspection
The inspection methods and quality control
goods will ship items that must eventually be rejected and returned as unsatisfactory for their purpose.
production quality, the problem is aggravated, because some imperfections may not be discovered until the item has been incorporated 4/20/12the finished product. Fall-2011. SZABIST. MBA 2525 into
Labor Relations
Another source of interference with the continuity of
projected by determining the morale of the workforce, and reviewing the labor policies as expressed by general management.
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Warranties
Service also includes the kind and form of
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Vendor Sources
Vendor relations also influence a supplier's service
rating.
materials and components that will ensure continuity of production during periods of fluctuating business conditions.
the relationship between direct and distributor sources affect this evaluation.
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Plant visitations
Buyers perceive risk when deciding upon a choice
handling 4/20/12
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plants of suppliers are an important means of initial evaluation and periodic examination of existing vendors.
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production or engineering departments to accompany the buyer on such visits, especially if the products are highly technical.
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financial standings.
These reports also provide information on the 4/20/12 SZABIST. MBA Fall-2011.
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information regarding the vendor's financial stability, pricing policies, and general operating efficiency by applying the tools of ratio analysis to the vendor's balance sheet and income statements.
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can be turned into cash within a short period of time (a year or less), this ratio measures the financial ability of the firm to continue in the short run.
4/20/12 SZABIST. MBA Fall-2011. 3333 However, because in recent years companies have
An acceptable ratio here is one to one. Like the current ratio, it is a reflection of a
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accounts receivable.
promptly or whether too much of the vendor's assets are tied up in receivables.
payment.
For example, if the terms are 90 days, not much more than A firm with annual sales of $6 million and 90-day terms
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taxes to depreciation charges, which are allocations against profits that do not reflect actual cash outflow.
It measures the amount of dollars the firm is
receiving.
Cash flow assists profit evaluation because it is a
measure of how much cash a company is likely to require for meeting short-term expenses. 4/20/12 SZABIST. MBA Fall-2011. 3737
or undersold.
A high turnover ratio MBA Fall-2011. 4/20/12 SZABIST. is usually preferable to a low 3838
one.
Quality Management
Quality is the last, but the most important, factor on the
evaluation list.
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setting of objective standards and procedures for evaluating and comparing existing suppliers.
categorical method.
It relies heavily on the experience and ability of 4040 the 4/20/12 SZABIST. MBA Fall-2011.
individual buyer.
Initially, a list of evaluation criteria is identified. The buyer then assigns a grade to each supplier, for each
4/20/12 4141 Evaluation lists SZABIST. MBA Fall-2011.other departments are often provided to
performance data.
judgment of the individuals providing the ratings, and the ratings may become routinely performed without 4/20/12 SZABIST. MBA Fall-2011. 4242 much critical thought.
their relative weights can be expressed in numerical terms so that a composite performance index can be determined and supplier comparisons made.
SZABIST. MBA Fall-2011. 4343 a point rating system such as the following
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that a number of evaluation factors can be used with relative weights corresponding to the needs of the firm, thereby minimizing subjective evaluation.
If this individually assigned plan is used in
conjunction with the categorical method, suppliers can be evaluated on a quantifiable basis and many of the intangible aspects of service can still be considered.
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purchasing costs to the value of the shipments received from the respective suppliers.
products involved.
categories, and respective costs are accumulated SZABIST. MBA Fall-2011. 4646 for each.
normally include
plants,
shipments, and
all costs associated with defective products,
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distribution strengths
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