Supplier Selection in Outsourcing

BUS 5116 Operations Managements course

Tokunbo Osinubi (Instructor)

Abstract

This paper shall examine the supplier selection process within the operations of a company in

light of the decision to outsource a complex part of the company’s value chain. Specifically,

this paper shall present a proposal to the Chief Procurement Officer identifying the best

supplier to outsource, for a 3-year period where the company operates in a mature market

where the qualifying and winning factors are quality and time to customer respectively.

In the alternate, the proposal shall also examine which supplier would best fit the company’s

needs where the qualifying and winning factors are changed to price and quality.

SUPPLIER SELECTION IN OUTSOURCING

Influence of Qualifying and Winning Factors

Choosing a supplier for outsourcing production requires careful analysis of the factors that

qualify a product for customer consideration and that win the customer’s business. The

company seeks to select a supplier for a 3-year period to operate in a mature market where

the qualifying and winning factors are quality and time to customer respectively. Although a

variety of methods can be used to analyze the desirability of selecting one supplier over

another, for purposes of this proposal, we shall consider the two methods which best fit the

company’s considerations in choosing a supplier using the criteria identified in the graph

below:

Types of Supplier Evaluation Systems

Benton states that the “guiding factors in determining which [supplier performance based

evaluation system] is best are ease of implementation and overall reliability of the system.”

(Benton & McHenry, 2010). Although there are three main types of supplier evaluation
systems, the categorical method, the cost-ratio method and the linear averaging method, for

purposes of this proposal, we shall consider only the categorical method which are best

tailored for the type of evaluation required by our company.

The categorical method develops a list of performance factors for each supplier and assigns a

grade (satisfactory, neutral, unsatisfactory) to each factor which is then used to give feedback

to the suppliers. (Benton & McHenry, 2010). The chart to be used for this proposal has

assigned a percentage out of 100% for the factors of Price, Quality and Delivery Time which

can be used in a categorical evaluation.

Supplier Price Quality Delivery Others

A 90 90 95 Overseas supplier
(transport lead time 3 weeks)

B 105 100 100 Supplier facing financial issues

C 85 85 95 Proximity supplier
(transport lead time 3 hours)

Supplier Selection – Quality/Delivery Time

Using the categorical method, and focusing on quality and delivery time as the key factors

in evaluating which supplier to select, the best way to assign the values is as follows:

100-95 =Satisfactory (A+);

94-90 = Neutral (A);

89 and below = Unsatisfactory (B).

Using these criteria,

Supplier A scores A+ for Delivery and A for Quality.

Supplier B scores A+ for both Delivery and Quality.

Supplier C scores A+ for Delivery but B for Quality.

Based on the categorical scores, Supplier B is the best choice, with Supplier A coming in a

close second.

By examining the results of the categorical method, although the method scores for Supplier

B, I recommend going with Supplier A because is we should consider Supplier B’s financial

instability. The financial stability factor although not quantifiable is crucial in the choice of

supplier because the company is looking for a relatively long-term relationship to span a 3-

year period.

After considering the other factors, such as Supplier B’s financial instability, Supplier A

would be the best choice using the categorical method.

Supplier Selection – Quality/Price

Applying the same analysis using the Quality and Price as the relevant factors and delivery as

the irrelevant factor, Supplier A would still be the best choice because although Supplier C

has a lower price point, it’s low quality rating would offset any benefit gained by the lower

price point.

In addition, although Supplier A is slightly more expensive than Supplier C, the combination

of the much higher quality and the relatively speedy delivery make it a much better long-term

choice.
Conclusion

In considering which supplier to choose, it is important to consider all of the relevant factors

and to balance their respective potential positive and negative implications on market

performance and on the costs associated with the supply chain. For these reasons and those

stated above, Supplier A is the best selection with which to enter into a 3-year outsourcing

contract.

References:

Benton, W. C., & McHenry, L. F. (2010). Construction purchasing & supply chain
management. New York: McGraw-Hill.