4/21/12

VENDOR EVALUATION
Click to edit Master subtitle style Ankit

Gupta 191008 FMG 19

4/21/12

Agenda

Importance of Vendor Selection Selection Process Evaluation Criterias Evaluation Methods

Methods

Vendor Vendor Vendor

AHP

Other

4/21/12

Vendor Definition

A third party that performs functions on your companys behalf or provides services to your company.
Core Processing w Information and Transaction Some examples include: Processing w Security Monitoring w System Development and Maintenance w Print and Reprographics w Strategic Alliances
w w

33

4/21/12

Importance of Vendor Selection

One of the most important processes performed in organizations today is the evaluation, selection and continuous measurement of Vendors. Selecting a vendor is now as important a process as developing new products.

4/21/12

Importance of Vendor Selection

Vendor selection process is a multi-criteria problem, which includes both qualitative and quantitative factors. Purchasing commands a significant position in most organizations since purchased parts, components, and supplies typically represent 40 to 60 percent of the sales of its end products. Thus relatively small cost reductions gained in the acquisition of materials can have a greater impact on profits. Vendors have a large and direct impact on the cost, quality,technology, and time-to-market of new products.

4/21/12

Importance of Vendor Selection

Organizations ability to produce a quality product at a reasonable cost and in a timely manner is heavily influenced by its Vendorscapabilities. Vendor selection is one of the key issues of SCM because the cost of raw materials and component parts constitutes the main cost of a product Management.

4/21/12

Vendor Selection Process

Steps in Vendor Selection Process
Evaluating Gathering

Needs and Defining Objectives

a Limited Pool of Vendors with Vendors

Interviewing Selecting

and Applying the Method

Evaluating Needs and Defining Objectives

4/21/12

What need you are looking to satisfy?

Increase product quality

Which evaluation categories you will use? What are your business, technical and usability requirements? What are the must requirements?

Max price, min performance, etc

How will you score the requirements?

OUTCOME: list of requirements, objective and criterias to evaluate the vendors and the way to score different criterias

Gathering a Limited Pool of Vendors

Evaluating

4/21/12

time

all potential vendors takes much

Basic

screening and elimination due to lack of must requirements

OUTCOME: vendors pool

4/21/12

Interviewing with Vendors

One Gap

by one interview with vendors

analysis between your requirements, objectives and vendor properties each criteria

Scoring

OUTCOME: criteria-score list for each vendor

4/21/12

Selecting and Applying the Method

Select AHP,

one among various methods

fuzzy logic method, etc

Calculate

overall vendor score using selected

method
Select

the vendor with best score

4/21/12

Vendor Evaluation Criterias

The

evaluation criterias are fundamental to choose the best Vendor. They are specific to each firm, because they vary according to the needs.

Six

categories of criteria selected

4/21/12

Vendor Evaluation Criterias

The six classes for the Vendorsevaluation measurement:
FINANCIAL HEALTH EXPERTISE OPERATIONAL PERFORMANCE METRICS BUSINESS PROCESSES & PRACTICES ENABLING BEHAVIORS OR CULTURAL FACTORS RISK FACTORS

4/21/12

Financial Health
In order to evaluate if a potential Vendor is in good financial position, a buyer can use indicators such as:
Sales Profitability Liquidity ROI Debt

ratio of finances

Transparency

4/21/12

Expertise
The purchasing department of the firm should choose its Vendors according to its capabilities:
Network Quality

capabilities

level?)

and production capabilities (dedicated level compared to sector average in R&D

Technical Spread

of technical creation

Investment

4/21/12

Operational Performance
There are a large number of criteria in this category, such as:

On-time delivery Lead time Responsiveness Inventory management and control: reorder management, forecasting capabilities Order acceptance, processing & fulfillement Customer service Preventive maintenance Hours of operators training in Total Quality Control (TQC) or JIT

4/21/12

Business Processes and Practices

How does Vendor provide a product or service at the best value, on time and exactly as required from the buyers?

Best practice and quality based information. This evaluation business can help get at the root causes of Vendor problems.

For example: is the quality standard of the products met by the production process (preventing defection) or by inspecting the quality of the products after production?

4/21/12

Behaviors and Cultural factors

The evaluation criteria of such a category focus on the long term sustainability of potential Vendors:
What What

is the improvement culture of the Vendor? Are his information capabilities always up-to-date? is his intention of coordination?

4/21/12

Risk Factors
A

Vendors risks are risks for the buyer. Indeed, if a Vendor takes too much risk, it can have a great impact on his customer. factors can be uncovered in the previous criteria exposed, but also in criteria such as: trade relations, currency exchange, insurance, legislations.

Risk

4/21/12

Supplier Evaluation Methods

The The The

Categorical Method Weighted Point Method Cost-Ratio Method Hierarchy Process(AHP)

Analytic

4/21/12

The Categorical Method

Basically, it is a procedure whereby the buyer relies on a historical record of supplier performance. Initially, a list of evaluation criteria is identified. The buyer then assigns a grade to each supplier, for each criterion, based on past experience. A simple marking system of plus, minus, and neutral grades may be used. Evaluation lists are often provided to other departments involved, such as quality control,
21 21

4/21/12

The Categorical Method

Vendors with composite high or low ratings are noted, and future supply decisions are influenced by them. Although this system is non-quantitative, it is a means of keeping systematic records of performance. It is also inexpensive and requires a minimum of performance data. However, the process relies heavily on the memory and judgment of the individuals providing the ratings, and the ratings may become routinely
22 22

4/21/12

The Weighted Point Method

Weighted-point method quantifies the evaluation criteria. A number of evaluation factors can be included, and their relative weights can be expressed in numerical terms so that a composite performance index can be determined and supplier comparisons made. For example, following evaluation criteria have been chosen: quality of shipments, accuracy of delivery, and price. Assuming that quality and delivery are the most significant, a point rating system such as the
23 23

4/21/12

Weighted Point Method

% Perf. (A) % Perf. (B) %Perf. (C) (A+B+C) Vendor Quality %40 Delivery %40 Price %20 Total Score A 90 36 70 28 60 12 76 B 80 32 60 24 80 16 72 C 70 28 80 32 90 18 78
24 24

4/21/12

Weighted Point Method

The advantage of the weighted-point plan is that a number of evaluation factors can be used with relative weights corresponding to the needs of the firm, thereby minimizing subjective evaluation. 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.

If

25 25

4/21/12

The Cost-Ratio Method

The

cost-ratio method relates all identifiable purchasing costs to the value of the shipments received from the respective suppliers. higher the ratio of costs to shipments, the lower the rating for that supplier. cost categories are used depends on the products involved. delivery, service, and price are the overall categories, and respective costs are accumulated for each.
26 26

The

What

Quality,

4/21/12

The Cost-Ratio Method

For

example, costs associated with quality normally include

the costs of unusual visits to a vendor's plants, and inspection costs of incoming shipments,

unusual all

costs associated with defective products, including rejected parts and the resulting manufacturing losses.
27 27

The Cost-Ratio Method Quality Cost Ratio

Vendor__________________________ Visit to vendor plant Sample approval Incoming inspection Manufacturing losses Reworking costs Value of rejected parts Other Total costs Total value of purchases Quality cost ratio: 9 1,000 100,000 0 425 75 0 200 300 January, 20__

28 28

4/21/12

4/21/12

Analytic Hierarchy Process

For Complex Decisions raher than Correct Decision Mathematics and Human Psychology Government, Business, Industry, Healthcare, and Education. Decomposition of a problem into a hierarchy Evaluation of various elements comparing them to one another in pairs A numerical weight or priority is derived for each element of the hierarchy Thomas L. Saaty

4/21/12

Example: Car Selection

Objective Selecting Criteria Style,

a car

Reliability, Fuel-economy

Alternatives Civic,

Saturn , Ford Escort, Mazda

Hierarchical tree
S a S t y l e
Civic Satu rn Esco

e l e N e e l i a
Civic Satu rn Esco

c t i n g w C a b Fi l i ut y e

r l E c o

Civic Satu rn Esco

4/21/12

Ranking of criteria
Weights? AHP pair-wise

relative importance

[1:Equal, 3:Moderate, 5:Strong, 7:Very strong, 9:Extreme]

Style Style Reliability Fuel Economy 1/1 2/1 1/3

Reliability 1/2 1/1 1/4 3/1 4/1 1/1

Fuel Economy

4/21/12

Preference
Style Reliability Fuel

.3196 .5584

Economy .1220

S a

e l e c t in g N e w C a 1 . 0 e li a b . 5 5 8 4

t y le . 3 1 9 6

i F l i tu y e l E c o n . 1 2 2 0

4/21/12

Ranking alternatives
Styl e Civi c Satu rn Esco rt M Maz da Reliabili tyCivi c Satu rn Esco rt Maz da Civi c1/1 4/1 1/4 1/5 6/1 1/1 Civi c1/1 Satu rn1/4 1/1 1/4 4/1 Satu rn2/1 Esco rt 5/1 Esco rt 4/1 4/1 Mazd ta 1/6 1/4 1/1 5/1 Maz da 1/1 3/1 1/1 4/1

.1160 .2470 .0600 .5770

.3790 .2900 .0740 .2570

1/2 1/1 1/5 2/1 1/3 1/1 1/2 1/1

4/21/12

Fuel Economy (quantitati ve informatio n)

Civi c Satu rn Esco rt Maz da

Miles/gal lon

3 4

Normaliz ed

2 2 7 4 28 11 3

. 301 . 0 239 . 0 212 . 0 2480 1.0

4/21/12

S a

e le N e 1 . 0

c t in g w C a

t y le . 3 1 9 6

e lia b . 5 5 8 4

i F l i tu y e l E c o n . 1 2 2 0

- Civic .1160 - Saturn . 2470 - Escort .0600 - Mazda . 5770

- Civic .3790 - Saturn . 2900 - Escort . 0740 - Mazda . 2570

- Civic 3010 - Saturn 2390 - Escort 2120 - Mazda 2480

. . . .

4/21/12

Ranking of alternatives
Style Reliability Fuel Economy Civic Saturn Escort Mazd a .1160 .3790 .3010 * .3196 .5584 .1220 = .2470 .2900 .2390 .0600 .0740 .2120 .5770 .2570 .2480 .3060 .2720 .0940 .3280

4/21/12

THANK YOU