Why has the selection of suppliers become increasingly important?
- Outsourcing
- Supply base rationalisation
- Long term buyer-supplier relationships
- Supplier involvement in new product development
What is the supplier selection process?
1) Initial supplier qualification - determine minimum criteria, hygiene factors
2) Agree measurement criteria - relative/variable assessment, comparable against other candidates
3) Obtain relevant information - collating other information that might support process
4) Make selection - transparent selection, have to justify process, suppliers expect process - particularly in public sector
How does type of purchase affect selection process?
1) Straight re-buy or routine purchase
2) Modified re-buy
3) New buy
How does a straight re-buy or routine purchase impact supplier selection?
- Extensive information concerning specifications + suppliers
- Often will involve placing order within existing contracts + agreements
- Able to codify what I want, low risk
- You know the supply pool, the 3 suppliers for example
How does modified re-buy impact supplier selection?
- New product/service from known suppliers or existing purchase from new suppliers
- Moderate uncertainty regarding specifications and maybe suppliers
- Redefining the service, using similar suppliers but for different service, certainty on the supply side but might not be certainty on what you’re buying
How does new buy impact supplier selection?
- Entirely new product, no previous experience
- No known suppliers and high level of uncertainty regarding specifications
- New in terms of what we are ordering and who from
- Greater risk, takes more time, involves more data
What are some examples of the firm’s general sourcing preferences that need to be considered in supplier selection?
- Single v multiple suppliers
- Short term v long term contract: might specify length
- Design support capability - support in design not production
- Domestic v foreign suppliers
- Collaboration v arm’s length
Interdependent with the type of product but also dictated by company culture
What is the matrix regarding factors affecting selection process?
High capability of current suppliers, low importance of purchase = minor information search
Low capability of capability current suppliers, low importance of syndrome minor-moderate information search
High capability of current suppliers, high importance of purchase = minor-moderate information search
Low capability of current suppliers, high importance of purchase = major information search
What are the principles for tools to support selection processes?
Objective - use obscuring systems where different suppliers can be rated along scale
Reliable - different raters should arrive at the same conclusion
Flexible - within the structured process, evaluation should flexible to incorporate different factors and measures
Mathematically straightforward - weighting and points should be clear and transparent so that those involved in the evaluation can understand the mechanics
What is involved in stage 1 - initial qualification?
- Limited resources reduce possibility of in-depth analysis of all suppliers
- Purchasers often perform a first cut of potential suppliers
- Use measures such as: manufacturing capabilities: ISO, techniques - continuous improvement, statistical process control
- Financial viability
What is stage 2a - agree measurement criteria?
Consider factors that are most important in sourcing the product
- Others
- Cost
- Quality
- Delivery
- Flexibility
Aiming to get to a point where you can fairly and reasonably compare suppliers against criteria.
What is stage 2b - operationalise criteria?
Others: financial risk analysis, e-commerce capability, environmental analysis, reputation, ethical analysis etc
Flexibility: mix + volume
Delivery: location, lead time, on-time performance, delivery frequency. minimum lot size etc
Quality: quality system certification, quality circles, continuous improvement, ISO 9000 series
Cost: unit price, pricing terms, exchange rates, taxes and duties
What is stage 3 - obtain relevant information?
Evaluation from supplier information - request for information (RFI) request for quotes (RFQs)
Supplier visits - arrange plant tours, financial audits
Use of preferred suppliers
Third party information e.g Dun and Bradstreet
What is stage 4 - make selection?
- Effort reflects type of product
- Use of multi criteria decision making (MCDM0 models e.g AHP)
- Models used to weight selection criteria and aid selection decision making process
What is the analytical hierarchy process (AHP)?
- Commonly used in substantial purchasing, strategically important suppliers
- Decision making for prioritising alternatives when multiple criteria are considered
- Assigning weights to different criteria, the alternative with the highest weighted score is selected
- Framework to formalise evaluation and trade-offs
- Use pairwise comparisons to express the relative importance of each criteria vs the other
How are pairwise comparisons ranked?
- Equally preferred
- Moderately preferred
- Strongly preferred
- Very strongly preferred
- Extremely preferred
What are the steps to AHP?
1) Assign weights to criteria - develop a set of pairwise comparisons
2) Calculate criteria weights
3) Evaluate individual suppliers - compare each supplier against criteria
4) Calculate supplier weights
How are criteria weights calculated in AHP?
Use the weights from the pairwise comparisons matrix
- Sum the elements in each column
- Divide each value by its column total
- Compute row averages –> weights should add up for 1, e.g innovation accounts for 61% of selection importance
What are the limitations of AHP?
- AHP driven by the judgements of the decision maker
- Process can be subject to simple errors or manipulation
- AHP reliant upon relatively consistent decisions
- Pairwise comparison matrix allows for some inconsistencies in the decisions
- The process is not very parsimonious
