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VENDOR EVALUATION

AGENDA
Importance of Vendor Selection Vendor Selection Process Vendor Evaluation Criterias Vendor Evaluation Methods

AHP y Other Methods


y

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

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.

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.

VENDOR SELECTION PROCESS


Steps in Vendor Selection Process
Evaluating Needs and Defining Objectives y Gathering a Limited Pool of Vendors y Interviewing with Vendors y Selecting and Applying the Method
y

EVALUATING NEEDS AND DEFINING OBJECTIVES


What need you are looking to satisfy?


y

Increase product quality

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

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 all potential vendors takes much time Basic screening and elimination due to lack of must requirements

OUTCOME: vendors pool

INTERVIEWING WITH VENDORS


One by one interview with vendors Gap analysis between your requirements, objectives and vendor properties Scoring each criteria

OUTCOME: criteria-score list for each vendor

SELECTING AND APPLYING THE METHOD


Select one among various methods


y

AHP, fuzzy logic method, etc

Calculate overall vendor score using selected method Select the vendor with best score

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

VENDOR EVALUATION CRITERIAS


The six classes for the Vendorsevaluation measurement:
y y y y y y

FINANCIAL HEALTH EXPERTISE OPERATIONAL PERFORMANCE METRICS BUSINESS PROCESSES & PRACTICES ENABLING BEHAVIORS OR CULTURAL FACTORS RISK FACTORS

FINANCIAL HEALTH
In order to evaluate if a potential Vendor is in good financial position, a buyer can use indicators such as:
y y y y y y

Sales Profitability Liquidity ROI Debt ratio Transparency of finances

EXPERTISE
The purchasing department of the firm should choose its Vendors according to its capabilities:
y y y y y

Network capabilities Quality and production capabilities (dedicated level?) Technical level compared to sector average Spread of technical creation Investment in R&D

OPERATIONAL PERFORMANCE
There are a large number of criteria in this category, such as:
y y y y y y y y

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

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?

BEHAVIORS AND CULTURAL FACTORS


The evaluation criteria of such a category focus on the long term sustainability of potential Vendors:
What is the improvement culture of the Vendor? Are his information capabilities always up-to-date? y What is his intention of coordination?
y

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. Risk factors can be uncovered in the previous criteria exposed, but also in criteria such as: trade relations, currency exchange, insurance, legislations.

SUPPLIER EVALUATION METHODS


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

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, engineering, production, and receiving.

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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 performed without much critical thought.

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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 following might be used: y quality, 40 points; delivery, 40 points, and price, 20 points.

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WEIGHTED POINT METHOD

% Perf. Vendor Quality Score A 90 B 80 C 70

(A) %40 36 32 28

% Perf. (B) %Perf. (C) Delivery %40 Price %20 70 60 80 28 24 32 60 80 90 12 16 18

(A+B+C) Total 76 72 78

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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. 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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THE COST-RATIO METHOD


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


For example, costs associated with quality normally include


the costs of unusual visits to a vendor's plants, y unusual inspection costs of incoming shipments, and y all costs associated with defective products, including rejected parts and the resulting manufacturing losses.
y

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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: (total cost / purchases) January, 20__ 200 300 75 0 0 425 9 1,000 100,000 %1
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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

EXAMPLE: CAR SELECTION


Objective
y

Selecting a car Style, Reliability, Fuel-economy Civic, Saturn , Ford Escort, Mazda

Criteria
y

Alternatives
y

HIERARCHICAL TREE
Selecting a New Car

Style
- Civic - Saturn - Escort - Mazda

Reliability
- Civic - Saturn - Escort - Mazda

Fuel Economy
- Civic - Saturn - Escort - Mazda

RANKING OF CRITERIA
Weights? AHP

y

pair-wise relative importance [1:Equal, 3:Moderate, 5:Strong, 7:Very strong, 9:Extreme]


Style Style 1/1 2/1 1/3 Reliability 1/2 1/1 1/4 Fuel Economy 3/1 4/1 1/1

Reliability Fuel Economy

Preference Style .3196 Reliability .5584 Fuel Economy .1220

Selecti ew 1.0

St l .3196

li ilit .5584

l c .1220

RANKING ALTERNATIVES
Style Civic Saturn Escort M Mazda Civic 1/1 4/1 1/4 6/1 Saturn 1/4 1/1 1/4 4/1 Escort 4/1 4/1 1/1 5/1 Mazdta 1/6 1/4 1/5 1/1

.1160 .2470 .0600 .5770

Reliability Civic Civic Saturn Escort Mazda 1/1 1/2 2/1 1/5 1/1

Saturn 2/1 1/1 1/3 1/2

Escort 5/1 3/1 1/1 4/1

Mazda 1/1

.3790 .2900 .0740

1/1

.2570

Miles/gallon Normalized
Fuel Economy (quantitative information) Civic Saturn Escort Mazda 34 27 24 28 113 .3010 .2390 .2120 .2480 1.0

Selecti ew 1.0

St le .3196

eli ilit .5584

el c .1220

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

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

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

RANKING OF ALTERNATIVES
Style Reliability Fuel Economy .3196 * .5584 .1220 = .3060 .2720 .0940 .3280

Civic Saturn Escort Mazda

.1160 .2470 .0600 .5770

.3790 .3010 .2900 .2570 .2390 .2480 .0740 .2120

THANK YOU

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