Module 1 : Purchasing Process.

Ch.6 Supplier Analysis.

Edited by Dr. Seung Hyun Lee (Ph.D., CPM) IEMS Research Center, E-mail : [email protected]

The Evaluation of Supplier Quotation. [Task110]

Informations Submitted by Offers ￭ Specification/SOW. The most critical aspect is to ensure that the quotation

meets the specifications and requirements of the initial RFQ, RFP, or RFI package. ․ The purchaser needs to ensure that the supplier will meet the specifications,

requirements, or SOW defined in the solicitation. ․ To fairly evaluate all quotes received, suppliers must quote based on a

comparable set of specifications or a comparable statement of work. ￭ Quality Requirements. As with the base specification and SOW, supplier must

be aware of the quality requirements and all other terms and conditions for the goods or services as part of the initial solicitation package.

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The Evaluation of Supplier Quotation. [Task110]

Informations Submitted by Offers ￭ Terms and Conditions. Most solicitations include a set of contract terms and

conditions that the purchaser has developed to match the risks and issues related to the product or service being considered. ￭ Product/Service Substitutions. Purchasing organization will not consider an

alternative proposal unless the supplier has also quoted the specific item or service requested. ￭ Use of Technical Proposals (un-priced). Pre-sale technical service is offered

by some companies as a part of the quotation process, particularly when technical products or services are being purchased.

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The Evaluation of Supplier Quotation. [Task110]

Analyses for Supplier Quotations. ￭ Technical Analysis. ․ Technical analysis involves determining if the supplier's proposal will satisfy

the specifications or SOW. ․ Purchasing should actively involve the engineering, manufacturing, materials

control, operations, and other using departments in the technical analysis of the bid.

￭ Operational Analysis. ․ This consist of evaluating the feasibility of the product or service being

purchased. ․ Organization often conduct an operational analysis to verify the economics,

ease of use, and functioning feasibility of the product or service.

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The Evaluation of Supplier Quotation. [Task110]

Analyses for Supplier Quotations. ￭ Cost & Price Analysis. ․ A comprehensive cost analysis begins with an understanding of the industry

that the potential suppliers represent as well as an understanding of each supplier's supply chains. ․ This analysis includes

: The structure of the industry such as monopoly or open competition. : Cost drivers and price trends. : Technology trends and barriers to entry by new competitors.

￭ Several Types of Cost/Price Analysis. 1. Price analysis methods. Price analysis is the examination of a supplier's price proposal by comparison with reasonable price benchmarks, without examination and evaluation of the separate elements of the cost and profit making up the price. - 4 -

The Evaluation of Supplier Quotation. [Task110]

Analyses for Supplier Quotations. 2. Profit Analysis. Analysis of costs versus profits is important to assess the viability of the supplier and subsequently their quotation. 3. Total Cost vs. Unit Price. Total cost includes other costs of ownership of the product such as acquisition, transportation, duty, brokerage fees, cost of quality, cost of accounting practices, cost of late delivery, and cost of customer support. The use of total cost of evaluation quotations is an increasingly accepted purchasing practice in both the public and private sectors. ※ Activity-based Costing. ABC is an approach that recognizes that not all

activities and processes use the same amount of indirect resources.

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The Evaluation of Supplier Quotation. [Task110]

Analyses for Supplier Quotations. 4. Learning Curve. As time progresses or as volume increases, the supplier has the opportunity to capitalize on manufacturing efficiency to reduce overall manufacturing costs. 5. Life-Cycle Costing. LCC is a tool which incorporates not only the purchase price of a piece of equipment, but also all operating and related cost over the life of the item, including maintenance, down time, energy costs, and salvage value.

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The Evaluation of Supplier Quotation. [Task110]

Analyses for Supplier Quotations. ￭ Offeror Capability Analysis. ․ Past Performance. The past performance of a supplier on similar jobs and

implications for performance on future contracts should be carefully evaluated. ․ Capacity. What is the supplier's capacity to take on additional business ? ․ Skills. The skills the supplier has to manage the specific product or service

in question. ․ Integrity. What has been the supplier's integrity and conduct in past

business dealings ?

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The Evaluation of Supplier Quotation. [Task110]

Analyses for Supplier Quotations. ￭ Offeror Capability Analysis. ․ Time in Business/Market. How long has the organization been in this line

of business. and what track record and evidence does it have ? ․ Certification and licensing. Confirmation may be necessary in order to

verify that a supplier has the appropriately documented certifications and license. ISO 9000 or other certifications can indicate a certain level of quality, technical competence, or other qualification. ․ Financial Factors. A variety of financial factors may influence the final

selection of a supplier.

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The Evaluation of Supplier Quotation. [Task110]

Analyses for Supplier Quotations. ￭ Transportation Terms. ․ Transportation costs often comprise a significant portion of the cost to obtain

a product and consequently should be carefully evaluated. ․ Domestic Transportation Terms.

- Title transfer of the goods. - Filing of claims if necessary for loss or damage. - Administrative processing of the freight invoice, and - Responsibility for the transportation costs.

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The Evaluation of Supplier Quotation. [Task110]

Analyses for Supplier Quotations. ￭ Transportation Terms. Shipping Terms

Ownership Transfer

Files Claims for Processes Responsible for loss or damages Freight invoices freight costs

FOB Origin, Freight Collect

Purchaser owns goods in transit

Purchaser

Purchaser

Purchaser

FOB Origin, Freight Allowed

Purchaser owns goods in transit

Purchaser

Seller

Seller

FOB Origin, Freight Prepaid, Charged Back

Purchaser owns goods in transit

Purchaser

Seller

Purchaser

FOB Destination, Seller owns Freight Collect goods in transit

Seller

Purchaser

Purchaser

FOB Destination, Seller owns Freight Prepaid goods in transit

Seller

Seller

Seller

FOB Destination, Seller owns Freight Collect goods in transit and Allowed

Seller

Purchaser

Seller

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Supplier Evaluation. [Task111]

Issues of Supplier Evaluation. ￭ A supplier's ability to perform. ￭ A supplier's financial status. ￭ A supplier's cost system. ￭ A supplier's quality assurance, quality control, and related systems. ￭ A supplier's organization and management. ￭ A supplier's labor status.

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Supplier Evaluation. Analyses for Supplier Performance. ￭ Evaluation for Supplier Process and Performance. ․ Purchaser should visit potential suppliers early in the development phase of

the product or project to suggest improvements and perhaps trigger a need to review alternative sources if the audit results are not favorable.

￭ Some items to be considered. ․ Frequency and/or volume of orders. How important will the purchaser's

business be to the supplier ? ․ Length of time to process orders. Long order processing leadtimes

increase total leadtime which could result in a great deal of follow-up or expediting. ․ Delivery. Does the supplier have sufficient facilities or the capacity ?

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Supplier Evaluation. [Task111]

Analyses for Supplier Performance. ￭ Some items to be considered. ․ Quality. Is there evidence of a TQM philosophy ? What mechanism does

the supplier have in place to maintain quality ? What is its record with regard to quality ? and so on. ․ Product/Service Expedite. Is this product one in which the supplier has

extensive experience or expertise, or is it merely a "side-line" activity ? ․ Order Backlog. Is the organization's productivity capacity over-booked ? Is it

operating efficient ? Is there a great backlog of orders ? Have leadtimes been lengthening or shortening ? ․ Contractor's "Make-or-Buy" Program. To what extent does the supplier

acquire items already produced from its suppliers or will the items being purchased be solely produced by the supplier ? - 13 -

Supplier Evaluation. [Task111]

Analyses for Supplier Performance. ￭ Some items to be considered. ․ Cycle-Time/Leadtime. How long will this be ? Can this be improved by

giving advanced scheduling notice ? ․ Productivity. Productivity can be defined as the relationship between the

organization's output and input. Productivity =

Output Input

It is essential that productivity be continually improved. This is can be achieved in three ways : - Improved efficiency or same output with less input. - Improved effectiveness or greater output with the same input. - Improved or greater output with less input.

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Supplier Evaluation. [Task111]

Analyses for Supplier Performance. ￭ Some items to be considered. ․ Flexibility. Flexibility is the willingness and ability to make or adjust to

changes. Flexibility is both an operational and a mental dimension. ․ References. A list of other customers the supplier has done business with

can serve to verify the quality, delivery, and service the supplier will provide. ․ Electronic Capabilities. Does the supplier have a Web site ? Can they

handle EDI or e-commerce transactions ? Are they conducting e-commerce with other customer ?

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Supplier Evaluation. [Task111]

Analyses for Supplier Financial Status. ￭ Reviews of the Supplier's Financial Data. ․ A comprehensive review of the supplier's financial data provides the

purchasing manager with good information.

￭ Reviews of the Supplier's Financial Data. ․ Balanced Sheets. This show the financial position for an organization at a

given

point

in

time.

Organization

assets,

or

what

the

organization

owns(assets) and what it owes(liabilities) are shown. ․ Income Statement. This shows earnings for a given period and will

reconcile earnings from sales against cost of goods sold to produce net income.

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Supplier Evaluation. [Task111]

Analyses for Supplier Quality Assurance, Control & Related Systems. ￭ Total Quality Management. ․ The most obvious indicator of a supplier's attention to quality is the

existence of a Total Quality Management (TQM) program. ․ Four key indicators highlight the TQM philosophy.

- The level of top management commitment through policies and actions. - The emphasis on educating and training all employees. - The evidence of statistical methods to ensure good quality. - The seeking and using customer feedback to improve operations and processes.

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Supplier Evaluation. [Task111]

Analyses for Supplier Quality Assurance, Control & Related Systems. ￭ Quality Control Issues. ․ Acceptance/Rejection History. What do the records indicate about the

supplier's performance ? Acceptance or rejection history should be readily available and reviewed, along with traceable records. ․ Testing Capability. What abilities does the organization have to detect

correct and incorrect work by both the workers and equipment ? Test methods, procedures, and instruments should be the same as those used by the purchaser's incoming quality-control department to ensure compatibility. ․ Process Control. What type of quality detection and correction systems are

used ? Primary ones in effect include statistical process control (SPC) and Six Sigma/Cpk Process Bounds.

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Supplier Evaluation. [Task111]

Analyses for Supplier Quality Assurance, Control & Related Systems. ￭ Quality Control Issues. ․ Organization and Management of Quality Systems. What are the overall

organizational systems in place for quality ? Is the traditional "check after in item was made," or is it proactive system that checks the work as it is being produced ? ․ Documented System/Procedures. All inspection procedures should be in

writing, and a solid training program with periodic updates should be in place. ․ Process Certification (ISO). The International Organization for

Standardization (ISO) has guidelines on the process necessary to produce quality goods. If a supplier has attained ISO certification or applied Malcom Baldridge National Quality Award standard to its internal operations then the need for a complete and comprehensive quality audit.

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Measurement of Supplier Performance [Task112]

Supplier Performance Rating Methods. ￭ Benchmarking. ․ Benchmarking is the comparison of a product or a process to the best

available. To use it for supplier measurement, compare a supplier's performance to the best-known performance for the attribute being measured.

￭ Weighted Point. ․ The weighted-point method is a "quantitative" measurement that allow

purchasers to put different levels of importance on the various factors. ․ Procedures.

Step 1. Choose the factors to be measured. Step 2. Establish a weight for each factor. Step 3. Determine a supplier's actual data. Step 4. Multiply the actual performance data for each factor.

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Measurement of Supplier Performance [Task112]

Supplier Performance Rating Methods. ￭ Weighted Point. ․ Example. Weight

Factor

Actual Performance

Performance Evaluation

50%

Quality

5% no shows

25%

Service

3 failures

25 × [1.00 - (0.07 × 3)] = 19.75

25%

Price

$100.00

25 × $90.00 ÷ $100.00 = 22.50

50 × [1.00 - 0.05] = 47.50

Overall Evaluation = 89.75 [Condition] ․ Service = 100% - 7% for each failure. ․ The lowest price offered = $90

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Measurement of Supplier Performance [Task112]

Supplier Performance Rating Methods. ￭ Categorial. ․ The categorical method is a "qualitative" measurement of supplier

performance. ․ Procedures.

Step 1. Determine the factors to be evaluated. Step 2. Assign a grade that reflects supplier performance on each factor. Grade systems commonly used include "A," "B," "D," or "F." Step 3. Determine an overall grade average and share that information with suppliers.

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Measurement of Supplier Performance [Task112]

Supplier Performance Rating Methods. ￭ Cost-Ratio. ․ The cost-ratio method determine a total cost acquisition for each shipment

by adding all identifiable procurement and handling costs to the purchase value of the shipment. ․ The lower the ratio of added cost to shipment value, the higher the rating of

the supplier. Step 1. Determine the factors to be included. Step 2. Determine the purchasing organization's cost for non-performance in any of these areas. Step 3. For a given shipment, calculate the costs actually incurred. Step 4. Total the ratios for all factors to determine a total for that shipment. Step 5. Calculate an adjusted price as follows. Step 6. Use the adjusted price to evaluate suppliers for future business.

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Measurement of Supplier Performance [Task112]

Supplier Performance Rating Methods. ￭ Cost-Ratio. ․ Example. Cost Factor

Supplier A

Supplier B

․ Quality

+ 3%

- 1%

․ Invoicing

+ 4%

+ 2%

․ Service

- 2%

+ 1%

+ 5%

+ 2%

Overall Cost Ratio ․

Original Bid Price

$ 150. 00

$ 150. 00

․

Adjustment Factor

1.05

1.02

․

Adjustment Bid Price

$ 157. 50

$ 155. 04

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Measurement of Supplier Performance [Task112]

Supplier Performance Rating Methods. ￭ Total Acquisition Cost. ․ Total acquisition cost is the sum of price plus all other identified costs of

acquisition such as delivery performance ; overhead costs of handling the transaction and delivery ; and cost of working capital, and the cost of non-conformance.

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Measurement of Supplier Performance [Task112]

Issues in the Dissemination of Ratings. ￭ When ratings are shared with suppliers. ․ When rating are shared with suppliers, the purchasing organization must pay

attention to the following : ․ Confidentiality. Rating information should be shared with the supplier whose

performance was measured and not with anyone else outside the purchaser's or supplier's organization. ․ Some considerations.

- Suppliers may react negatively if they are recipients of evaluations based on inaccurate data. - Unclear specification or fluctuating schedules can cause a supplier to look bad despite its very best efforts. - It is desirable that reports on performance usually results in enhancing the purchasing organization's statue as a customer. - 26 -

■ Performance Check. 1. Dual sources A and B have the same price for a certain item. Supplier A delivers within plus or minus 6 days, while Supplier B delivers within plus or minus 2 days. Supplier B announces a 3% price increase, while Supplier A maintains its price. Given this situation, which of the following describes the BEST course of action for purchasing take ? A. Continue with present dual sourcing.

B. Buy 100% from Supplier A.

C. Evaluate carrying costs.

D. Consider qualifying a third source.

2. Supplier XYZ's proposal is suspected of failing to reflect recent developments that should allow for lower prices. The buyer's approach should be to A. Request a new quotation from Supplier XYS only. B. Request new quotation from all bidders. C. Look for another supplier who has not yet provided a bid. D. Perform a value analysis study.

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■ Performance Check. 3. Which of the following is likely to be the LEAST important consideration a purchaser should make when evaluating bids for an off-the-shelf product ? A. Price. B. Freight cost. C. Reliability of the supplier. D. Learning curve.

4. The primary goal of cost analysis in purchasing is to A. Determine a basis for negotiating a lower price. B. Assist marketing in setting selling prices. C. Ensure that the organization is paying a fair price. D. Protect the organization against excessive supplier profits.

5. Which of the following statement is TRUE about the learning-curve concept ? A. Personal experience in producing a given product can ignored. B. When output is doubled, only the cost of the last unit is reduced. C. It can be applied only to individual workers. D. When output is doubled, the percentage reduction of labor hours per unit of output will be constant. - 28 -

■ Performance Check. 6. On shipments involving overland transportation, FOB Point of Shipment means that the buyer is responsible for all of the following EXCEPT A. Transportation costs.

B. Loading costs.

C. Insurrance in transit.

D. Loss and damage in transit.

7. Under which of the following terms does the seller pay the freight charges and add them to the invoice ? A. FOB Origin, Freight Prepaid. B. FOB Destination, Freight Collect and Allowed. C. FOB Destination, Freight Prepaid. D. FOB Origin, Freight Prepaid and Charged Back.

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■ Performance Check. 8. Which of the following refers to a method of allocating overhead cost based on the actual amount of resources consumed ? A. Activity-based costing.

B. Value engineering.

C. Value analysis.

D. Cost/price analysis.

9 - 11 refer to the following objectives underlying a buyer's visit to a supplier's plant : A. Determination of the age and applicability of the supplier's equipment. B. Determination of the supplier's ability to meet the buyer's specification. C. Determination of the possibility of delayed deliveries. D. Determination of the supplier's pride in its operations. From the objectives above, choose the one that is being pursued in each of the following buyer inspections. A choose may be used once, more than once, or not at all. 9. An inspection of the external and internal conditions of the plant, with emphasis placed on determining whether the supplier keeps tools and equipment in a clean condition. - 30 -

■ Performance Check. 10. An inspection of the machines and their capacity to meet specific tolerances.

11. An inspection of production control and the relationship between production workers and management.

12. At which of the following times would supplier evaluations and plant visits generally be LEAST appropriate ? A. Immediately after major top level management changes are made at the supplier's location. B. Before placing substantial volumes of business with a new major supplier of critical materials. C. When significant changes in quality levels of delivered materials occur. D. Before significant increases in different levels of delivery schedules are to be implemented.

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■ Performance Check. 13. In order to prequalify a supplier, a buyer needs to connect an in-depth analysis of which of the following supplier characteristics ? Ⅰ. Financial status. Ⅱ. Labor status. Ⅲ. Management. A. Ⅰ

B. Ⅲ

C. Ⅱ and Ⅲ

D. Ⅰ, Ⅱ and Ⅲ

14. Which of the following is LEAST important in the assessment of a supplier's ability to perform ? A. Employee turnover. B. Quality. C. Order backlog. D. Delivery capabilities.

15. A major reason for using a supplier performance evaluation system is to evaluate quality A. A final inspection. B. During incoming inspection. C. During assembly. D. Over a period of time. - 32 -

■ Performance Check. 16. A group of buyers develops a list of criteria for supplier performance, evaluate each supplier against these criteria, and combines the results to determine a group rating. These buyers are using which of the following to measure suppler performance ? A. Benchmarking.

B. Categorical Method.

C. Cost-Ratio Method.

D. Weighted-Point Plan.

17. When using the Categorical Method for rating supplier performance, the ratings in the categories are dependent upon A. Supplier delivery performance data.

B. UCC requirements.

C. Top management.

D. An overall group evaluation.

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■ Performance Check. 18. Supplier performance rating systems are usually used to do all of the following EXCEPT A. Evaluating buyer performance. B. Aid in supplier selection. C. Identify problems requiring corrective action. D. Justify dropping a poorly performing supplier.

19. Which of the following is the LEAST appropriate measure of supplier performance to include within a supplier rating system ? A. The prices charged by the supplier in excess of buyer projections. B. The number of trips the buyer must make to the supplier's plant to resolve problems. C. The number of parts rejected at incoming inspection. D. The frequency of late deliveries.

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■ Performance Check. 20. Which of the following statements about the Uniform Commercial Code is (are) TRUE ? Ⅰ. It is intended primarily to protect consumers. Ⅱ. It is based on the Interstate Commerce Act. Ⅲ. It does not govern service contracts.

A. Ⅰ

B. Ⅲ

C. Ⅰ and Ⅱ

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D. Ⅱ and Ⅲ

■ Performance Check.

Solutions. 1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

C

B

D

C

D

B

D

A

D

B

C

A

D

A

D

B

D

A

A

B

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