Supplier Selection Process

Imran A Abbasi
MSc Supply Chain and Operations Management – University of Strathclyde
MBA Finance – Bahria University
Black Belt in Lean 6 Sigma – University of Strathclyde
Supply Chain Consultant
Anti Money Laundering Consultant
Oracle Financials R12 Functional Consultant

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 Supply Chain Flow
• Flow of products and services from
– Suppliers
– Raw materials manufacturers
– Intermediate goods manufacturers
– Finished goods manufacturers
– Distributors and wholesalers
– Retailers
– Customers
• Connected through logistics, information, and exchanges of funds.

End -
Supplier/ Warehouses/ Consumer/
Manufacturer Retailer
Raw Material Distribution Centers Customer
Flow Of Funds

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Reverse Logistics/3PL
Upstream and Downstream Operations

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 Drivers of Supply Chain
Competitive Strategy

Supply Chain
Strategy
Efficiency Responsiveness
Supply chain structure

Logistical Drivers

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

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 Sourcing
 Role in the supply chain
– Set of processes required to purchase goods and services in a supply chain
– Supplier selection, single vs. multiple suppliers, contract negotiation
 Role in the competitive strategy
– Sourcing is crucial. It affects efficiency and responsiveness in a supply chain
– In-house vs. outsource decisions- improving efficiency and responsiveness
• TI: More than half of the revenue spent for sourcing.
• Cisco sources: Low-end products (e.g. home routers) from China.
 Components of sourcing decisions
– In-house versus outsource decisions
– Supplier evaluation and selection
– Procurement process:
• Every department of a firm buy from suppliers independently, or all together.
– EDS to reduce the number of officers with purchasing authorization.

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 Pricing
• Role in the supply chain
– Pricing determines the amount to charge customers in a supply chain
– Pricing strategies can be used to match demand and supply
• Price elasticity: Do you know yours?
• Role in the competitive strategy
– Use pricing strategies to improve efficiency and responsiveness
– Low price and low product availability; vary prices by response times
• Amazon: Faster delivery is more expensive
• Components of pricing decisions
– Pricing and economies of scale
– Everyday low pricing versus high-low pricing
– Fixed price versus menu pricing, depending on the product and services
• Packaging, delivery location, time, customer pick up
• Bundling products; products and services

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Considerations for Supply Chain
Drivers
Driver Efficiency Responsiveness

1. Inventory Cost of holding Availability

2. Transportation Consolidation Speed

3. Facilities Consolidation / Proximity /

Dedicated Flexibility
4. Information Low cost/slow/no High cost/
duplication streamlined/reliable
5. Sourcing Low cost sources Responsive sources
6. Pricing Constant price Low-high price
 Major Obstacles to Achieving Fit: Size

1. SC is big and fragmented

– Variety of products/services
– Variety of distribution channels
• Brick & Mortar vs. Online
• Regular stores vs. Discount Outlets
– Spoiled customer
– Globalization
– Multiple owners
• Procurement, Production, Inventory, Marketing in a
company
• Manufacturer, Distributor, Retailer in a Supply Chain
– Multiple objectives
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1. Dealing with Multiple Owners / Local Optimization
• Information Coordination
– Information sharing / Shyness / Legal and ethical issues
• Contractual Coordination
– Mechanisms to align local objectives with global ones
• Coordination with (real) options
– Rare in the practice
• Without coordination, misleading reliance on metrics:
– Average safety inventory, Average incoming shipment size, Average
purchase price of raw materials.

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 Major obstacles to achieving fit: Change
• 2. Instability and Randomness:
– Instability refers to knowing that there will be a change in the
future and also knowing the amount of change.
– Randomness refers to only knowing that there will be a change
in the future but not knowing the amount of change.
– Increasing product variety
– Shrinking product life cycles
– Customer fragmentation: Push for customization, segmentation
– Fragmentation of Supply Chain ownership: Globalization

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Increasing implied uncertainty
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 Common problems
• Lack of relevant SCM metrics: How to measure
responsiveness?
• How to measure efficiency, costs, worker performance, etc?
• Poor inventory status information
• Theft: Major problem for furniture retailers.
• Transaction errors: Retailers with inaccurate inventory records
for 65% of SKUs
• Information delays, dated information, incompatible info. systems
• Misplaced inventory: 16% of items cannot be found at a major
retailer
• Spoilage: active ingredients in the products are losing their
properties
• Product quality and yield
• Lack of visibility in SCs
– Do you know the inventory your distribution centers hold?
– Do you know the inventory your fellow retailer holds?
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 Common problems
• Poor delivery status information
• Not knowing the order status
• Poor IT design
• Unreliable, duplicate data
• Security problems: too much or too little
• Ignoring uncertainties
– “The flight from uncertainty and ambiguity is so motivated that we often
create pseudocertainty.”
» Nitin Nohra, HBR February 2006 issue, p.40.
• Internal customer discrimination
• Giving lower priority to internal customers than external customers
• Poor integration
• Elusive inventory costs
• Accounting systems do not capture opportunity costs
• SC-insensitive product design
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 Summary

• Components
• Logistical: Inventory, Transportation,
Facilities
• Cross-Functional: Information, Sourcing,
Pricing
• Challenges
• Obstacles: Size and Change
• Common Problems

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 Make Versus Buy Decision
 In today’s changing and global environment outsourcing has
become a competitive weapon for increased number of businesses.
 It is not an easy task for the top management to decide either to
make, lease, or buy commodities, components, parts or services
from single or multiple suppliers.
 The decision to outsource and supplier selection has led to a
strategic partnership.
Outsource Strategy
(Buy)

Finished Product, Raw

Material, Semi Finished Strategic Decision
Goods, or Service

In-Source Strategy
(Make)
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 Carter’s 10 C’s For Supplier Selection
Particular Details
Competency Does the Supplier have the ability to deliver the products/services your
organisation requires.
Capacity Does the Supplier have sufficient capacity to provide the products you
require? Capacity can include raw material, semi-finished goods,
equipment, human resources and finished products.
Commitment Does your Supplier have the commitment to maintain suitable Quality
Performance* as agreed in the contract?

Control Is your Supplier in control of their policies, procedures and

relationships with their suppliers(2nd/3rd/4th Tier)?

Cash Does your Supplier have a solid financial standing and their suppliers?

Cost What is the cost of products from the supplier and how exchange rate
has been agreed? What payment terms have been put in place, are
they Cash in advance, FOB, CIF or C&F, L/C, etc…*see Other Export
Cost*.
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 Carter’s 10 C’s contd…
Particulars Details

Consistency Does the Supplier Guarantee’s a consistent supply of product, lead

time, quality, and collaboration?

Culture Does the supplier share the same cultural values as your
organization, or do they commit targets which are unachievable?

Clean Does your supplier have an appropriate sustainability policy, doesn’t

damage the environment, has Green policy in place and does not use
child labour,etc…. ?

Communication What tools will you utilize to communicate with your supplier and
vice versa. ( Fore.g daily Online Conferences, shared spread sheets or
ERP systems reporting live on daily tasks/activities achieved)

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 Supply
Chain Strategies
1. Supplier Relationship Management (SRM) : Establishing sustainable
improvement of the total supply chain by creating, managing and supporting
relationships with key vendors. The focus is on:
i. Chosing the right vendor/s.
ii. Establishing the right relations.
iii. Information exchange.
iv. Cooperation ( in appropriate areas and to appropriate degrees).
v. Systems integration.

2. Customer Relationship Management ( CRM): Developing, managing and

controlling customer relations. The focus is on:
i. Securing customer loyalty.
ii. Increased information exchange with customers.
iii. Consolidation of knowledge about customers.
iv. Integrating customer facing rpocesses an systems( sales force, order
processing, customer service and so on).
v. Creating increased value for the customer.
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 Supplier Relationship Strategies
3. Vendor Managed Inventory (VMI): An alternative to traditional buyer/supplier
relationships, which gives the vendor access to information( production plans,
inventory, ordering, sales forecast) and delegates responsibility to the vendor to
manage and replenish the Buyer’s Inventory, within policy guidelines. The buyer
benefits from freedom to focus on more strategic decision making, while the vendor
can optimise its internal capacity utilisation and material flow.
4. Collaborative Planning, Forecasting and Replenishment ( CPFR): A collection
of new business practices that leverage the internet and electronic data interchange
in order to radically Reduce Inventories and Costs while improving Customer
service.
The focus is on information exchange, systems integration and process focused
collaboration on production planning, product development, transport planning and
marketing activities.
5. Partnership Sourcing (PS): A commitment by customers/suppliers, regardless of
size, to a long term relationship based on clear and mutually agreed objectives to
strive for World Class Capability and Effectiveness.
6. Supplier Development (SD): Supporting or assisting suppliers to be able to meet the
buyer’s requirements better (eg by training, investment in systems integration,
information exchange, etc..)

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 Lysons Supply Chain Strategies

Lysons suggests that a mix of centralised and decentralized purchasing is common

in practice with a division of duties.
Duties of local and central purchasing functions

Decentralised/Local Purchasing Functions Centralised Purchasing Functions

Small orders and MRO items Determination of major Purchasing
policies
Items used only by local plant Preparation of standard specifications
Emergency purchases (to avoid disruption Negotiation of bulk contracts for a number
to production) of plants/divisions/SBU
Items sourced from Local suppliers Stationery and office equipment
Local purchasing undertaken for reasons of Purchasing research
social or “Community” responsibility Staff training an development
Purchase of Capital Assets

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 Mixed Structures contd…

Lysons and Farrington elaborate on this model, by showing that procurement may
be “centralised” on a spectrum from:
1. Centralised Procurement: Procurement strategy, policy, systems and standards
are controlled centrally and all procurement activities are carried out centrally.
(This may be suitable where the items required by plants or SBUs are largely
the same).
2. Co-ordinated Devolved Procurement: Procurement strategy, policy, system and
standards are controlled centrally. Procurement of sites common to more than
one plant/SBU are usually centralised, but other procurement activities are
carried out within the SBUs/Plants. ( This may be suitable where SBUs or
plants produce widely dissimilar products.)
3. Consultative Centralised Procurement: Procurement activities, both strategic
and operational are carried out within SBUs/Plants, which take guidance and
advise from a centralised procurement function.

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 Mixed Structures contd…
Other Hybrid models/strategies that can be used for procurement/Outsourcing
include:
1. The CLAN (Centre Led Action Network) approach.
a. Procurement staff located in multiple-sites or different locations.
b. They report familiarity to the local management with Secondary
responsibility to a Head Office Procurement Centre.
c. The procurement centre leads and coordinates the network by
formulating policy, setting standards and encouraging best practices.
d. Elements of Centralisation, Decentralisation and Matrix structure are
therefore used to achieve coordinated devolution.

2. The SCAN (Strategically Controlled Action Network): Similar to SCAN,

except that local procurement staff (business purchasing teams) report
primarily to the central procurement unit. The Central unit is responsible for
strategy, policy, training and performance management. It also includes
central category managers, who are responsible for goods/ services supplied
across the organisation.

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 Mixed Structures contd…
3. A Lead Buyer approach. Defined procurement responsibility are
delegated to members of user departments, as “lead buyers”, for a
particular category of purchases. Lead buyers are NOT procurement
professionals, and require support from purchasing staff. The key benefit
is that user departments are closely involved in outsourcing/purchasing
decisions, where there is important for agility and local advantages.
4. A Business Partnering approach. A member of the purchasing team works
within a user department where there is large or complex external spend.
He or she represents the purchasing function, liaises with the user function
and identifies situations where purchasing can add value.

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 c
External Environment

General environment

Political/legal Competitive environment

factors Buyers/customers
Technological
Suppliers factors
Internal
environment:
Strengths &
Weaknesses

Substitute goods or
Competitors
services

Economic factors
Socio-cultural factors

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Dobson & Starkey(1993) & Baddy(2002)
 PEST(PESTLE) Analysis
A popular tool for analysing the “Macro Environment” is described by the acronym
PEST or PESTLE or SLEPT., which sets out the main categories of environmental
factors which impact on organisations.
Also known as External Environment of an organisation.

Political/Legal Socio-Cultural Political

Economic Legal Economic
Socio-Cultural Economic Socio-Cultural
Technological Political Technological
Technological Legal
Ecological

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 Porter’s 5 Forces Model of Competitive Analysis
 For a strategist it is to determine which of the economic and competitive forces
exists in a particular industry, which of these forces are relevant and to what
extent.
 Porter’s frame work argues that the extent of competition in an industry, its
attractiveness or profitability depends on 5 forces in the organisation.

Threats from potential

entrants
Supplier’s
bargaining power
Competitive rivalry
within the industry
Buyer’s bargaining
power

Threats from substitutes

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 Analysing the internal environment
Position Audit: It is a systematic test of an organisation’s current state, in
order to identify its strength and weaknesses in areas such as:
i. Its resources and assets(human, financial, information, physical, brand
image, etc..).
ii. Its products, brands and markets.
iii. Its internal organisation and structure.
iv. Its distinctive competencies and capabilities.
v. Its performance and results ( using financial and non financial criteria).

Portfolio Analysis: Assessing the current and future potential of

organisation’s portfolio of products and services in different markets or
market segments. It includes strength of demand, profitability and
vulnerability of products life cycle( from development to growth,
maturity and decline). Tools to be used can be Product life cycle
model, Boston Consulting Group ( BCG) product/market matrix.

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 Analysing the internal environment
Resource Audit: Assessing the resources that the organisation owns, controls or
can access to support its competitive position and strategies.
i. Tangible resources include physical resources(building, plant, equipment,
machinery, vehicles, stock).
ii. Financial resources include cash, debtors, loan finance.
iii. Human resources are managers, staff, and contractors.
iv. Intangible resources include reputation in the market, goodwill and
intellectual resources ( know how, information and owned ideas in the form of
patents, trade marks and copyrighted materials).
v. It also includes the age and state of repair of machinery.
vi. Location and accessibility of stock
vii. Learning capacity and turnover of staff.
viii. Effective procedures for managing debtors.

Benchmarking: Measuring products, processes and practices against those of

competitors, industry leaders or accredited standards. They can also be used as a
checklist for corporate appraisal to identify strengths and weaknesses. 27
 Analysing the internal environment
Skills Audit: Kills available in the organisation tocope with the
current and future demands. Information may be available
through employee appraisal an learning needs analysis
processes.

Knowledge Audit: Assessing key knowledge or intellectual

property that the organisation owns, controls or can access,
and how effectively knowledge is created, shared, managed
and retained within the organisation.

Value Chain Analysis (VCA): Assessing organisation

competencies. Basic competencies necessary to compete in an
industry or market. Long term competitive advantage, like
difficult to imitate, value added or innovation.
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 SWOT Analysis
SW( Strengths and weaknesses) are internal aspects of the business
that enhance or limit its ability to compete, change an thrive such as:
i. Its physical and financial resources: availabiltyof raw materials,
asset base, profitability, tax structure, etc.
ii. Effectiveness of various functions and operations: Efficiency or
quality of production, R&D expertise, purchasing integration.
iii. Its product/service portfolio, positioning and market share.
iv. Human resources: Management expertise, staff skills, flexibility,
etc.
v. Efficiency and effectiveness of its systems (eg for quality control,
inventory management, communication ,etc..)
vi. Its structure: adaptability toenvironments, efficiency, coordination
with suppliers/vendors and buyers/customers.
vii. Distinctive competencies: Things it does better than competitors.
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 SWOT Analysis

O&T: They are the factors in the external environment that may emerge to
impact on the business. What potential do they offer to either enhance or
erode its competitive advantage or profitability.
SWOT is used to identify areas where strategic responses are required for the
organisation to maintain or enhance its position in relation to the
environment:
 Plan to build on strengths and or minimise weaknesses – by identifying the
opportunities or creating new ones and to cope better with the identified
threats.
 Plan to convert threats into opportunities – by developing strengths and
contingency plans to counter them (more effectively than competitors) and
by being prepared to learn from them.
 These strategic responses may be resource based(building on firms
resources and competencies) or position based( identifying and exploiting
product/market opportunities and aligning resources with environmental
conditions).
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 SWOT Analysis

Weaknesses
Strengths
Low new product
New Tech development
Quality Mgt system
Poor financial
Stable, high quality controls
staff, Market leading
brands Non renewable
resources

Threats
Opportunities
Environmental
E-Commerce protection law
Consumer values re Fashion trends
quality
Aging demographic
Tax breaks
Weather

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 The rational strategic management model
Define Organizational purpose (Mission) and
. Objectives

Position analysis: Resources, External environment analysis:

strength, weaknesses Opportunities, threats

Pestle Analysis
Value chain analysis, Identify strategic gaps Porter’s Five Forces
Resource /Skill audit, Ratio
analysis Stakeholder mapping
Identify & evaluate options
SWOT ANALYSIS

Ansaff matrix Select optimal solutions

Generic strategies,
Suitability, feasibility,
accpetability Plan and implement tactics
Budgeting, operational
planning, change
management Monitor, review & control
Control systems 32
 The rational strategic management model
 This is the basic model, although large organisations and
strategic consultancies develop their own process models and
maps. In the right side and left side of the table, some of the
techniques associated with each stage of the process are
shown. (Will discuss later).
 Ansoff: There were some advantages to not practicing
systematic planning, implementation and control, to evaluate
each opportunity that presents itself on the merits of its
individual profitability with the organization’s portfolio of
investments. The firm saves time, money and managerial talent
which would be tied up in strategic analysis. It delays
commitment until an opportunity presents itself, so it can act
on the basis of the best available information.

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 The rational strategic management model
However, Ansoff argued for the importance of systematic strategic
planning. Without strategy, there is no proactive, purposeful
search of opportunities. The firm may lack the specialist
knowledge needed for competent analysis of opportunities when
they arise. There will be no meaningful criteria for evaluating and
selecting opportunities, the firm will be unable to anticipate
internal and external changes which will effect its competitive
position.

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 Analysis of Strategic Position
Conduct a strategic analysis of the supply chain:
1. Techniques for analysing external environemnt:
PESTLE Analysis, Porter’s 5 forces analysis.
2. Techniques for analysing the internal environment:
SWOT Analysis, Resource audit, Skills audit,
Knowledge audit, Portfolio analysis.
3. Stakeholder mapping(Internal & External)

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