Chapter 13

Supplier Evaluation and Supplier

Relationships

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 Key Questions Addressed in
Chapter 13

• How do we evaluate supplier

performance?

• How do we manage our supplier

relationships?
 EVALUATION METHODS
The supplier evaluation process can be informal or highly structured and formalized
depending on the nature of the acquisition.

Informal Evaluation and Rating

Informal evaluation includes assessments of the supplier by internal users and others
anywhere in the buying organization where supplier contact takes place. “How are things
going with supplier X?” is a typical question that can and should be asked by supply
personnel when in contact with others in their own organization.
In larger organizations, however, communication lines are stretched, supply personnel
and internal users may be in different locations, and large contracts may be negotiated by
a centralized supply group or a prime contractor located at a primary facility, while daily
supplier contact is handled at various locations. If suppliers are also large, requirements in
different locations of the country or the world may be met with varying degrees of
success by different plants or offices belonging to the same supplier. As the buyer–
supplier network grows in complexity, the need to have a more formal system for
evaluating current sources also increases.

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Semiformal: Executive Roundtable Discussions
One simple semiformal supplier evaluation tool is the regular, annual discussion
between top executives in the buying organization and those of the supplier. Normally,
these top-level discussions are confined to suppliers of strategic or critical requirements.
The presence of top executives of both sides lends weight to the occasion and permits
discussion of past performance; future expectations; economic, social, and technological
trends; long-term plans; and so on, in a high-level context.
Formal Supplier Evaluation and Rating
Accompanying the trends of supply base rationalization, strategic sourcing, and closer
relationships with key suppliers is the growing sophistication in supplier performance
rating. Often, continuous improvement is tracked along with more traditional factors
such as quality, quantity, delivery, and price. In other cases, suggestions for product or
service redesign, value chain improvements, willingness to work on supply chain teams,
assistance in investment recovery or disposal, or the development of anything that
would provide better value for the ultimate customer may be tracked and recorded. In
evaluating current sources, the question is, How well did the supplier do? To use this
information in future supplier selection decisions, the key question is, What is this
supplier’s performance likely to be in the future?
Most formal supplier rating approaches attempt to track actual performance over time.
It is normal to track a supplier’s quality performance closely and in sufficient detail to
pinpoint corrective action. In many organizations, only certified suppliers are considered
for potential future business, and extensive evaluations on quality and other dimensions
of supplier attributes and performance are carried out accordingly. 4
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 Categorical Evaluation and Rating
Example of a Categorical Supplier Evaluation and Rating
Excellent: a. Meets delivery dates without expediting.
b. Requested delivery dates are usually accepted.
Good: c. Usually meets shipping dates without substantial follow-up.
d. Often is able to accept requested delivery dates.
Fair: e. Shipments sometimes late, substantial amount of follow-up required.
Poor: f. Shipments usually late, delivery promises seldom met, constant expediting
required.
Quantifying the assessment is often preferred because it signifies an attempt to remove
subjectivity from the process. Some performance areas, such as delivery, are more easily
quantified than others such as service.

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 Example 1:
Suppliers A B C D
Quantity ordered & delivered (units) 1,000 1,200 1,500 1,000
Units rejected (defects) 30 40 20 30
Average price/unit (L.E) 40 36 40 35
Number of orders placed 8 7 8 10
Number of late delivery 1 1 1 2
Number of advices offered & resulted in cost reduction 2 3 3 2
Factors of evaluation & their relative weights:
Quality 40, price 30, delivery 20, and services 10 points.
Who will be the selected supplier?
The solution:
Evaluation of supplier A :
number of defects 30
- % of defects = x 100 1,000 x 100 = 3%
= level of quality 97%
Total quantity
35
- % Level of price = Lowest price x 100 = 40 x 100 = 87.5 %
Actual price
- % of late delivery= number of late deliveryx100 = 1 x 100 = 12.5% on-time delivery 87.5%
Total number of order 8
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 number of advices of supplier 2
- % of services = x 100 = x 100 = 20%
Total number of advices of all suppliers 10
Marks for supplier A :
- Quality = 40 X 97 % = 38.8
- Price = 30 X 87.5% = 26.25
- Delivery = 20 X 87.5% = 17.5
- Services = 10 X 20 % = 2
Evaluation of supplier B :
number of defects 40
- % of defects = x 100 1,200 x 100 = 3.33%
= level of quality 96.67%
Total quantity
Lowest price x 100 = 35 x 100 = 97.2%
- % Level of price = 36
Actual price
number of late delivery 1
- % of late delivery= Total number of order x100 = 7 x 100 = 14.3% on-time delivery 85.7%
number of advices of supplier 3
- % of services = Total number of advices of all suppliers x 100 = 10 x 100 = 30%

Marks for supplier B:

- Quality = 40 X 96.67% = 38.67
- Price = 30 X 97.2 % = 29.16
- Delivery = 20 X 85.7% = 17.14
- Services = 10 X 30 % = 3 Education. All rights reserved.
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Evaluation of supplier C :
number of defects 20
- % of defects = x 100 1,500 x 100 = 1.33%
= level of quality 98.67%
Total quantity
Lowest price x 100 = 35 x 100 = 87.5%
- % Level of price = 40
Actual price
number of late delivery 1
- % of late delivery= Total number of order x100 = 8 x 100 = 12.5% on-time delivery 87.5%
number of advices of supplier 3
- % of services = Total number of advices of all suppliers x 100 = 10 x 100 = 30%

Marks for supplier C:

- Quality = 40 X 98.67% = 39.47
- Price = 30 X 87.5% = 26.25
- Delivery = 20 X 87.5 % = 17.5
- Services = 10 X 30 % = 3
Evaluation of supplier D :
number of defects 30
- % of defects = =
x 100 1,000 x 100 = 3% level of quality 97 %
Total quantity
35
- % Level of price = Lowest price x 100 = 35 x 100 = 100%
Actual price
number of late delivery 2 x 100 = 20% on-time delivery 80%
- % of late delivery= x100 =
Total number of order 10
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 number of advices of supplier 2
- % of services = x 100 = x 100 = 20%
Total number of advices of all suppliers 10

Marks for supplier D:

- Quality = 40 X 97 % = 38.8
- Price = 30 X 100% = 30
- Delivery = 20 X 80 % = 16
- Services = 10 X 20 % = 2

Final Evaluation of All Suppliers:

Suppliers: A B C D
Quality 38.8 38.67 39.47 38.8
Price 26.25 29.16 26.25 30
Delivery 17.5 17.14 17.5 16
Services 2 3 3 2
Total 84.55 87.97 86.22 86.8
Rank Order 4 1 3 2

So, the selected Supplier is “ B “

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 Example 2:
Factors Suppliers X Y Z
1. Price 10,000 12,000 15,000
2. Quality 90% 95% 99%
3. Warranty 3 months 6 months 18 months
4. Main cost 600 800 800
5. Fin. Condition Good [Link] Excellent
6. Terms of Payment Cash 6 Month 1 Year

The above 6 factors are assigned the relative weights: 30, 20, 10, 15, 5 and 20
respectively.

Required : Evaluate these suppliers & comment on the results of evaluation.

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Factors Weight X Y Z
1. Price 30 10,000 x 30 = 30 10,000 x 30 = 24.9 10,000 x 30= 19.9
10,000 12,000 15,000
2. Quality 20 90% X 20 = 18 95% X 20 = 19 99% X 20 = 19.8
3. Warranty 10 3
18 x 10= 1.6 6
18 x 10= 3.3 18
18 x 10 = 10
4. Main 15
600 600 600
cost 600 x 15= 15 800 x 15= 11.25 800 x 15= 11.25
5. Fin. 5
Condition 3 x5 =3 4 x5 =4 5 x5 =5
5 5 5
6. Terms of 20 0 X 20 =0 X 20 = 10 X 20 = 20
Payment 6 12
12 12
Total 100 57.6 72.45 85.95
Rank order 3rd 2nd 1st

As results illustrate, the best supplier is “ Z “ , as he got

the highest marks of total factors weight

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 Weighted Point Evaluation Systems
Many organizations rate suppliers by assigning points and scales to each factor and
each rating. Where several sources supply the same goods or services, such schemes
permit cross-comparisons.
The typical process for developing a weighted point evaluation system is to:

• Identify suppliers
– Important suppliers and/or critical goods and
services
• Identify factors or criteria for evaluation

• Determine the importance of each factor

• Establish a system to rate each supplier on each

factor
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 Identify factors or criteria for evaluation
The relevant factors or decision criteria should be determined in the context of the
purchase and the sourcing strategy for that item. Most organizations track major
suppliers more closely than those sources deemed to have less impact on organizational
performance. Some organizations use annual dollar volume as a guide toward such
categorization.

Determine the importance of each factor

The selection of the factors, weights, and form of measurement will require considerable
thought to ensure congruence between the organization’s priorities for this product class
and the rating scheme’s ability to identify superior suppliers correctly. For different
product classes, different factors, weights, and measures should be used to reflect
varying impact on the organization.
In an electronic procurement system, all supplier performance data is entered as orders
are received, and the buyer (and the supplier in some cases) has online access to be able
to discuss the supplier’s performance at any time. Suppliers need to be informed about
how they stand on the rating scale. Improved performance on the part of the supplier
often results from the knowledge that its rating is lower than some competitor’s or falls
short of a set target.
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 SUPPLIER RANKING
If supplier performance is measured fairly and regularly, it is possible to rank suppliers on
a scale from unacceptable to exceptional.
Unacceptable Suppliers
Unacceptable suppliers fail to meet operational and strategic needs of the buying
organization. Discontinuing business with unacceptable suppliers and substituting better
ones are the normal actions required.
Exceptions:
₋ A sole-source situation such as a patented or OEM part where the supplier takes
undue advantage of its privileged position.
₋ a new source of supply that is still learning how to satisfy the purchasing organization’s
requirements and is assiduously working to achieve significant improvement.
Acceptable Suppliers
Acceptable suppliers meet current operational needs as required by contract. Acceptable
suppliers provide a performance that other purchasers could easily match and, hence,
acceptable suppliers provide no basis for competitive edge.
Preferred Suppliers
Preferred suppliers meet all operational and some of the strategic needs of the buying
organization. Preferred suppliers react positively to initiatives of the purchaser to improve
the current situation.
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 SUPPLIER RANKING
Exceptional Suppliers
Exceptional suppliers anticipate operational and strategic needs of the purchaser and
are capable of meeting and exceeding them. With exceptional suppliers, mutual
breakthroughs may be a source of significant competitive advantage. Exceptional
suppliers, like exceptional customers, need to be treasured. They can serve as an
example of what is possible: an opportunity to experiment with new and different
approaches to supply base management and as an early indicator of future supply
management and supplier relationship direction and goals.

SUPPLIER RELATIONSHIPS
The key strategic decisions in supply management center on which supplier to pursue
and what kinds of relationships to maintain with suppliers. Strategic supply management
is founded on the conviction that a significant competitive edge can be gained from the
suppliers an organization has developed and its supply systems and supplier relationships.

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 Customer Satisfaction and
Supplier Performance
Any organization’s desire to satisfy its customers and to provide continuing improvement
in its customer service is dependent on its suppliers to help it accomplish this goal.

Customer Satisfaction

Strategic Traditional Other Additional

Needs Needs Needs

Suppliers

Supplier performance has a greater impact on the productivity, quality, and competitiveness
of the organization than most managers realize. Recent trends to buy instead of make, to
outsource instead of continuing to make, to improve quality, to lower inventories, to integrate
supplier and purchaser systems, and to create cooperative relationships such as partnerships
have underlined the need for outstanding supplier performance.
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 Simplified Supply Chain Perspective:
The Three Core Links
In the supply chain management perspective, the link between the buying organization
and its direct suppliers (upstream) is one of the two primary external ones. The other link,
between the buying organization and its customers (downstream), continues the chain on
the exit, or distribution, side. The ability of any organization to connect these two external
links through its internal organization will, to a large extent, determine the effectiveness
of its supply chain.

Supply Internal Customer

Link Link Link

the weakest link determines the strength of the whole chain, it is important that the
strength of each link be equal and congruent. It is also a relatively simple perspective
that greater strength in any one link can create a customer-dominant, internally
dominant, or supplier-dominant chain. The prime objective in supplier relationships is,
therefore, to develop a supply link that will provide a short- and long-term strategic
competitive advantage.
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Supplier Relationship Context
The criticality or impact of the supplier choice may vary and the acquisition process
and final decision may change depending on the nature of the purchase, whether it is
a repeat, a modified repeat, or a new requirement, the size of the dollar amount
involved, and the market conditions. The trend to fewer suppliers, longer-term
contracts, e-procurement, and continuing improvement in quality, delivery, price, and
service requires much closer coordination and communication between various
people in both the buying and selling organizations. Therefore, improving buyer–seller
relationships is a key concern.
Outstanding supplier performance normally requires extensive communication and
cooperation between various representatives of the buying organization and the
selling organization over a long period of time.
When one organization supplies another with goods or services, the nature of the
relationship between the two organizations is a major influencer of the ultimate value
and customer satisfaction achievable. Supply management is, therefore, not simply
engaged in the exchange of money for goods and services, but also in the
management of the buyer– seller relationship.

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Supplier Goodwill
Goodwill has been cultivated through the development of trademarks and brands,
service satisfaction, utility satisfaction (goods and services are available at the right
quality), extensive advertising, regular calls by sales personnel, fairness, relationship
commitment and all the emotional, nontangible aspects of a professional relationship
that lead the customer to see the seller as a partner and not a supplier.
Goodwill between a purchasing organization and its suppliers needs to be just as
carefully cultivated and just as jealously guarded.

Progressive companies have started to measure supplier goodwill on a regular basis

using third-party research organizations to conduct surveys.

One of the interesting outcomes of supplier satisfaction surveys is the general finding
that suppliers believe that the best purchasers are those who know more about the
supplier’s business than the supplier’s own employees.

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 The Purchaser–Supplier Satisfaction Matrix
One of the major assessments a purchaser must make is whether the current relationship
with a supplier is a satisfactory one or not. This relationship is highly complex, and
different people inside the purchasing organization may have different perceptions of it.
For a new supplier of a small order where no deliveries have been made, the perception
of satisfaction may be based on an assessment of the agreement and the buyer’s
impression of the salesperson. For a long-term supplier of major needs, the assessment
will be based on past and current performance, professional relationships with a number
of personnel in both organizations, and even future expectations.
The Purchaser–Supplier Satisfaction matrix in Figure 13–3 provides a simple framework
for clarifying the current purchaser–supplier relationship in terms of satisfaction and
stability. The assumptions behind it are:
1. That satisfaction with a current supplier relationship can be assessed, whether it is
satisfactory or not.
2. That an unsatisfied party (seller or purchaser or both) will attempt to move to a more
satisfactory situation.
3. That attempts to move may affect the stability of the relationship.
4. That attempts to move may fall in the win-lose, as well as the lose-lose, lose-win, and
win-win categories.
5. That purchaser and seller may well have different perceptions of the same relationship.
6. That many tools and techniques and approaches exist that will assist either party in
moving positions and improving stability.
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Purchaser-Supplier Satisfaction
Model

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Obviously, any purchaser–supplier relationship could fall into any of the four quadrants in the matrix.
However, only quadrant A represents a desirable region in which a reasonably stable relationship can
be maintained. In each of the other quadrants attempts by purchaser or supplier or both to increase
satisfaction may worsen the satisfaction of the other, thereby lowering stability in the relationship.
Clearly, quadrant D, with both parties dissatisfied, represents a highly undesirable and unstable
relationship.
The diagonal in the diagram may be seen as a “fairness or stability” line. As long as positions move
along this line, both purchaser and supplier are at least equally well off. Its end points of (0, 0) and (10,
10) represent two extremes. The (0, 0) position is completely undesirable from either standpoint. The
(10, 10) position represents a utopian view rarely found in reality. It requires a degree of mutual trust
and sharing and respect that is difficult to achieve in our society of “buyer beware” and where
competition and the price mechanism are supposed to work freely. However, in some partnerships a
relationship close to the (10, 10) state has been developed. Buyers are willing to share risks and
information with the seller, and the seller is willing to open the books for buyer inspection. Risks and
rewards are allocated between buyer and seller. Problems are resolved in an amicable and mutually
acceptable manner, and both parties benefit from the relationship.
The middle position of (5, 5) should really be considered as a minimum acceptable goal for both
sides, and few agreements should be reached by the purchaser without achieving at least this place.
Adjustments in positions should, hopefully, travel along the diagonal and toward the (10, 10) corner.
Substantial departures from the diagonal raise the difficulty that the agreement may be seen as less
beneficial to one party than the other, with the possibility of jealousy and the attempt by the less-
satisfied party to bring the other down to a more common denominator. The region of greatest
stability will, therefore, lie close to the (5, 5) to (10, 10) portion of the diagonal line.

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 Purchaser-Supplier Satisfaction Model:
Congruent and Noncongruent Perceptions

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Buyer-Supplier Relationship:
Investment Versus Rewards
Obtained

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 View of Buyer-Supplier
Relationships
Traditional Partnership
• Lowest price Total cost of ownership

• Specification-driven End-customer driven

• Long-term
Short-term, reacts to market
Opportunity maximization
• Trouble avoidance
Cross-functional teams and top
• Purchasing’s responsibility
• Tactical management involvement
Strategic
• Little sharing of information
Both supplier and buyer share

short- and long-term plans

Shared risk and opportunity
Standardization
Joint ventures
Share data
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The Deployment Path to
Partnership
1. Supplier Assessment
(Potential)

2. Supplier Improvements

3. Supplier Rationalization

4. Supplier Alignment

Supplier Partnership

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 Partnering Strategies and
Outcomes
Strategies Outcomes
Decrease average delivery lot Improved quality of the

size supplier’s operations/processes

Decrease number of suppliers Improved quality of incoming
Decrease average number of goods
sources used per purchased item Decreased supplier’s and buyer’s
Increase average contract length total costs
Increase average frequency of Improved supplier’s ability to

delivery to the plant handle buyer-initiated changes

Increase supplier involvement in to the agreed-to delivery date
Improved buyer’s ability to
quality certification programs
handle supplier-initiated changes
to the agreed-to delivery date
Source: T. S. Graham, P. J. Daugherty and W. N. Dudley, “The Long Term Strategic Impact of Purchasing
Partnerships”, International Journal of Purchasing and Materials Management, Fall 1994..
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 Some Indicators of a Successful
Partnering Effort
• Formal communication processes
• Commitment to suppliers’ success
• Mutual profitability
• Stable relationships, not dependent on a few personalities
• Consistent and specific feedback on supplier performance
• Realistic expectations
• Employee accountability for ethical business conduct
• Meaningful information sharing
• Guidance to supplier in defining improvement efforts
• Non-adversarial negotiations and decisions based on total
cost of ownership
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