MGT 3070 Study Guide - Final Guide: Evaluation Strategy, Purchasing Manager, Pareto Principle
Chapter 9: Supplier Management and Development
SUPPLIER PERFORMANCE MANAGEMENT
• Consists of methods and systems to collect and provide information to measure, rate, or
rank ongoing supplier performance. Acts as supplier “report card”
SUPPLIER MEASUREMENT DECISIONS
• Corporate and business unit goals, objectives, and strategies must drive supply
management’s corresponding goals, objectives, and strategies
• Supply management must develop appropriate supplier evaluation strategies to support
the business unit
• Supplier segmentation must consider …
• Supply base risk levels
• Category spend amounts
• Switching costs
• Quantitative variables
• Delivery performance
• Quality performance
• Cost reduction
• Qualitative variables
• Compare to standards and goals
• Measurement and reporting frequency
• Uses of measurement data
• Remedial or Developmental Actions
• Identify Highly Capable Suppliers
• Rationalization and Optimization of Supply Base
• Future Purchase Volume Base
QUALITATIVE MEASUREMENTS
Problem Resolution Ability: Supplier’s attentiveness to problem resolution
Technical Ability: Suppliers manufacturing ability compared with other industry suppliers
Ongoing progress report: Supplier ongoing reporting of problems or recognizing potential
problem
Corrective Action Response: Supplier’s solution/timely response to requests for corrective
actions
Supplier cost-reduction ideas: supplier’s willingness to help find ways to reduce purchase cost
Supplier new product support: supplier ability to help reduce new product development cycle
time
Buyer/supplier compatibility: subjective rating concerning how well a buying firm and supplier
Work together “Wavelength”
TYPES OF SUPPLIER MEASUREMENT TECHNIQUES
1. CATEGORICAL
• Assign subjective rating score for each performance category
• May be completed by buyer, other internal users, or combination
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• Minimal insight provided
• Often significant variance between subjective ratings
Advantages
Easy to implement
Requires minimal data
Different personnel contribute
Good for firms with limited resources
Low cost system
Disadvantages
Least reliable
Less frequent generation of evaluations
Most subjective
Usually manual
Users
Smaller firms
Firms in the process of developing an evaluation system
2. WEIGHTED-POINT
• Less subjective
• Weighs and quantifies relative scores across different performance categories
• Weights can be adjusted depending on needs
• Need to carefully select categories
• Need to choose proper weights
• Need to develop a set of decision rules
Advantages
Flexible system
Supplier ranking allowed
Moderate implementation costs
Qualitative and quantitative factors combined into single system
Disadvantages
Tends to focus on unit price
Requires some computer support
Users
Most firms can use this approach
3. COST-BASED
• Most thorough and least subjective
• Seeks to identify and quantify total cost of doing business with given supplier
• Challenge
• Identifying and recording appropriate costs that result when supplier fails to
perform as expected
• Logic is based on calculation of supplier performance index (SPI)
Advantages
Total cost approach
Specific areas of supplier non-performance identified
Objective supplier ranking
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Greatest potential for long range improvement
Disadvantages
Cost accounting system required
Most complex
Implementation costs are high
Computer resources required
SUPPLIER PERFORMANCE INDEX(SPI)
(Total Purchases + Nonperformance Costs)
Total Purchases
• SPI has base value of 1.0
• It is total cost index calculated for each item or commodity provided by supplier
Q ADJUSTMENT FACTOR
(Average cost of a lot of material for an individual supplier)
(Average cost of a lot of material for all suppliers)
RATIONALIZATION AND OPTIMIZATION
• Determining optimal number and quality of suppliers in supply base
• Rationalization
• Analysis of how many and which suppliers to maintain
• Optimization
• Analysis to ensure that only most capable suppliers are kept
• Should be a continuous process
RATIONALIZATION AND OPTIMIZATION: ADVANTAGES
• Buying from world-class suppliers
• Use of full-service suppliers
• Reduction of supply base risk
• Lower supply base administrative costs
• Lower total product cost
• Ability to pursue complex supply management strategies
RISK OF MAINTAINING FEWER SUPPLIERS
• Supplier dependency
• Absence of competition
• Supply disruption
• Overaggressive supply reduction
FORMAL APPROACHES TO RATIONALIZATION
• Twenty-eighty rule
• Based on Pareto principle
• Identifies 20% of suppliers receiving bulk of purchase spend or that cause the
most quality problems
• Assumes the best suppliers receive the majority of purchase dollars
• “Improve or else” approach
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Supplier performance management: consists of methods and systems to collect and provide information to measure, rate, or rank ongoing supplier performance. Identify highly capable suppliers: remedial or developmental actions, rationalization and optimization of supply base, future purchase volume base. Problem resolution ability: supplier"s attentiveness to problem resolution. Technical ability: suppliers manufacturing ability compared with other industry suppliers. Ongoing progress report: supplier ongoing reporting of problems or recognizing potential problem. Corrective action response: supplier"s solution/timely response to requests for corrective actions. Supplier cost-reduction ideas: supplier"s willingness to help find ways to reduce purchase cost. Supplier new product support: supplier ability to help reduce new product development cycle time. Buyer/supplier compatibility: subjective rating concerning how well a buying firm and supplier. Work together wavelength : categorical, assign subjective rating score for each performance category, may be completed by buyer, other internal users, or combination, minimal insight provided, often significant variance between subjective ratings. Qualitative and quantitative factors combined into single system.
