3.3.

Strategic Supplier Evaluation and

Selection
• Strategic supplier selection involves four main
stages:
1 initial supplier qualification;
2 agree measurement criteria;
3 obtain relevant information;
4 make evaluation and selection.

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 Step 1: Initial supplier qualification
• Supplier qualification is the first step towards
supplier selection.
• The goal is to identify suppliers who meet the
requisite product and process standards and are
capable of supporting the buyer’s long-term
objectives.
• Because organisations are resource constrained,
qualification helps to reduce the pool of potential
suppliers to a more manageable number for
detailed evaluation and selection.
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 Cont’d...
• Buyer firms will usually wish to assess two categories:
1. Manufacturing capabilities: Manufacturing capabilities
are best conceived as stocks of strategic assets that are
accumulated through a pattern of investments over
time and cannot be easily imitated, acquired by trade,
or substituted (Dierickx and Cool, 1989).
• Thus, capabilities such as low cost, quality, flexibility
and delivery performance are stocks of strategic assets
that the supplier has accumulated over time.
2. Financial viability: Buyer firms also need to assess the
long-term financial health of the suppliers.

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 Step 2: Agree measurement criteria

• The strategic selection process continues with

identifying relevant and appropriate selection
criteria.
• We use the words relevant and appropriate
deliberately to emphasise the need for criteria
that are specific to the particular product
purchased and that do not create unnecessary
effort within a resource-constrained
organisation.
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 Criteria for supplier selection
• Cost: Unit price, Pricing terms, Exchange rates, taxes and
duties.
• Quality: Quality system certification ,Quality
circles ,Continuous improvement, ISO 9000 series.
• Delivery: On-time performance, Lead-time Delivery
frequency, Minimum lot size, Inbound delivery cost,
Location.
• Flexibility: Supplier flexibility
• Others : Financial risk analysis, Ethical analysis,
Environmental analysis, E-commerce capability,
Reputation ,Diversity of ownership, Innovation capability.

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 Step 3: Obtain relevant information
• The third stage in the process is obtaining the information
used to compare suppliers across criteria. It is important
that the information is comparable across suppliers so
that, for example, information on quality from supplier A
can be compared to information on quality from supplier
B.
• Information should also be timely and accurate. The
supplier selection procedure relies on having up-to-date
information that provides an accurate representation of
suppliers. Supply Strategists can obtain information from
a variety of sources, including information from suppliers,
supplier visits and supplier performance measures.

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 Step 4: Make evaluation & selection
• A range of models has been developed to assist
the Supply Strategist in making the final
selection between potential suppliers.
• Selection models range from the highly
quantitative (such as fuzzy set theory) to the
highly qualitative (such as categorical methods),
and from the very simple (such as eyeballing
RFQ data) to the much more complex (such as
artificial intelligence based models).
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 Cont’d...
• There are a number of models that can be used to select
the appropriate suppliers, of these let us see the following
one:
• Multicriteria decision models, as the name suggests, are
models that allow decision makers to evaluate various
alternatives across multiple decision criteria.
• Multicriteria decision models are especially helpful when
there is a mix of quantitative and qualitative decision
criteria, when there are numerous decision alternatives to
be considered, and when there is no clear “best” choice. As
such, they are well suited to supplier evaluation efforts.

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 Weighted-Point Evaluation System
• A common multi-criteria decision model is the
weighted-point evaluation system.
• In this model, the user is asked upfront to
assign weights to the performance measures
(WY), and rate the performance of each
supplier with regard to each dimension
(Performance XY). The total score for each
supplier is then calculated as follows:

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 Cont’d...
n

Score X is = Σ performance xy X Wy
1
Where X = Supplier X
Y = Performance Dimension Y
Performance XY = rated performance of Supplier X with regard to Performance
Dimension Y
WY assigned weight for Performance dimension Y

where Σ Wy =1
y= 1

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 example
• The Electra Company is looking to award a new contract for 500,000
integrated circuit boards (ICBs). In the past, the company has shared
all business equally across three suppliers, and has amassed a
significant amount of information on their performance history.
• The process begins by developing a weight for each of the criteria
used. The sum of the weights must equal one. In this case, the
sourcing team assigned to evaluating suppliers for the new contract
has decided that quality is the most important criteria, closely
followed by delivery and price. The resulting weights are:
• WPrice 0.3 = 30%
• WQuality 0.4 = 40%
• WDelivery Reliability 0.3 = 30%
• Total 1.0 = 100%
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 Cont’d..
Performance D S1 S2 S3
Price (Birr) 4 5 2
Quality (%,defection) 5 1 10
Delivery, Reliability (%) 95 80 60
Price (5-scale) 4 3 5
Quality (5-scale) 3 5 1
Delivery (5-scale) 4 2 1

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 Cont’d...
Q. Rank the suppliers, and which supplier should
be awarded as per the model.?
S1 = 4X0.3 + 3 X 0.4 + 4 X 0.3 = 3.6
S2 = 3 X 0.3 + 5X0.4 +2X0.3 = 3.5
S3 = 2 X 0.3 + 1X0.4 +1X0.3 = 2.2

Now which one?????

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 Cont’d...
• The model and the amount of effort put into the
final selection should reflect the impact on the
business and market complexities:
• Impact on the business:
• For low-value products, selection may involve
little more than a comparison of the information
contained within the responses to the RFQ or RFP.
• For high-value, strategic products, selection
should be more complex and will often involve the
use of multi-criteria decision-making models.

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 Cont’d...
• Market complexity:
• For products with few alternative sources of
supply, selection should be comprehensive
because the possibility of substitution is low.
• For products with many alternative sources of
supply, selection can be less comprehensive.

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 3.4. Negotiation
• What is Negotiation?
• One of the most important activities performed by
supply managers involves negotiating agreements or
contracts with their suppliers. Although supply
management is certainly not the only group in an
organization that negotiates, negotiation is a vital
part of every sourcing process.
• Negotiation is an ideal way to implement the supply
management strategies and plans that a business
unit develops.
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 Cont’d...
• Negotiation has been defined in a variety of ways:
• “A negotiation is an interactive communication process
that may take place whenever we want something from
someone else or another person wants something from
us.”
• “Negotiation is the process of communicating back and
forth for the purpose of reaching a joint agreement
about differing needs or ideas.”
• “Negotiation is a decision-making process by which two
or more people agree how to allocate scarce resources.”
• “Negotiating is the end game of the sales process.”
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 Cont’d....
• For our purposes, we define negotiation as a process of
formal communication, either face-to-face or via
electronic means, where two or more people come
together to seek mutual agreement about an issue or
issues.
• The negotiation process involves the management of
time, information, and power between individuals and
organizations who are interdependent.
• Each party has a need for something that the other party
has, yet recognizes that an interactive process of
compromise or concession is often required to satisfy that
need.
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 Negotiation Framework
• Perhaps the best way to approach a buyer-supplier
negotiation is by presenting it as an interactive,
give-and-take process involving five major phases:
1. Identify or anticipate a purchase requirement
2. Determine if negotiation is required
3. Plan for the negotiation
4. Conduct the negotiation
5. Execute the agreement

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 Question????
Thank you!!

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