How to Evaluate Suppliers
Supplier evaluation is not an easy process. Many different formulas and techniques can be used. One effective method assigns suppliers to four basic categories based upon their level of performance in key areas, such as delivery, quality and responsiveness.
A supplier is labeled a "full partner" if it meets all expectations. An "associate partner" is a firm that needs a little work to bring it up to full partner status.
Additional categories include "high risk" and "incapable" suppliers. A high risk source might continue to be utilized for current production only, based upon an internal risk assessment. But, you might not want to award this supplier any future business. An incapable supplier should be dropped as soon as possible.
The first step is to agree upon a set of criteria for each of these categories. The following characteristics should be considered:
- Goals are compatible with your organization's future plans.
- Demonstrates 100 percent on-time delivery performance and is capable of participating in your organization's automatic ordering systems.
- Fully ISO 9000 or QS 9000 approved.
- Provides full field response and support within 24 hours of notification.
- Provides assistance with new designs.
- Provides proto-samples within one week or less (depending upon tooling).
- Consistently meets the full partner criteria in five key areas: technology, quality, responsiveness, delivery and lowest total cost (see below for more details).
- Satisfies most of the full partner criteria as agreed upon by management.
- Supplier's management and its employees demonstrate an ongoing commitment to continuous improvement in quality and delivery. Develops goals, objectives and action plans to meet or exceed the goals and objectives of your organization.
- Supplier's services or products fulfill a strategic need in your organization.
- Requires little effort and expense to achieve full partner status.
High Risk Supplier
- Supplier's goals and action plans are not compatible with your organization.
- No benefit in developing these sources to associate partner or full partner status.
- Current quality and delivery are acceptable to sustain present production.
- Not economically feasible to move tooling for parts these sources are currently producing.
- Supplier does not meet quality and delivery goals.
- Does not demonstrate a desire or a capability to improve deficient service areas, such as quality and delivery.
- Has no interest in obtaining ISO 9000 or QS 9000.
- This supplier should be dropped immediately.
Once you have agreed upon these categories and established criteria, you're ready to focus on the topic that many accountants claim is the most important--cost. However, cost must be taken to the next step. In other words, you need to look at the total cost--not only piece price.
The lowest total cost of a product includes not only its initial procurement cost, but all those factors that went into getting it to market and keeping it there. Therefore, you must take into consideration these added factors.
Lowest total cost can be calculated as: LTC = Piece Price x IV. In this equation, IV is a composite index determined by tables developed and agreed upon within your organization.
For example, if you select quality, delivery and proto lead time as the factors you want to assign an IV to, then the formula would appear as: LTC = Piece Price x Quality IV x Delivery IV x Proto Lead Time IV.
If one supplier exhibits a 315 PPM performance level, a 100 percent on-time delivery record and a 10-day lead time, its composite index would be 1.04. If a second supplier exhibits a 12,400-PPM performance level, a 20 percent on-time delivery and a 20-day lead-time, its composite index would be 3.65.
If the first supplier's part cost $0.06 each and the second supplier's part cost $0.03 each, whose part is better?
By following this formula, you can develop tabulated charts (see below) that track lowest total cost for all your suppliers. This can be a very effective evaluation tool.
Full Partner Criteria
Suppliers qualify as "full partners" if they meet the following key criteria: Technology:
- Demonstrates an ongoing ability to assimilate state-of-the-art technology into their business.
- Demonstrates an ability to quickly develop new processes and modify existing processes as necessary to create a sustained competitive advantage for customer and self.
- Strong commitment to R&D.
- Demonstrates a willingness to invest in the business and grow.
- Willingness to pursue mutual product and process development.
- Complete understanding of process capabilities.
- Provides documented design guidelines usable by customer engineers.
- Full ISO 9000 or QS 9000 approved.
- Consistently meets or exceeds your organization's quality goals.
- Knows whether or not the parts being produced for your organization meet or exceed the letter and intent of the specification.
- Does not ship out-of-spec parts.
- Has well-documented processes (both manufacturing and administrative).
- Demonstrates a willingness to say "no" and present alternatives to new designs that lack process capability.
- Demonstrates an ability to interact directly with your engineers and maintain ongoing business relationships.
- Actively supports your remote manufacturing sites.
- Provides timely responses to technical and business issues.
- Demonstrates a high level of commitment to your organization.
- Is a long-term thinker and is financially stable.
- Demonstrates flexibility to quick changes.
- Willingness to work with your organization to optimize lead times.
- Consistently meets delivery goals.
- Allows order flexibility within acceptable limits.
- Has business systems in place to accurately schedule product and procure material in an economical manner.
- Notifies your organization in advance of shipments delayed for any reason.
Lowest Total Cost:
- Demonstrates a commitment to continuous cost reductions.
- Willing to work with you to perform value engineering for new and existing designs.
- Openly shares cost structures and pricing models.