Supplier Selection in Supply Chain

One major aspect of the purchasing function is the selection of supplier, which includes the acquisition of required material, services and equipment for all types of business enterprises. The first step in any supplier rating procedure is to establish criteria for supplier selection. Weber et al. (1991, 1993) review and classify various articles related to the selection of supplier and discusse the impact of just-in-time (JIT) manufacturing strategy on supplier selection. They use Dickson’s 23 criteria and indicate that net price, delivery and quality are discussed in 80%, 59% and 54% of the 74 articles respectively. Identifying these capabilities is difficult because many different criteria are involved of being good supplier, trust and coordination play a major role are very important in achieving price reductions, quality improvement, reduced production development time and flexibility (Maloni & Benton 1997; Monczka et al., 1998).

Fawcett et al. (1997) represent a measure of the firm’s logistics performance concerning key factors such as cost, quality, delivery, flexibility and innovation. This is not an easy decision because there are many different criteria for a good supplier. The criteria to develop a partnership with a supply chain member organization are typically driven by the expectation of cost efficiency, delivery dependability, volume flexibility, information, quality and customer service (Choi et al., 1996; Motwani et al., 1998; Olhager & Selldin, 2004).

Different companies have different specific requirements concerning supplier evaluation. For instance, in the automotive industry (Europe), functions of supplier logistics performance measurement include strategy formulation and clarification, management information, communication, motivation of suppliers, coordination and alignment (Schmitz & Platts, 2004).

Different companies have different specific requirements concerning supplier evaluation. In Consumer Electronics Division of Philips Electronics Industries (Taiwan) Limited requirements for supplier selection include cost, delivery, flexibility, quality and response (Li et al., 1997).

Prahinski and Benton (2004) use structural equation modeling and collect data from 139 first-tier North American automotive suppliers. They indicate that when a purchaser utilizes collaborative communication, the supplier perceives a positive influence on the buy-supplier relationship. Hai (2004) adopts DEA model to evaluate the operational

efficiency of the top 57 semi-conduction companies in Taiwan and uses sensitivity analysis to examine the range of reliability of the best-practice frontier. Liu and Hai (2006a) use DEA to measure the efficiency of the possible suppliers. Each supplier is evaluated in four indices:

cost, delivery, flexibility and quality. The problem is modeled as a MOBILP. We perform sensitivity analysis through perturbing the evaluation indices of each supplier. Narasimhan et al. (2001) propose a methodology for effective supplier performance evaluation based on DEA, a multi-factor productivity analysis technique. This article aids in supplier process improvement, which in turn enhances firm performance, allows for optimal allocation of resources for supplier development programs, and assists managers in restructuring their supply chain network (Ross & Droge, 2004).

Some authors apply an Activity Based Costing (ABC) approach for supplier selection.

Management experts consider the economic aspects of supplier evaluation, and focus on the direct costs (price) and indirect costs (quality) of materials supplied by suppliers (Tagaras &

Lee, 1996). However, since suppliers in a supply chain perform interactively, some cost-based mathematical models in the literature appear insufficient for delineating such key supply chain characteristics as multiple objectives and responsive requirements (Schneeweiss, 1998;

Li & O’Brien, 1999).

Dickson (1996) identifies 23 different criteria evaluated in the supplier selection process listed in Table 2-1. In that article, quality is treated as being of extreme importance while delivery, performance history, warranties and claim policies, production facilities and capacity, price, technical capability and financial position were viewed as being of considerable importance in the supplier selection process. Yahya and Kingsman (1999) operate the particular Umbrella Scheme of Malaysia’s furniture industry and use the criteria of supplier selection in Dickson’s research. A major part of the scheme is that all wooden furniture specified what kinds of requirements for government department and services, including school, administration, police, hospitals and military etc., are bought only from supplier companies that are members of the scheme.

Table 2-1: The different criteria evaluated in the supplier selection process Dickson’s Study ^a 1991 Exercise Criteria

Ranks Evaluations Ranks

No. of Articles ^b Quality

Delivery

Performance history

Warranties and claim polices Production facilities / capacity Price

Technical capability Financial position

Bidding procedural compliance Communication system

Industry reputation and position Desire for business Amount of past business Training aids

a EI= extreme important, CI= considerable important, AI= average important, SI= slight important.

b No. of article in Weber, Current and Benton 1991 review of 74 papers.

* Source: Yahya and Kingsman (1999).

The relationships with suppliers are different. They seem to work best when they are more family-like and less rational. Relationships with full commitment on all sides endure long enough to create value for the suppliers. In fact, the best organizational relationships, like the best marriage, are true partnerships that tend to meet certain criteria (Kanter, 1994):

Individual Excellence: Both partners are strong and have something of value to contribute to the relationship. Their motives for entering into the relationship are positive.

Important: The relationship fits major strategic objectives of the partners, so they want to make it work. Partners have long-term goals in which the relationship plays a key role.

Interdependence: The partners need each other. They have complementary assets and skills.

Neither can accomplish alone what both can together.

Investment: The partners invest to each other to demonstrate their respective stake in the relationship of each other. They show tangible signs of long-term commitment by devoting financial and other resources to the relationship.

Information: Communication is reasonable open. Partners share information required to make the relationship work, including their objectives and goals, technical data and knowledge of conflicts, trouble spots or changing situations.

Integration: The partners develop linkages and share the ways of operation so that they can work together smoothly. They build broad connections between many people at many organizational levels. Partners become both teachers and learners.

Institutionalization: The relationship is given a formal status which clears responsibilities and decision processes. It extends beyond the particular people who formed it, and it cannot be broken on a whim.

Integrity: The partners behave toward each other in honorable ways that justify and enhance mutual trust. They do not abuse the information they gain, nor do they undermine each other.