Selecting a Supplier or Contractor - Research Paper Example

SELECTING A SUPPLIER CONTRACTOR Executive Summary In the competitive global market, each company tries to complete it’s projects successfully. To accomplish this, firms need to opt for best methods right form purchasing to production. It could be said that the supply chain management plays an important role in the success of projects. Further, in the supply chain, the method of choosing the suppliers has a major impact. There are many criteria that govern the selection of suppliers. These criteria include quality of goods, service performance of suppliers, cost of procurement, speed of delivery, ability to deliver, reputation of the supplier and the like. This paper intends to discuss these supplier selection criteria by analyzing practical projects. The four different projects chosen include that of production of electronic products, construction of a retail outlet, manufacturing glass containers and construction of residential buildings. The criteria for supplier selection followed by these projects include that of quality, speed of delivery, cost and reputation respectively. After analyzing these criteria, a comparison of these supplier selection methods has been given along with the critique that identifies the most best method of supplier selection. 2. Literature Review: Every business has the impact of competition in the market due to increased globalization and various technological advancements. In such a competitive scenario, good supply chain becomes an important part of the corporate strategy. Coyle, Bardi and Langey (2003) say that this prime need has driven the logistics managers to concentrate more on supplier capabilities, conceptualizing and designing and implementing the supply process. Traditionally, there were only a few criteria like cost, delivery time and quality of the goods that were mainly concerned with supplier selection says Smith et al (1963), in the recent there are many other criteria in selecting a suitable supplier. Selecting a competent supplier becomes the key for the production and delivery of high quality products. Hence the supply chain managers need to adopt a proper strategy for selecting the suppliers based on some criteria. 2.1. Major criteria in supplier selection: Selecting and maintaining a good supplier involves an important decision regarding purchase of quality goods as it leads to quality products. The selection of competent suppliers can be based on various criteria as prescribed by Dickson (1996) are the net price quoted by the supplier, the reputation of the supplier, the extent up to which the supplier is able to meet the quality requirements, the replacement or repair services that could be provided by a supplier, the ability of the supplier to meet time constraints in delivering the goods, the location of the supplier from the company, the financial position of the supplier, the production rate of the supplier, the previous dealings with the supplier, the technological developments adopted by the supplier company, the potential future purchases from the supplier, the operating procedures of the supplier company like quality and inventory control, the market position of the supplier, the attitude of the supplier like his desire to business, the warranties and other policies, compliances of the supplier to the company rules and finally the performance history of the supplier. Among these criteria, the most important criteria in selecting a supplier have been identified by Dickson (1996) as the quality criteria, cost criteria and the delivery in time. Again many researchers like Chapman and Carter (1990), Dempsey (1978) have analyzed the priority among these criteria and have categorized that quality is the first important criteria, then the performance delivery and then the cost criteria. Another discussion by Lehmann and O. Shaughnessy (1982) has identified that there are five major criteria to select a supplier. They are the performance criteria, economic criteria, integrative criteria, adaptive criteria and realistic criteria. Lehmann and O. Shaughnessy (1982) add that “these five types of criteria are likely to operate in every industrial buying situation, other than the most minor purchases, since they represent the different facets or problems associated with a purchases.” Based on the development of a company, these five criteria fall under four categories, namely supplier performance, service performance, product performance and cost performance says Kahrman, Cebeci and Ulukan, (2003). 2.2. The Process of Selecting the customer : After identifying the criteria for selecting a supplier, a specific strategy has to be followed by the supply chain managers to make sure that a right decision is made with respect to the choice of a supplier. As explained by Lasch and Janker (2005), the process of selecting a supplier has five phases. These phases are listed by Lasch and Janker (2005) as preparation for selecting a supplier, pre – qualification of the supplier, analysis of the supplier, controlling the supplier and managing the supplier relationship. Lasch and Janker (2005) also describe these steps as a sequence which is shown in Fig.1. These phases of supplier selection are explained below. Fig. 1. The various processes in selecting a supplier. (Source: Lasch and Janker (2005)). The first phase concerning the preparation for selecting a supplier deals with the formulation of the decision making strategy and criteria. All the general and specific criteria need to be accounted for during this preparation process. The need or relevance of each the criteria has to be analyzed and decision has to be made according to Interpretive Structural Modeling (ISM) says Mandal and Dechmukh (1994). This method used a table to identify the relationship between the suppliers and the criteria. The second phase concerning supplier pre-qualification deals with the two steps namely, identifying the supplier and limiting the supplier. In this phase, the potential suppliers form the procurement market are listed out. Next among the listed suppliers, the most appropriate suppliers are sorted out by some sorting algorithm like Cluster Analysis (CA) proposed by Hinkle et al (1969) or Data Envelopment Analysis (DEA) proposed by Cooper (1998). The third phase is concerned with the evaluation of the sorted supplier according to their performance. A Request For Proposal (RFP) is the common mode of communication between the supplier and the company regarding the activities, services and target performances. The reply by the suppliers are in terms of their ability to provide the goods or services, cost involved, the strengths of the supplier and the like. According to De Boer et al (2001), there are five models for selecting the supplier, they are the Total cost of ownership (TCO), Mathematical Programming (MP), Statistical model, Artificial Intelligence based models (AI) and Analytical Hierarchy Process (AHP). The fourth phase of selecting and controlling the supplier is the final step in the decision making process. The supply chain manager has to select the most suitable supplier out of the chosen prospects (ITRG, 2003 ). Supplier controlling phase concerns with the regular examination of the supplier’s services and find the shortcomings in these services. This would enable counteractive measures to improve the services. The fifth phase of supplier relation management aims at reducing the cost , improving the quality and helping the suppliers to improve themselves. This activity leads to an integrated development with a care for the supplier. The main principles in supplier management are based on the evaluation of the supplier. With these explanations regarding criteria and process of supplier selection, the next section is a multiple case study of four chosen projects where the criteria for supplier choice are different. 3. Projects for the Study: In this section, four different projects have been discussed in terms of the nature of the project, the client business, the main characteristics of the projects, the major priorities of the client and finally the choice of supplier. The first company chosen is based in Cork, Ireland that operates internationally and has main branches in China. The company focuses in the production of consumer electronics, medical devices, personal computers and telecommunication devices. The company has set target for a specific period and has more concern for the quality of the products delivered. Customer satisfaction is the main aim for this company. Among the various products, the consumer electronics is of primary importance. The production of these consumer electronics is managed by a cycle that concentrates on constant production of quality products so as to satisfy the customers. Also the company is committed towards sustained improvement throughout the supply chain by building social and environmental capabilities. The major criterion that is set to select a supplier by this company is Quality as it is the most important requirement for an electronic product. The company assures the quality based selection through Quality Assurance (QA) department. In order to acquire high quality goods from the supplier, the company is ready to compromise on cost of the goods supplied. Based on this quality criteria, a list of suppliers were prepared. These suppliers were contacted through websites like alibaba.com. this method of supplier searching leads to less time in the decision making process and also gives exposure to local and international suppliers. To select the required supplier, the potential suppliers were sorted by some sorting algorithm (Cluster Algorithm). After the selection, the supplier is fixed and regular quality checks are conducted by the quality department. It was identified that there is no other supplier in the market for the desired goods, who would provide quality goods at a nominal price through negotiations. To support the company’s quality policy, the company also opts for new potential suppliers who could provide best supplies for the electronics products. The second project chosen is setting up a retailing outlet in one of the remote place in China. The main target was to bring all type of retail products under one roof. Being located in a remote place, the main issues involved in the construction of this retail outlet are timely supply of the construction materials and acquiring laborers. The major criterion of this project is the time (speed of completion) as there are a few other competitive local retailers in that area. This criterion can also be stated as the speed of delivery of the supplier. As stated by Henrik Olsson , (2009) , “Delivery evaluates the suppliers’ logistical capabilities and critical activities performed during the time from which the products are ordered until arrival. It is an important issue that influences costs, speed to market and value perception by the end user. It also includes inaccurate, missed or delayed deliveries that can disrupt operational efficiency.” Thus the time or speed of delivery also accounts for other activities like repair replacement. Thus to accomplish the construction job in the stipulated time, the construction procurement manager has to choose a supplier who is highly proactive and has the capability to deliver the materials fast. For this, the supplier has to have a good distribution system and geographically distributed at many locations. Also the supplier has to have enough resources at all the time so that there is no delay in the distribution. This project, being time constrained, has to compromise the price and a few standards of the materials. The supplier chosen for this construction project is located nearby the site and has a good material distribution network. The third project chosen for this study happens to be a glass industry in Sweden. The company is involved in the production of glass containers for the past 250 years and hold 40% of the glass forming machines market in the world. Apart from quality, flexibility and deliverability, the company mainly concentrates on low cost purchasing. As stated by Yeung (2008), purchasing not only depends on the mere tracing and buying of the materials, it is also a part of the supply chain management that affects the company’s profit. Hence, the choice of the supplier based on the cost becomes inevitable. The purchasing department of the chosen glass industry, intends to add value to the activities of the company by selecting the supplier purely on the basis of low cost. This glass manufacturing company depends on the suppliers for the glass forming machines, Gob forming machines, raw material for glass and ware handling machines. Apart form Activity Based Costing (ABC), this glass company also concentrates on the total cost of ownership and total cost of purchasing. To sustain it’s operations with good financial background, the company is ready to compromise on issues like quality and speed of delivery to some extent. The fourth project concerning the construction of a residential flat was proposed to be built in two years time. The flat was a multistory building with an estimated budget of two millions. The builder of the flat is a reputed real estate firm and has contacts with almost all reputed suppliers in the city. The builder opted for supplies of the building material from reputed suppliers. A reputed supplier would have a broad range of purchasers this adds to the strength that, the supplier would be able to manage all the requested materials. As the supplier is well established, the quality of the materials may be good with many distribution centers and speed of delivery. A good reputation is an added advantage for the supplier. The building contractor has less risk in the supply chain by choosing the reputed supplier. 4. Comparison of the criteria used for Supplier Selection: As explained, the above chosen projects differ from each other in the method of selecting the supplier. For the first project, the supplier choice was by Quality criterion. The major advantage of selecting the supplier by quality is the success of the project that would lead to the sustained growth of the company. The disadvantage may be in terms of high prices and certain amount of delay in the project completion. The second project discussed involves time or speed of completion as the major criterion. This type of supplier selection may be advantageous in terms of performance but it may lack the required quality. The third choice of supplier was in terms of cost. This method of supplier selection may have many disadvantages in terms of quality and service performance. The fourth method of supplier selection is by reputation. This is a crude method of selection that lacks proper decision making in the choice of supplier. 5. Critique of the selection procedures: Based on these discussions, it can be critiqued that the most important criteria for selecting a customer happens to be the quality of the good supplied by the supplier. The next criteria preferred for supplier selection is the speed or service performance followed by the reputation criteria. Finally the cost criteria has to be the least preferred criteria. This critique has also been supported by Dempsey (1978). 6. Conclusion: Supplier selection has been a major task in procurement management because proper selection of the supplier leads to the successful completion of the projects. This paper has dealt in detail about the various criteria for selecting a supplier and the various steps or process in selecting a supplier. After a detailed literature review, the paper analyses four different projects that employed different methods of supplier selection like quality, cost, reputation and speed of service. The analysis provides a brief about the nature of the projects, client requirements and the supplier requirements. Based on the analyses a critique has been made about the criteria used for selecting the supplier. It has be seen that the quality criteria seems to be the best criteria for supplier selection. References Chapman, S.N., Carter, P.L. (1990), "Supplier/customer inventory relationships under just in time", Decision Sciences, Vol. 21 No.1, pp.35-51., Cooper, R. (1998&1999). “The rise of activity-based cost systems: part Ⅰ- Ⅳ”. Journal of cost management, summer 1988, fall 1988, spring 1989 and winter 1989. Dempsey (1978) , “Vendor Selection and buying process”. Industrial Marketing Management , v7, 257-267. Dickson, G.W. (1966) “An analysis of vendor selection systems and decisions”. Journal of Purchasing 2/1, 5-17. Henrik Olsson , (2009), “A Model for Supplier Selection & Total Cost of Purchasing”. Master’s Thesis, Lulea University of Technology, Department of Business Administration and Social Sciences, Division of Industrial Logistics, 2009:050 CIV –ISSN: 1402 - 1617 – ISRN: LTU-EX—09/050 –SE. Hinkle, C.L., Robinson, P.J., Green, P.E. 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(1963) , “ The Development Project committee on Standards for Vendor Evaluation” , National Association of Purchasing Agents, New York, NY. Yeung, A.C. (2008) “Strategic supply management, quality initiatives, and organizational performance”. Journal Of Operations Management, 26(4), 490-502. Read More