A supplier is a party that supplies goods or services. A supplier may be distinguished from a contractor or subcontractor, who commonly adds specialized input to deliverables.
Supplier Lifecycle Management
The purpose of supplier lifecycle management is to recognize the right supplier & get better value while reducing the cost & risk by ensuring the quality throughout cycle. supplier lifecycle management can be divided into following phases
- Supplier Qualification: In this initial phase, suppliers are qualified based on whether a supplier is capable of fulfilling the specified requirement or not. Suppliers are invited to participate from across the globe to find the eligible potential supplier to determine if it can provide the goods or services to the company’s standard.
- Supplier Evaluation: Suppliers need to fill application forms and submit documents to participate in the evaluation process and depending on the suppliers cost of quality, cost of doing business, financial & economic aspects they are evaluated. There are also different methods to evaluate suppliers such as questionnaires, scorecards, site visits etc.
- Supplier Selection: An effective supplier selection process leads to great outcome. Supplier selection is a critical issue, the main objective of the supplier selection is to maximize the overall value and develop a long term relationship. Supplier selection relies on various assessment techniques such as qualitative and quantitative.
- Supplier On-boarding: It is necessary to collect the supplier information to make the working relationship transparent. Once the supplier is on boarded, the organization can be able to track the supplier performance & supplier information.
- Supplier Performance Management: Supplier performance management can help a company spot the supplier issues at the early stage and ensures issues are solved on time. Though tracking the supplier performance across the global is complex but for better visibility organizations must effectively track the supplier performance and identify the problem areas.
- Supplier Risk Management: It is important to identify the supplier risk at the supplier base to prevent disruptions. Risk management is among the most critical duties of procurement, yet often among the most overlooked. Risk management is essential for a successful business.
- Supplier Development: It is the process of Collaborating with suppliers to improve their process and manufacturing capabilities. Supplier development comes into picture when any of the supplier performance is not up to the mark. Giving the regular feedback about supplier’s performance could improve the supplier base.
- Supplier Relationship Management: The main purpose of SRM is to develop mutually beneficial relationship to deliver greater level of competitive advantage and innovation. SRM helps collaboratively driving value for both parties, resulting in lower costs, reduced risk, better quality, greater efficiency.
Supplier Search
Although the expanded supply bases can be beneficial for buying firms due to a greater number of alternatives to consider, they often complicate the process of searching for the appropriate supplier. To make such a search process simpler, the buying firm should first explore and leverage the more reliable sources of information about the potential supply sources. These sources of supplier information can be classified into four different categories, as
- Published industry sources—Available from publications and websites that contain information on new products and substitutions, suppliers’ general backgrounds, and advertisements
- Internal sources—Available from the company’s own historical files Professional sources—Available from the buyers’ professional contacts
- International sources—Available from the World Trade Organization (WTO), foreign governments, and embassies
Supplier Evaluation
After developing a manageable list of prospective suppliers and gathering background information about them, the purchasing manager needs to evaluate these suppliers and compare them with each other in terms of their ability to provide right products and/or services with the right price at the right time. Such ability can be reflected in the host of supplier evaluation attributes summarized below.
Although the importance of these attributes to supplier evaluation may vary from one organization to another and/or one purchase to another, the simultaneous consideration of these attributes will help the purchasing manager identify the strengths and weaknesses of each prospective supplier and then select the overall winner(s) of the purchasing contract. Among these attributes, some past studies on supplier evaluation indicate that quality, price, and delivery services/performances are the three most dominant factors for selecting a particular supplier.
Quality
- Quality of products
- Warranty
- Past records on the reliability of products
- Quality certification, affidavits
- Willingness to take the corrective actions
- Willingness to accept a responsibility for defects or latent deficiencies
- Prompt replacements of rejects
Price
- Competitive price
- Accurate price quotation
- No hidden costs
- Correct billing/invoicing
Delivery services
- Delivery on schedule
- Delivery per routing instructions
- Delivery without constant follow-ups
- Prompt responses to emergent and rush delivery requests
- Good packaging
- Geographical location
Supplier Selection
After the thorough evaluation of potential suppliers, a purchasing manager needs to select the most suitable supplier. However, the evaluation and the subsequent selection of suppliers are not simple tasks, especially when a relatively large number of supplier pools and many different attributes are considered at the same time. Such complexity calls for the use of a more systematic supplier evaluation and selection method. This method includes the categorical method, weighted-point method, cost-ratio method, analytic hierarchy process (AHP) method, and multiple attribute utility theory (MAUT) method. Each of these methods has its own pros and cons and therefore cannot be considered a panacea.
- Categorical method—In this method, a purchasing manager is required to keep and maintain a past performance record of all suppliers. The purchasing manager establishes a list of factors (with equal importance) for evaluation purposes and assigns a grade (plus, minus, and neutral) that measures supplier performance in each of the established areas. After an overall group rating, a positive evaluation in terms of a composite score may lead to increased business for a supplier, whereas a negative rating should result in discussions with the supplier to rectify the situation. This method is simple and straightforward; however, it may not be effective in handling a larger number of candidate suppliers (exceeding five). Also, this method may lead to many tie scores among the multiple suppliers.
- Weighted-point method—An application of the weighted-point method requires the assignment of an appropriate weight to each performance factor. The specific weight is a reflection of the purchasing manager’s judgment about the relative importance of the specific performance factor. Then, a specific procedure or formula for measuring actual supplier performance must be developed for each individual factor. This results in a quantitative performance rating for each factor and then eventually results in a composite performance index for each supplier.
- Cost-ratio method—The cost-ratio method relates all identifiable purchasing costs to the value of shipments received from individual suppliers. Each cost ratio is assigned to a specific rating, subject to various performance criteria (e.g., quality, delivery, service). The lower the ratio of costs to shipments, the higher the rating for the supplier. Conversely, the higher the ratio of costs to shipments, the lower the rating for the supplier. The cost-ratio method is only used by a few progressive firms due to its complexity, which requires a computerized cost accounting system.
- Analytical hierarchy process (AHP) method—AHP is suitable for systematically selecting the most desirable suppliers with respect to multiple, confliction factors influencing the supplier selection decision. Basically, AHP is a scoring method that helps the purchasing manager comparatively evaluate the strengths and weaknesses of each supplier through a series of pairwise comparisons. Also, unlike the weighted-point method, it does not require the arbitrary assignment of weights (relative importance) to each supplier selection attribute and allows the purchasing manager to conduct sensitivity analyses under various “what-if” scenarios.
- Multiple attribute utility theory (MAUT) method—MAUT was initially proposed by Min for supplier selection due to its ability to take into account both qualitative (e.g., quality assurance, perceived supply risk, communication barriers) and quantitative factors (e.g., quoted price) influencing supplier selection in the presence of risk and uncertainty. One of the important advantages of using the MAUT method includes its feature that allows the purchasing manager to see a performance “what-if” sensitivity analysis when the relative importance of supplier selection factors changes over time. In addition, unlike the weighted-point method or AHP, MAUT can handle a large number of potential suppliers (up to 500 prospective suppliers) and supplier selection attributes (up to 100 different attributes).
Supplier Risk Management
Supplier risk management is the process of identifying, assessing and controlling threats to an organization’s capital and earnings that are caused by the organization’s supply chain.
Companies with supplier risk management plans in place typically place a chief risk officer (CRO) in charge of overseeing the effectiveness of the organization’s supplier risk management strategy. An effective plan reduces supply chain risk whenever possible and anticipates how the organization could swiftly respond to supply chain disruptions.
Supplier risk management plans should address the many different areas where supplier issues may arise. These stages can include onboarding (beginning a relationship with a supplier), financials, supplier collaboration, mergers, integrated supply chains, natural or geopolitical disasters, and criminal or terrorist threats to the supply chain.
Supplier risk management (SRM) is an evolving discipline in operations management for manufacturers, retailers, financial services companies and government agencies where the organization is highly dependent on suppliers to achieve business objectives.
The complexity and globally outsourced nature of today’s supply chains combined with the practice of optimization techniques such as lean and just-in-time manufacturing in order to improve efficiency has increased supply chain vulnerabilities to even minor supply disruptions. While these models have allowed companies to reduce overall costs and expand quickly into new markets, they also expose the company to the risk of a supplier suddenly going bankrupt, closing operations, data breach or being acquired. Among the several types of supply disruptions, most severe are those that have a relatively low probability of occurrence with a very high severity of impact when they do occur. While such risks cannot be eliminated, however, its severity can be reduced.
Supplier Relationship Management
Supplier relationship management (SRM) is the discipline of strategically planning for, and managing, all interactions with third party organizations that supply goods and/or services to an organization in order to maximize the value of those interactions. In practice, SRM entails creating closer, more collaborative relationships with key suppliers in order to uncover and realize new value and reduce risk of failure.
Supplier relationship management (SRM) is the systematic, enterprise-wide assessment of suppliers’ assets and capabilities with respect to overall business strategy, determination of what activities to engage in with different suppliers, and planning and execution of all interactions with suppliers, in a coordinated fashion across the relationship life cycle, to maximize the value realized through those interactions. The focus of SRM is to develop two-way, mutually beneficial relationships with strategic supply partners to deliver greater levels of innovation and competitive advantage than could be achieved by operating independently or through a traditional, transactional purchasing arrangement.
In many fundamental ways, SRM is analogous to customer relationship management. Just as companies have multiple interactions over time with their customers, so too do they interact with suppliers – negotiating contracts, purchasing, managing logistics and delivery, collaborating on product design, etc. The starting point for defining SRM is a recognition that these various interactions with suppliers are not discrete and independent – instead they are accurately and usefully thought of as comprising a relationship, one which can and should be managed in a coordinated fashion across functional and business unit touch-points, and throughout the relationship lifecycle.