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TOPIC FOUR:
SOURCING
Supplier development concept
Supplier development is the process of working with certain suppliers on a
one-to- one basis to improve their performance for the benefit of the buying
organization. Reasons for supplier Development
 Improving supplier performance
 Reducing costs
 Resolving serious quality issues
 Developing new routes to supply
 Improving business alignment between the supplier and the
buying organization
 Developing a product or service not currently available in the marketplace
 Generating competition for a high price product or service
dominating the marketplace
Note: Supplier development should lead to improvements in the
total added value from the supplier in question in terms of product
or service offering, business processes and performance,
improvements in lead times and delivery for instance.
Factors considered for selection of suppliers for development
 Category strategy
 Scale of value/improvement opportunity
 Cost,
 Complexity
 Duration of value attainment
 Supplier co-operation
Three levels to build trust and develop supplies:
1. Communication
 The easiest way to up-skill suppliers is to simply direct it. This partly
depends on the buyer company’s relative strength. You cannot
command a supplier to invest in new technologies if they have no
interest in doing so or face no commercial threat in your cancelling the
contract.
 Communication can be facilitated on mass to suppliers, either by
generic emails or through a supplier portal, but these are unlikely to
create dramatic alterations.
2. Training
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Training comes in two forms. Firstly, remote training allows buyers to use
on- line webinars to convey new required standards or systems. This
absorbs considerably less resource for both buyer and supplier, as travel
is kept to a minimum, but the impact of such sessions can be
questionable.
3. On-site assistance
On-site assistance can provide rapid implementation for a new capability
– either in installing a new technology or implementing a new
management practice – and can offer faster time-to-market than sourcing
from a new supplier.
Benefits of supplier Development
1) Full transparency between organization and supplier
2) Improved collaboration between organization and supplier
3) Streamlined and reduced sourcing activities and lead times
4) Improved quality, manufacturability, and reliability for new designs
5) Increased supplier responsiveness
6) Increased customer satisfaction
7) Increased awareness of supplier diversity
8) Increased visibility of full supply base to procurement, quality, and
even management departments
Steps to Supplier Development
1. Supplier selection
 Choosing suppliers is crucial to your business. And categorizing your
supply base is also vital to making the most of your available resources
when managing those suppliers.
Importers and purchasers often consider various criteria for evaluating
potential suppliers when beginning their search, such as:
 Minimum order quantity (MOQ): smaller purchasers or those with a
limited budget, in particular, will be sensitive to the minimum order
size a supplier requires.
 Payment terms: importers large and small may consider payment
terms an important factor in choosing a supplier.
 Certifications: common certifications like ISO 9001 and ISO 14001
may be valuable to you.
 Production capabilities and capacity: an obvious point but one that
many importers don’t know how to verify.
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2. Developing an approved suppliers list

We often find that a company’s supply base invariably expands over time.
Indeed, taking advantage of the “risk management” option of a
“second source supply” is a very prudent business strategy.
Categorizing suppliers by criteria
Your supplier list should contain categories based on the following criteria:
 Supplier type – critical, tooling, office supplies, maintenance and training
 Spending – high, medium, low
 Frequency of use – often, occasionally, rarely
 Second source supplier – yes or no
Filtering information in approved list to manage suppliers
By adding categories such as these to the supplier list, you can then filter
this information in numerous ways to find:
 The top five highest spending suppliers
 The top 10 critical suppliers
 Critical suppliers with no second source
 Infrequently used suppliers with low spending
3. Auditing suppliers
As with most audits, supplier audits represent a snapshot in time.
Lots of information can be collected by this method, and it is indeed
a mandatory requirement for most quality management systems
(QMS).
On-site supplier audits
On-site auditing would, of course, provide you all of the information
from a questionnaire-based audit and much more, such as:
 The structure of the company’s QMS
 Performance data
 Product and process management
 Results of supplier internal audits and certification audits
 A tactile feeling of how the company operates and the atmosphere
within the organization
 Personal interaction with key members of the supplier’s staff
4. Measuring supplier performance
Supplier KPIs are a good measure of overall supplier performance, such as:
 Right first time
 Delivery on time
 Response time, quotes and inquiries
 Defect rate
 Inspection and auditing results
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5. Supplier development
Some larger companies will have a team of dedicated supplier quality
engineers who spend most of their time at their own office, rather than at
suppliers’ facilities.
This defeats the purpose of supplier quality engineering.
6. Supplier management
 Once the development stage has matured to an acceptable level, it’s
time to tailor on-going management to the needs of each supplier.
 Tracking ongoing supplier performance is key to
understanding each supplier’s needs and any required
corrective actions.

Barriers/challenges to supplier development

 Protectionism. Suppliers will naturally seek to protect their
investment in the innovation.
 A fair return. Suppliers will want to commercialise their ideas and
innovations and get a fair return. If you expect your suppliers to
innovate for free or demand that they bring you the latest thing as
part of your expectations around ‘continuous improvement’, the
chances are your suppliers will pay lip service to this and talk to other
companies who are prepared to pay.
 Lack of communication. Even if parties are prepared to open up and
share their plans, someone needs to ask that question. And often when
it is business as usual that simple question gets forgotten.
 Failure to act. If a supplier brings you a great idea that could add
competitive advantage to your business, but the idea doesn’t make it
past the minutes of the meeting, then it is lost.
Ways to overcome Barrier/challenges to supplier development
 Choose your partners well. Lots of suppliers will have good ideas
they want to share, but you need to choose with whom you want to
work.
 Align your directions. The best innovation happens naturally when
achieving your goals resonates with, and helps the supplier achieve,
theirs.
 Base your relationships on trust. This doesn’t exist between
companies; but between the right people in them working in an open,
transparent and consistent way.
 Ensure there are mutual rewards. Innovation is often more than a
piece of work that gets completed to an agreed specification.
Ways in which buying organization may develop a supplier
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 By providing them with finances to support supply operations

 By advising suppliers on changes in the production process and technologies
 By providing skilled personnel to suppliers
 By allocating purchase orders to such suppliers in order to maintain
their business
 By establishing supplier performance standards
 By jointly conducting research for innovations
 By loaning the supplier production equipment for use.
 Early supplier involvement in decisions
 By promptly paying the suppliers
 By offering after supply services
Building and maintaining relationship with suppliers
 Openness and transparency in the process of awarding contracts.
 Ensuring joint problem solving whenever there is an issue between them
 Ensuring proper communication to ensure the right information is received
 Providing feedback whenever its necessary.
 Maintain trust with each other through ethical dealings.
 Supplier development
 Joint consultations
 Early supplier involvement
 Timely payments/deliveries
 Giving clear specification
Suppliers Evaluation
 Supplier evaluation is when you are deciding if you want to work
with a vendor; analyzing their proposal, checking their references,
checking experience, evaluating the delivery team, project
management methodology, industry expertise e.t.c etc.
 Supplier rating is when a supplier has delivered their goods/services
and you are rating their actual performance on factors such as
Customer Service, Innovation, Quality, Value, Execution etc.
Benefits of Supplier Evaluation Process:
1) Increase performance visibility
When companies have no or little knowledge on how their suppliers are
performing, supplier management tends to be based on the game of
guesswork with the factor of ambiguity.
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2) Remove hidden waste and cost drivers in the sustainable procurement.

The sustainable process of the procurement is full of potential risks that can
originate from suppliers with regards to the aspect of corporate social
responsibility.
3) Leverage the supply base
Through the process of Supplier Evaluation, the company is able to set a
threshold for its suppliers that can result in the higher-quality results.
Companies can plan better and new range of products and services based on
a good understanding of its suppliers’ expertise, vital capabilities, and
performance levels.
4) Align customer and supplier business practices
In the ideal case scenario, the suppliers should run their business operations
in alignment with their customer sharing the similar business ethics, expect
similar levels of excellence, show commitment towards the aspect of
corporate social responsibility, and work towards the continuous
improvement of their operations.
5) Diminish risk factors
With the proper insights into the performance of the suppliers and their
overall business practices helps to reduce the business risk, particularly
when the companies increase their dependency on their key suppliers. Risks
can range from financial to operational in nature and increase with
geographic distance.
6) Improve the performance of the suppliers
The main goal of the Supplier Evaluation process should be the improvement
of the performance of the suppliers.
There are eight common supplier selection criteria
 Cost.
 Quality & Safety.
 Delivery.
 Service.
 Social Responsibility.
 Convenience/Simplicity.
 Risk.
 Agility.
The 10 Cs of supplier evaluation are:
1. Competency.
2. Capacity.
3. Commitment.
4. Control.
5. Cash.
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6. Cost.
7. Consistency.
8. Culture.
9. Clean.
10. Communication.

1. Competency
 First, look at how competent this supplier is. Make a thorough
assessment of the supplier's capabilities measured against your needs,
but then also look at what other customers think. How happy are they
with the supplier? Have they encountered any problems? And why
have former customers changed supplier
2. Capacity
 The supplier needs to have enough capacity to handle your firm's
requirements. So, how quickly will it be able to respond to these, and
to other market and supply fluctuations?
 Look at all of the supplier's resources, too. Does it have the resources
to meet your needs, particularly when commitments to other clients
are considered? (These resources include staff, equipment, storage,
and available materials.)
3. Commitment
 Your supplier needs to provide evidence that it's committed to high
quality standards. Where appropriate, look for quality initiatives within
the organization, such as ISO 9001 and Six Sigma
 The supplier also needs to show that it is committed to you, as a
customer, for the duration of the time that you expect to work
together. (This is particularly important if you're planning a long-term
relationship with the supplier.)
4. Control
 Query how much control this supplier has over its policies, processes,
procedures, and supply chain.
 How will it ensure that it delivers consistently and reliably, particularly
if it relies on scarce resources, and particularly if these are controlled
by another organization?
5. Cash
 Your supplier should be in good financial health. Cash-positive firms
are in a much better position to weather the ups and downs of an
uncertain economy.
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 So, does this supplier have plenty of cash at hand, or is it

overextended financially? And what information can the supplier offer
to demonstrate its ongoing financial strength?
6. Cost
 Look at the cost of the product that this supplier provides. How does
this compare with the other firms that you're considering?
 Most people consider cost to be a key factor when choosing a supplier.
However, cost is in the middle of the 10 Cs list for a reason: other
factors, such as a commitment to quality and financial health, can
potentially affect your business much more than cost alone,
particularly if you will be relying on the supplier on an ongoing basis.
7. Consistency
 How will this supplier ensure that it consistently provides high quality
goods or services?
 No one can be perfect all of the time. However, the supplier should
have processes or procedures in place to ensure consistency. Ask this
supplier about its approach, and get a demonstration and a test
product, if possible.
8. Culture
 The best business relationships are based on closely matching
workplace values
 . This is why looking at the supplier's business culture is important. For
example, what if your organization's most important value is quality,
and your main supplier cares more about meeting deadlines? This
mismatch could mean that it's willing to cut corners in a way that could
prove to be unacceptable to you..
9. Clean
 This refers to this supplier's commitment to sustainability, and its
adherence to environmental laws and best practices. What is it doing
to lighten its environmental footprint? Ask to see evidence of any
green accolades or credentials that it's earned.
 Also, does this supplier treat its people – and the people around it –
well; and does it have a reputation for doing business ethically?
10. Communication
 Query how the supplier plans to keep in touch with you. Will its
proposed communication approaches align with your preferred
methods? And who will be your contact person at this firm?
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 It's also important to find out how the supplier will handle
communications in the event of a crisis. How quickly will it notify you if
there's a supply disruption? How will that communication take place?
And will you be able to reach senior people, if you need to?
Supplier Competence
Compliance to
specifications
 Meets specification requirements
 Meets standards
Customer service
 Policy and practice
 Surveys customers
 Systems to measure customer satisfaction
 Backup and advice
Quality system for deliverables
 Certification
 Documented system
Capability
 Staffing structure
 Availability of experienced staff
 Experience in the industry
 State of technology
Past performance
 Experience in the industry
 Previous experience
 Customer recommendation
Strategic
 Location
 Networking
Innovation
 Leading technology
 Creativity
Supplier
analysis
Financial
viability
 Satisfies key financial ratios for the industry
 Full financial disclosure from supplier will be required.
Risk and insurance
 Adequate insurance
 Allocate and acceptance of risk
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Legal review
Compliance to Cigna contract terms
 Complies to the terms and conditions
Conflict of interest
 Existing or potential, or perceived
Legal proceedings
 Legal proceedings related to contractual issues - past or present
Financial
Total cost of ownership/best value
 Bid price
 Ability to propose an innovative financial approach (gain-sharing, etc.)
 Freight
 Warranty
 Price breaks and quantity discounts
 Satisfies best value analysis
 Maintenance costs
Financial review
 Tax
 Accounting
 Lease vs. Buy
 Foreign exchange
 Payment terms
 Business justification
 Insurance
 Net present value analysis
 Payment methods (i.e. EDI, etc.)

 Supplier appraisal– Assessment of a potential supplier ’s

capability of controlling quality, delivery, quantity, price and all
other factor s to be embodied in a contract.
 Supplier approval – The placing of an enterprise on an
approved list of suppliers following a process of supplier
appraisal.
 Supplier rating– an index of the actual performance of a supplier
Importance of supplier evaluation and appraisal
(i) Managing supplier risks
Perhaps the most single compelling reason for evaluating your suppliers is
because to do so helps to manage your risks.
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(ii) Fewer Defects

Increasingly customers who do evaluate their suppliers indicate
that the process leads to fewer defects within the supply chain.
(iii) Better Co-ordination
Although managing risks is important, there are more positive
benefits to be had from supplier evaluation.
(iv) Evaluations As Incentives
Although the days of the supplier being very much dominated by
the customer have long gone, the evaluations can act as an
incentive for the supplier to implement new procedures or tasks
that they can then present at the evaluation,
(v) Retaining The Competitive Edge
Evaluating suppliers’ performance can therefore be a very useful
tool that leads to a better working relationship, fewer defects and
problems with regard to the supply chain, as well as overall
efficiency savings and cost reductions.
What is Vendor rating
 Is the result of a formal vendor evaluation system. Vendors or
suppliers are given standing, status, or title according to their
attainment of some level of performance, such as delivery, lead
time, quality, price, or some combination of variables.
Criteria for Vendor Evaluation
Vendor performance is usually evaluated in the areas of pricing, quality,
delivery, and service. Each area has a number of factors that some firms
deem critical to successful vendor performance.
Pricing factors include the following:
 Competitive pricing. The prices paid should be comparable to those
of vendors providing similar product and services. Quote requests
should compare favorably to other vendors.
 Price stability. Prices should be reasonably stable over time.
 Price accuracy. There should be a low number of variances from
purchase- order prices on invoiced received.
 Advance notice of price changes. The vendor should provide
adequate advance notice of price changes.
 Sensitive to costs. The vendor should demonstrate respect for
the customer firm's bottom line and show an understanding of its
needs. Possible
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cost savings could be suggested. The vendor should also exhibit

knowledge of the market and share this insight with the buying firm.
 Billing. Are vendor invoices are accurate? The average length of time
to receive credit memos should be reasonable. Estimates should not
vary significantly from the final invoice. Effective vendor bills are
timely and easy to read and understand.
Quality factors include:
 Compliance with purchase order. The vendor should comply with
terms and conditions as stated in the purchase order. Does the
vendor show an understanding of the customer firm's expectations?
 Conformity to specifications. The product or service must conform
to the specifications identified in the request for proposal and
purchase order. Does the product perform as expected?
 Reliability. Is the rate of product failure within reasonable limits?
 Reliability of repairs. Is all repair and rework acceptable?
 Durability. Is the time until replacement is necessary reasonable?
 Support. Is quality support available from the vendor? Immediate
response to and resolution of the problem is desirable.
 Warranty. The length and provisions of warranty protection offered
should be reasonable. Are warranty problems resolved in a timely
manner?
 State-of-the-art product/service. Does the vendor offer products
and services that are consistent with the industry state-of-the-art? The
vendor should consistently refresh product life by adding
enhancements.
Delivery factors include the following:
 Time. Does the vendor deliver products and services on time; is the
actual receipt date on or close to the promised date? Does the
promised date correspond to the vendor's published lead times? Also,
are requests for information, proposals, and quotes swiftly answered?
 Quantity. Does the vendor deliver the correct items or services in the
contracted quantity?
 Lead time. Is the average time for delivery comparable to that of
other vendors for similar products and services?
 Packaging. Packaging should be sturdy, suitable, properly marked,
and undamaged. Pallets should be the proper size with no overhang.
 Documentation. Does the vendor furnish proper documents (packing
slips, invoices, technical manual, etc.) with correct material codes and
proper purchase order numbers?
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 Emergency delivery. Does the vendor demonstrate extra effort to

meet requirements when an emergency delivery is requested?
Finally, these are service factors to consider:
 Good vendor representatives have sincere desire to serve. Vendor reps
display courteous and professional approach, and handle complaints
effectively. The vendor should also provide up-to-date catalogs, price
information, and technical information. Does the vendor act as the
buying firm's advocate within the supplying firm?
 Inside sales. Inside sales should display knowledge of buying firms
needs. It should also be helpful with customer inquiries involving order
confirmation, shipping schedules, shipping discrepancies, and invoice
errors.
 Technical support. Does the vendor provide technical support for
maintenance, repair, and installation situations? Does it provide
technical instructions, documentation, general information? Are
support personnel courteous, professional, and knowledgeable? The
vendor should provide training on the effective use of its products or
services.
 Emergency support. Does the vendor provide emergency support for
repair or replacement of a failed product.
 Problem resolution. The vendor should respond in a timely manner to
resolve problems. An excellent vendor provides follow-up on status of
problem correction.
Factors that determine price for products
 Unique properties e.g. technological advancements
 Devepolment costs
 Demand and supply state in the market
 Quality perception in the buyers eyes
 Production and transportation cost
 Government price control/restrictions
Factors considered when carrying out technical appraisal of
potential supplier
1. The technical capability of the supplier
2. The production capacity of the supplier
3. Quality control systems of the supplier
4. The level of technology employed by the supplier
5. The competence of the supplier staff in handling production
system used in their operations
6. Innovation and creativity of the supplier
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Benefits of vendor rating systems include:

 Helping minimize subjectivity in judgment and make it
possible to consider all relevant criteria in assessing
suppliers.
 Providing feedback from all areas in one package.
 Facilitating better communication with vendors.
 Providing overall control of the vendor base.
 Requiring specific action to correct identified performance
weaknesses.
 Establishing continuous review standards for
vendors, thus ensuring continuous improvement of
vendor performance.
 Building vendor partnerships, especially with suppliers having
strategic links.
 Developing a performance-based culture.