Page 106 - DMGT525_MATERIALS_MANAGEMENT

Unit 7: Selection of Suppliers

Benefits a buyer can achieve by using this approach include: Notes
 The ability to source requirements based on total cost consideration
 A methodology to increase supplier accountability and control
 An equitable and consistent evaluation tool

 Definition of supplier performance expectation
 Communication of the firm’s buying priorities to suppliers
 The ability to perform sourcing risk assessment

 Enhancement of internal communication for reporting critical supplier sourcing
information
 The ability to provide positive supplier reinforcement

 A basis for a supplier award program
This system is the least subjective of the three because it quantifies the total cost of doing
business by considering non-performance costs. The main difficulty in the use of the system is
its complexity and its requirement that users have a developed cost accounting system. Although
this sounds like an ideal way of dealing with costs, it is difficult to identify the costs of supplier
non-performance.
Against their subjectivity and drawbacks, the categorical method, the weighted-point method
and the cost-ratio method are the most widely used techniques in supplier evaluation due to
their ease of use and implementation. Several other models and techniques have been proposed
for supplier measurement and evaluation. These include: total cost of ownership approach,
analytical hierarchy process (Barbarosoglu and Yazgac, 1997), weighted linear model approaches
(Lamberson et al., 1976; Timmerman, 1986; Wind and Robinson, 1968), mixed integer
programming (Weber and Current 1993) discreet choice analysis experiments (Verma and
Pullman 1998), matrix method (Gregory 1986), human judgment models (Patton 1996), interpretive
structural modeling (Mandal and Deshmukh 1994), statistical analysis (Mummalaneni et al.
1996), linear programming models (Pan 1989; Turner 1988), and neural networks (Siying et al.
1997), multi-objective programming (Weber and Ellram 1993). Of these methods, Total Cost of
Ownership (TCO) method stands out as a commonly endorsed approach.

7.2.5 Categorical System

In this method, the buyer chooses attributes that are most important to its particular situation.
The buyer assigns either a preferred (+), unsatisfactory (-), or neutral (O) rating for each of the
selected attributes to every vendor. Then the ratings are totaled for each vendor.

Example: Ratings resulting in scores of two preferred (++), one unsatisfactory (-), and
one neutral (O) would total one positive (+). A comparison of total scores reveals the highest
rated vendor.

The representatives of the involved divisions agree upon the ratings.
Categorical supplier measurement is the easiest method to implement but suffers from
subjectivity. It does not provide a detailed insight into the supplier’s true performance because
the attributes being measured are weighted equally. Also, because the representatives of the
involved divisions assign the ratings, this method relies on an individual’s perception about
performance and not on quantitative data.

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