Which of the following is the “identification” step in the supplier selection process?

Case Summary:

A systematic approach in supply-chain methodologies can get your company ahead of third-party problems and save you not only money, but also eliminate risk of supply-chain interruption and lots of headaches and issues before your supplier become a liability or operation risk that lead to a full blown crises.

I have written a short analysis on this topic, regarding on supply-chain and vendor management and compliance issues. Operation Management tool, such as the "Analytic Process Model" for supplier selection process and application of the "Factor Rating" methodology are among effective tool used for vendor selection process. Using these models would provide the company a sound and rational decision making, and effective vendor selection, and help establishing a long-term partnership with the suppliers. Six general criterias: cost, quality, trust, timely delivery, flexibility, and risk attributes to lessen the chances of supply-chain interruption, ensure product flow, work safety and overall outsourcing operation.

Outsourcing makes it possible for the companies to procure products much more cheap than manufacturing them in their home country. In today’s globalized world many retailers are building strong supply-chains around the world to gain advantage over their competitors by offering the best value to their customers. In many cases, cost saving is the strongest motive for companies and retailers to engage in global outsourcing. However, in developing viable sourcing strategies on the global scale, companies must consider not only the cost of manufacturing and transportation, but also assess its supplier’s risk factor and trust in the selection criteria to measure reliability of the contractors.

Finding a new trusting supplier within the pool of alternative countries is a part of SCM critical task, managing the risk, dynamics, and complexities of global sourcing to ensure best supply-chain at low cost. Finding a new supplier that falls in the company's qualification standards, conforming trust and reliability and adequate standards is a tedious process that can only be achieved through a well-designed supplier selection process, and re-assigning new critical factors in the supplier ranking criteria.

Proposed International Ops. Management concepts/tool can be applied to the problem
I. Strategic importance and criticality matrix (SIC Matrix)
II. Selection process model
III. Factors ranking for supplier selection

These strategies, when applied in order can be useful for any company when considering outsourcing a suitable that meets the company’s criteria, adhere the compliance and policy, lessens unpredictable risks, and accidents, while ensuring supply-chain flow, work safety, and maximizing profit with low cost strategy.

I. Strategic Importance and Criticality (SIC) Matrix:

What should be outsourced needs to be carefully considered. Utilizing the Strategic Importance and Criticality Matrix is a tool to determine what should be produced in-house or by an outside supplier.

II. Selection Process Model:

The model helps to rank and make a rational decision in the selection process for a long-term partnership. The first step to pre-qualification process is to search and compile a comprehensive list of eligible suppliers that may be able to meet the company requirements. After that is completed, we will need to narrow down the list of suppliers which we request more information from. Next, trial period begins for testing the supplier’s ability to meet company and product requirements from smaller sample to larger ordering. After this trial period is completed, we would apply the Factor Rating Method in selecting the best suppliers among the qualified suppliers.

III. Factor rating:

Factor rating is one of the common methods that is applied by SCM and sourcing managers in supplier selection process. The first step to take in factor rating is to list the criteria that are critical to the particular outsourcing activity. In our example, we have concluded six general criteria: cost, quality, trust, timely delivery, flexibility, and risk. In our case we placed “cost” as number one criterion of the company and assigned the highest weight on this attribute. Low-cost strategy gives the company a competitive edge among its rivals. However, the company has trade-off of cost against and trust, quality, and risk, which they cannot be sacrificed to short-term profit and low-cost strategy.

And, finally, we have identified three suppliers from South East Asia region.

Supplier-1: Vinatex Danang is a Vietnam-based company engaged in apparel industry. The Company’s activity is manufacturing and marketing of various clothing lines. Company central offices are located in Ha-Noi. The average labor wage the company pays to apparel workers is $0.55 per hour plus incentives.

Supplier-2: Brandix Lanka Ltd is Colombo, Sri Lanka based apparel company, and a largest exporter in the country. The Brandix Group is engaged in developing, manufacturing and marketing end-to-end apparel solutions to global fashion super brands such as Wal-Mart and other European retailers. The average labor wage the company pays to apparel workers is $0.40 per hour plus incentives.

Supplier-3: New Orient Garment Co Ltd is located in city of Phnom Penh, Cambodia, produce knitted and woven garments. Their buyers also include JC-Penney, K-Mart & Sears, Footlocker, American Eagle Outfitters Etc. The average labor wage the company pays to apparel workers is $0.30 per hour plus incentives.

The Global Competitiveness Index and Business without Borders are among the government and private institutions covers 144 economies, provide detailed information including, country risk ranking, political and economic profiles, labor markets, business environments, technologic, infrastructure, transportation and developments, which are useful sources for any company and other MNCs that are planning for foreign direct investment, (FDI), joint ventures or, searching for suitable suppliers in the world. Supply Chain Managers (SCM) should utilize similar sources from government and institutional organizations when evaluating the country of interest.

A short list of critical attributes below exerted from the Global Competitiveness Index to provide hypothetical information in calculating and factoring for the new manufacturing suppliers.

Vietnam. Country score 4.1. Ranked 75/144.
Reliance on professional management: 3.7/7 –107/144.
Poor work ethic in national labor force 5.9.
Labor market efficiency 4.5/7 - 51/144.

Sri Lanka. Country score 4.2. Ranked 68/144.
Reliance on professional management: 5.0/7 –35/144.
Poor work ethic in national labor force 2.5.
Labor market efficiency 3.7/7 - 129/144.

Cambodia. Country score 4.0. Ranked 85/144.
Reliance on professional management: 4.4/7 – 59/144.
Poor work ethic in national labor force 4.8.
Labor market efficiency 4.8/7 – 28/144

Steps to take in Factor Rating:
First we list the attributes (factors) that are critical to Company’s outsourcing activity in our case. Next, we place an importance weight on each of these six attributes. We sum the importance weights equal to 1.0. We rate each supplier’s ability to satisfy each factors on the scale of 1 to 5, with -5- being the most satisfactory and -1- being the least satisfactory. We multiply each rating by the corresponding weight, and sum the products for each factor. And, we pick the supplier with the highest overall rating. Importance weights are attached to each criterion.

Conclusion:

The use of the Analytic Process Model for supplier selection process and application of the Factor Rating methodology help better evaluate which suppliers to choose based on a scoring system. Using the selection process model requires careful research and identification of qualified suppliers that helps to rank and make a rational decision in the selection process for a long-term partnership. The factor rating helps the SCM compare suppliers and decide which supplier is best suited to work with in each specific situation. With the application of selection process model and factor rating, the selection of the best qualifying suppliers would have been executed more rationally, and the company would have saved itself not only money, but also lots of headaches and deathly accidents.

Kaya Okay Ilkiz, MBA

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