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Purchasing (BMK 3748)

Chapter 5: Analysis Of The Efficiency Of The Purchasing Function

Supplier is the fundamental resouce employed by your organization to meet its requirements and if
you do not select correctly, you will never achieve satisfactory results.

1. Evaluating Offers

Evaluating suppliers offer means not only evaluating its bid or proposal on the cost perspective, but
means evaluating the suppliers ability to perform based on level of speed and quality.
Buyer reviewing an offer should evaluates three (3) criterias before awarding an contract to the
supplier: responsiveness, capability, and competitive value.

a. Responsiveness
The basic criteria is that the suppliers ability to perform to the specification or scope of work
contained in your request.
In high value or high profile contracts, it is wise to actually visit the suppliers facility and
physically inspect the facility to qualify the supplier and determine its ability to meet
requirements.
However, site visit migh be pyhsically and financially impractical, therefore there are other
methods should be used. For instance:
o Contact the suppliers references to ask about similar project or work performed in
the past.
o Review the response documents to ensure that the supplier has answered all the
questions in your bid and successfully addressed any mandatory requirements.
Offers that do not answer your specific questions should be considered
noncomforming and rejected.
Determine that the suppliers proposal conforms to your organizational business and ethical
policies and procedures.

b. Capability

i. Operational Capability
Ensure that the supplier has the ability and systems to properly schedule orders and keep
track of current operations to meet its commitments.
With little or no technology to assist in scheduling process, supplier will have difficulty in
keeping track of its obligations and may prove unreliable.
Past performance, might not be a clear indicator of future performance, but its provide some
information about the supplier.

ii. Technical Capability
Another key capability to be evaluated is the suppliers technology and technical ability.
Does it have the necessary equipment, tools, and talent to meet your requirements?
How many patents does the company hold in comparison to its competition?
Consider certification as an adjunct to technical ablement.
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Does the supplier have the necessary licenses, insurance, and certifications required to
ensure regulatory compliance?

iii. Financial Ability
A key indication of the suppliers ability to service your needs is its history of profitability.
When a company profit trends are moving downward at a faster rate than its competitors, it
is an indication that the supplier begin to face financial constrain.
This may affect its ability to meet current schedules, to effectively invest in new equipment,
to employ new technologies or to hire the best talent.


c. Competitive Value
Value can be considered as a combination of number of factors: price, service, technology and
quality.

Elements of Value

i. Price
When supply exceeds demands = price usually drop.
When demand exceeds supply = price usually rise.
When facing declining prices, suppliers usually will move away from marketing the
particular product or service on to other, more profitable offerings.
Similarly, when facing rising prices, consumers tend to move to less costly alternatives.

ii. Service
From customers perspective, service is the element that bonds the organization to the
supplier.
In developing relationship with customers, the supplying sales team generally strives to
develop a perception of responsiveness to problems ad issues.
Service after sales.

iii. Technology
In any conideration of value, two (2) questions regarding the use of technology are
important:
o How effectively does the proposed technology meet current requirements?
o How long into the future will the technology continue to be viable?
Always keep in mind that technological innovation can provide your organization with a
competitive advantage.

iv. Quality
The evaluations of quality involves both the suppliers ability to conform to specifications
and the perceived satisfaction of the user.





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Tool to Evaluate Supplier Performance

a. Supplier Evaluation Matrix

Category % Value A* B* C* D* E* Average Weighted
Score Average
Cost 35%
Relative bid 15% 4 4 3 4 5 4.0 .60
Containment- 8%
tools
Tracking 4%
system
Market 8%
leadership
Quality 30%
Historical
defects level
Incoming insp. 8%
Six Sigma 6%
SPC 6%
*Rating Scale: 1=Poor, 3=average, 5=Excellent.



1. Benchmarking

Definition: a process of evaluating a companys work methods, processes, service levels, or
produts against meaningful standard.
Benchmarking means comparing the performance of other organizations with that your own.
Performance benchmarking measures what results organizations have achieved in their
purchasing/supply activities.
Process benchmarking attempts to determine how an organization achieve results.
To better assess the validity of your goals, you should consider developing benchmarks with
other organizations in your industry.
To conduct a process benchmarking study, practices used by top-performing organizations are
identified and a team visits the top performer in an attempt to identify its best practices.
CAPS Research is a global research center for strategic supply management, has benchmarking
reports available for a wide variety of industries for instance; aerospace, engineering and
construction, higher education and so forth.
Caps has established 20 standard benchmarks to enable cross-industry comparisons.

Types of Benchmarking

Three types of benchmarking can be identified; internal which is focused on the processes of a single
company, external which examines processes outside of a companys direct industry and
competitive, competitive which examines processes at firms within the same industry.


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i. Internal Benchmarking

The internal benchmarking process allows a company with a number of facilities that operate the
same supply chain processes to compare and contrast the ways in which the process is
performed in those facilities.
For example if a company operates five distribution centers in the US and Canada, the
benchmarking process can examine a number of operations that take place at each of the
distribution centers and compare how they are performed and what improvements can be made
by comparing the results of the benchmarking.

ii. External Benchmarking

The external benchmarking process takes a company outside of its own industry and exposes
them to different methods and procedures.
For example, a manufacturer and distributor of electrical components have internally
benchmarked their warehouses for a number of years and have exhausted ideas on improving
efficiencies.
They approached a very successful retail company to visit their central warehouse and
benchmark the processes that occur there to compare to their own warehouse processes.
The external benchmarking allowed the manufacturer of the electrical components to assess the
processes seen in the retailers warehouse and develop an improvement plan for their own
facilities based on the results.

iii. Competitive Benchmarking

For companies that are not performing as well as their competitors they may want to identify the
reasons why their processes are not as efficient.
Consulting and research firms can perform competitive benchmarking studies for companies that
will identify the strengths and weaknesses of their processes based on those of their
competitors.
The company can then produce improvement plans based on the results of the competitive
benchmarking.