Supplier Selection phase and purchase Category

The increasing importance of supplier selection is interrelated with the nature of the company business. Normally, „direct procurement‟ refers to purchases of components, raw materials, inventory items and is mostly used in manufacturing processes such as semiconductors and petrochemical products (Lamming, 1993). Indirect procurement, however, relates to equipment and services for its maintenance, repair and operation. This focus on the product and its services are not part of the end company product (Zenz, 1994).It is important to consider product-based factors carefully to procure the right quality of product in the right quantity at the right time. Judging supplier quality is also important to meet the service levels as set in service specifications and to increase customer satisfaction (Tam and Tummala, 2001).

Kahraman et al., (2003) stated that selection criteria conventionally fall into one of the four following categories: supplier criteria, product performance criteria, service performance criteria, and cost criteria.This shows that supplier selection is a multi- objective decision to both minimise some criteria and maximise others (Luo et al., 2009).

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In their research on the purchase decision, supplier selection and supplier relation; Ellram and Olsen (1997) discussed the portfolio model that provides the categorisation of purchase groups. This model provides a categorisation of the products in the four following groups: (1) leverage category (2) noncritical category (3) Strategic category and (4) bottleneck category.

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1. The leverage category includes purchases that are easy to manage but important to the company on a strategic level. During the management of these purchases, high importance is held in identifying the particular value of the purchase and leverage volume across product lines and suppliers; in order to lower the materials costs. The aim is to create a supplier relationship that holds mutual respect and allows the communication of requirements further into the future. This good, two-way relationship should be established and could be handled through system contracting. Getting a low total cost is paramount, as the total value of purchases in this category is high.

2. The noncritical category involves purchases that are easy to manage and hold a low strategic value. Standarisation and consolidation are the two key words when managing these purchases. Standardising means the company should reduce the number of suppliers and the number of repeated products/services. The supplier relationships should be maintained by establishing a relationship that is able to manage itself. The company could use blanket order, system contracting, and/or small purchase order charge card (SPOCC). The main target of this category is to reduce administrative costs.

3. The Strategic category covers the purchases that are difficult to manage and represent high strategic importance to the company. Again, establishing a close relationship with the supplier is one of the crucial things that will help the company manage the purchases. In addition to this, joint development of products and services by gaining early supplier involvement is important as well as keeping a long term value focus and lowering the cost of poor performance. The supplier should be regarded and entrusted as a natural extension of the firm.

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4. Lastly, the bottleneck category involves purchases that are difficult to manage although they hold a low strategic value to the company. Finding possible substitutes or standardizing the purchases is amongst the ways they can be effectively managed. The company should also attempt to establish some form of a relationship that focuses on concurrent engineering and involves the supplier in value analysis. This should effectively lower the cost of operations (Ellram and Olsen R.F, 1997).

The process of determining the supplier selection criteria as well selecting the supplier also often relates to the phase and classification scheme of the purchase. Commonly, this classification scheme identifies three differing purchasing situations which are categorised as straight rebuy, modified rebuy and new buy (Robinson et al.,1967). A straight rebuy often means that the purchasing agent does not need to seek out or acquire any further information in order to reach a purchase decision. This is because the straight rebuy is basically a situation whereby the product is repurchased from a previous supplier.

A modified rebuy on the other hand, includes significant changes to the usual purchasing patterns. Examples of these changes would include a change of suppliers, alterations to products specifications and or soliciting bids. As a result, all of these would need collection of new information before a purchase decision could be made.

A new situation is a self-explanatory situation occurring when a buy would be totally new for the purchasing agent. This means that in order to reach a final decision, extensive research and gathering of information would be essential. These three categories provide an outline of all the basic purchase situations in a classification scheme. To summarise, straight rebuys require the least amount of additional information, a moderate amount of additional research is required for modified rebuys, and new buys need the most extensive research to provide new information.

The supplier selection decisions will depend on the situation and categories of the purchasing requirement. They also depend on the degree of complexity and the level of uncertainty associated with purchasing. Centred on the work of De Boer et al., (2001) and Robinson et al., (1967), a group of three typical scenarios are categorised: modified re-

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buy, straight re-buy and new task. With a modified re-buy, a different product is purchased from a supplier that already exists and is known to the company, or an existing product that is perhaps modified is purchased. It holds a moderate level of uncertainty when this is taken into account. The straight re-buy holds the least uncertainty as the purchasing agent has already previously attained much information regarding the supplier and product specification. Finally, the new task scenario is that of a completely new product or service. Due to the fact that there is no previous experience to base anything on, it holds a high sense of uncertainty. Supplier selection could sometimes involve and require a single or multiple suppliers which are based on the product category and work category.

Based on the product and work category, in some cases supplier selection requires a sequence or series of phases. The initial phase contains a pre-qualification list upon which suppliers are assessed in order to make an eventual short-list of the suppliers that would be preferable. The common criteria assessed during this stage are usually of a generic nature and look into issues like: innovation, product expertise, process knowledge, architectural experience and dedication to continuous improvement potential. The evaluation stage uses the well-known categorical approach in labelling a supplier‟s performance on any particular criteria as either “positive”, “neutral” or “negative”. De Boer et al., (2001) describe a similar approach. During the second phase, the design indications are evaluated. The design criteria identified will be specific to the product and cover or meeting the product technical criteria. The system enables the benchmarking of internal suppliers‟ design criteria against those belonging to external suppliers.

The diagram below shows that the y axis represents the level of complexity of the business environment criteria and x axis is related to the information availability. The higher or the more complex business environment would require more comprehensive criteria formulation. It will be followed by the qualification process before final selection, eventually feeding back or monitoring the supplier progress. When all of the necessary information is made easily available on a diagram like this, the selection process is eased and the process of evaluating the supplier is less complicated. Figure 2.1 below shows the phase of supplier selection framework (source adopted from De Boer et. al., 2001).

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Figure 2.1: Phase of supplier selection framework

The phase of supplier selection Framework (DeBoer et. al., 2001 and Luo et. al, 2009) (Source: Adopted from DeBoer et. al., 2001).

To further simplify the process, there are companies that have taken an initiative to introduce process in the selection of suppliers that contains two stages. The initiative behind this is to allow the procurement team a reduction in how many suppliers need to be assessed as a result of the decreasing amount of suppliers progressing from the first phase to the next.

Cross-functional groups from the companies become involved in exploring and choosing the model attributes initially, and through an exercise involving bench-marking, the best design profiles for suppliers are identified. Effective communication between staff in an evaluation team will enhance their understanding of the areas that function which are a part of the design process. It can also improve the cohesiveness of a company‟s procurement team.

Product development times need to be measured in months when it comes to the telecommunications industry. Companies are constantly striving to find ways of compressing the time it takes to market so that they can increase their speed of response to clients and customers. Prior to introducing the new system, teams would spend several days having extensive discussions with manufacturing, design, marketing, accounting, and finance professionals so that they could decide upon the most fitting supplier. By

Many Pot ent ial Com bi nat ion s Few

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simplifying the process, the amount of time put into conducting the evaluation and assessment process has been significantly reduced.

However due to technological evolvements the buying firm would be required to continue upgrading the equipment and system in order to be able to compete in the business. This is how the supplier selection became a strategic function in procurement and purchasing field.

Since the supplier selection decision is a very important task, firms usually try to find ascertained criteria and factors that are associated with supplier selection. The selection of supplier is usually considered to be a five stage process, beginning with a realisation that a new supplier is needed. This is followed by the determination of decision making criteria, then the pre-qualification process. The final supplier selection then needs to happen and ultimately, monitoring of the selected supplier to ensure maintenance of high quality standards (Sonmez, 2006; De Boer and Van der Wegen, 2003).