Reputed suppliers are intangible assets to any organisation. As they are not only suppliers of materials but are also extremely important sources of information with regard to market conditions, price trends and the general industrial climate. It is, therefore, natural that many organisations have accepted source selection as a corporate policy.
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This helps in bringing about a fair competition among the suppliers and supply failures are kept at a minimum. Source development is also important for import substitution, cost reduction and quality improvement.
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Source development needs are dependent on factors such as make or buy decisions, amount of sub-contracting, break even points at manufacturing and plant capacity. It should however, be remembered that source selection, development and presentation is a continuing activity.
Stages in Vendor Selection/Procedure of Source Selection:
For selecting the vendor the following procedure is adopted (Fig. 15.1).
STAGE-I: Searching:
The need for a material or product is the starting point. The search process begins with the finalization of specifications in consultation with technical departments. In consists in identifying the sources of supply— the initial survey should be exhaustive. Normally, comprehensive information can be obtained from the Indian Trade Journal, Newspaper advertisements, telephone directory as well as the publications of government agencies like the Directorate General of Supply and Disposal and the Indian standards institutions.
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The routine sales calls by suppliers’ representatives are another important source of information. Salesman should be encouraged to present the products in which the organisation is presently interested, and their company’s entire product line.
This enables the buyer to identify potential sources for products which under normal circumstances might be overlooked. Trade shows technical exhibitions and samples are other important sources that assist the search process.
STAGE-II: Vendor Selection:
The key considerations in source selection are: (a) there should not be so many sources, that the buying company is no longer perceived by each supplier as an important customer, or (b) there should not be so few that prices and service competition among suppliers diminishes.
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Another important factor is the nature of the supplier — customer interface for items involving considerable technical development engineers’ work, it is desirable to restrict the number to one or two suppliers at the most, for each item.
Such relationships required enormous amount of time, energy, security control, initiative and understanding on both sides, who relate well to each other. Plainly, it is usually impractical, uneconomical and inefficient to work simultaneously with a number of suppliers on developmental efforts. Further, the cost of qualifying the suppliers may be very high.
Another is that, splitting the available volumes of purchases among several suppliers may make it impossible for any one supplier to achieve economy of scale in production and servicing. Then, the customer must suffer the penalty in the prices paid for maintaining multiple sources. Finally, there is the matter of simplifying ordering routine.
This is a consideration, particularly in connection with purchase agreements that are centrally negotiated but decentrally used. In negotiating, for supply items for example, there may a price advantage in buying some items from one vendor and some from other sources. A significant difference however is the confusion that this might cause, in ordering routines at the plant level. Hence, it is desirable to limit the number of sources to manageable levels.
STAGE-III: Negotiation and Trial Orders:
After the preliminary screening and selection, the process of negotiation with the vendors for placing trial orders starts. Correct and cordial relations with the vendors are essential for mutual co-operation. The vendors should be provided with the same courtesies that an organisation expects for its own salesmen or gives to its customer.
Various aspects, including terms of delivery, price and quality finalised during negotiations and then the purchase orders a released for the initial trial. Normally, the trial orders do not exceed more than 20 to 30 days’ requirements as the buyer has to convinced, in the first place, about the vendor’s capability in meeting his needs.
There are many factors which enhance the process of negotiation. They include:
1. The need for quantity requirements and other technical detail should be described fully but concisely.
2. Personal contacts between the executives of the buyers and the vendors often help in maintaining a smooth relationship and understanding of each other’s problem areas.
3. On a regular basis, the buyer may organise a conference of his suppliers with a view of giving than an opportunity to find out where there materials are utilised, to compare and clarify the quality and other technical requirements of the materials they supply.
STAGE-IV: Vendor Rating:
After the trial orders are executed, it becomes necessary for the buyer to rate the vendors to enable him to determine how he should apportion his requirements among the vendors. In other words, the basic responsibility of the materials manager is not only to locate the sources but also to preserve them through continuous rating. A vendor’s performance in meeting the quality, delivery and price standards set by the buyer has to be assessed in a systematic manner. Several rating systems are as follows:
1. Categorical plan.
2. Weighted point plan.
3. Cost ratio method.
4. Eavaston’s vendor selection.
5. Forced decision matrix.
6. Service cost ratio.
7. Bell quality rating system.
8. IBM quality rating system.