3. Choosing the right supplier

The decision of how to choose a particular supplier might depend on the number of factors. Usually, buyer considers the following major conditions: quality, possible volumes and terms of deliveries, prices and supporting services.

The nature and costs of a final product would influence the particular evaluating parameters (requirements) to the supplier of raw (input) materials.

Ex.: to produce a new product “A” (in small volumes) for the market the parameters of quality and time of deliveries (raw materials, spare parts) might be preferable over price terms (because there is a real market demand to be satisfied immediately). From the other side, if there are big volumes of input materials planned to acquire, the price might be a key point, while delivery time should be accurate, but not urgent. Thus having a demand for the same raw materials the evaluating criteria of the supplier might be different depending on the nature of a final product.

The algorithm:

1. Risk evaluation. If: supplier is unknown, high costs of purchase, unknown raw

material, then risk level is higher. The “selection supplier” decision has to be

treated as a chain link (звено цепи), and not as an isolated process.

2. Information sources about the suppliers:

   • exhibitions, shows; personal contacts; catalogues (printed, electronical); Internet; trade journals; trade delegates; contacts with employees from the supplier company; carrying out tenders (if big volumes are planned and long-term cooperation)

   • creation of a list of potential suppliers, and its optimization

3. Analysis and evaluation of selected suppliers. On-going process.

Criteria: informal evaluation (typical for small comp.); half-formal (“round-table meetings”); formal evaluation – quality parameters, prices, reliability of deliveries, services. Other: minimum volume of delivery, geographical location, discounts possibilities, reputation, assortment, adv capacities, risk sharing, etc.

Final stage – negotiations, which depend on market power, the extent the products are important to the buyer, other.

4. Evaluation of result.

Performed when there is an experience of cooperation available (in most cases). Tools: development of “classification scale”, or “scale of grades”. The experts from different departments are involved, and evaluation criteria are selected. Ex. : quality of product, terms of payment, geograph. loc-n, service, etc. For each criteria the “coefficients of importance” are applied, ranged “0…1”, or “1..10” etc. Afterwards the complex grade is received.

Criteria	Evaluation of importance by diff. experts				Complex grade (Cg)
	1	2	…	n
1	0,2	0,5	0,4	0,2	1,3
2	0,1	0,4	0,7	0,3	1,5
…	…	…	…	…	…
n	0,5	0,2	0,3	0,2	1,2

Suppliers then are treated accordingly to the defined importance of each criteria.

More precise calculation of criteria’s importance (Cg) when each expert has been also graded:

Cg= ,

where n – number of experts;

Ci – coefficient of importance given by i.. expert;

Ei – coefficient of competence of “i..” expert

Calculation of a supplier’ ratio (example):

Criteria of the supplier selection	Importance of a criteria (Cg)	Evaluation of supplier	Multiplication of importance and eval-n
Price	1,5	4	6
Delivery terms	0,4	8	3,2
Location	0,2	9	1,8
Service	0,7	4	2,8
…	…	…
Total	constant		13,8

The same with diff. suppliers. Evaluation of supplier by 1..10 grades. There might be minimum ratio level settled (defined by the purchasing company).