THE STUDY OF VENDOR (SUPPLIER) SELECTION AND

EVALUATION METHODS IN AUTOMOBILE INDUSTRY

A Second review report

(Submitted by JAWAHAR V, Roll No: 69017200116, Reg No: 1722MBA0422)

1 NEED FOR THE STUDY
The growing role and dependence on suppliers within the company’s business chain increases
the need for objective assessment of supplier performance. In many cases it is not sufficient
that suppliers are able to meet the materials and service requirements of today. Buyers also
need to determine whether a supplier is sufficiently equipped to live-up to the company’s
long-term requirements and needs. In addition, it is necessary to know whether a supplier can
guarantee sustained continuity of supply. Primarily, the purpose of this study is to construct
an analytical framework for the vendor selection process. It combines quantitative and
qualitative vendor performance indicators and based on the most important key factors of
suppliers’ evaluation to construct a model for vendor evaluation and selection.

2 REVIEW OF LITERATURE

• According to Prashaya fusiripong and Yuhanis Yusof. The IT supplier selection is

required to apply multi-criteria which comprised tangible criteria and intangible
criteria in consider optimal IT supplier. Most researches attempted to identify optimal
criteria for selecting IT supplier, however, the criteria cannot be the considered
common criteria support the variety of IT outsourcing. Therefore, the study aimed to
identify a common set of criteria being used in the various types of IT outsourcing.
The common criteria are constructed by multicriteria and success criteria, which were
collected by literature review with comprehensive and comparative approach.
Consequently, the researchers are able to identify a common set of criteria adopted in
the variety of selection problem IT outsourcing supplier.

• According to Lokpriya Gaikwad and Vivek Sunnapwar, It is the responsibility of

purchasing department to choose the correct suppliers to purchase the required
products for their company. Thus, supplier evaluation technique is essential for
purchase manager’s point of view to choose the best supplier among available
suppliers. The literature addresses quality, delivery, technology, value and service as
the five most common criteria used for supplier quality evaluation. In this chapter,
approach of evaluation and selection of supplier has been presented as per the ISO
9000/TS16949 standards. Considering the most important criteria for evaluating the
quality of suppliers based on a review of the literature and observation in practice.
Finally, these organizations continuously review and implement effective quality
systems following the rigorous ISO 9000/TS16949 series of standards and most

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 automobile companies have developed in-house procedures and software for the
supplier selection process

• According to Surajit Bag,In turbulent economic situation, the cost of Production is

the key to competitive advantage. To sustain competitive for the long term a firm
need to focus on upstream Supply Chain. The Supplier selection has a critical impact
on Cost of raw materials, which finally affect the Costs of goods sold. Every firm has
their own set of parameters on which they select suppliers. Depending upon their
strategies it could be either short/long-term contract which further depends upon
suppliers overall performance and firm’s operating model. Here the researcher aims to
explore various possible supplier selection models depending upon the nature of the
product. This paper reveals the findings of a wide ranging literature review of supplier
selection models. The areas that have received less focus are also discussed.

• According to T S Sinaga and K Siregar. The performance of suppliers in a company

have to be monitored to ensure the availability to fulfill the company needs. This
research is intended to explain how to assess suppliers to improve manufacturing
performance. The criteria that considered in evaluating suppliers is criteria of
Dickson. There are four main criteria which further split into seven sub-criteria,
namely compliance with accuracy, consistency, on-time delivery, right quantity order,
flexibility and negotiation, timely of order confirmation, and responsiveness. This
research uses PROMETHEE methodology in assessing the supplier performances and
obtaining a selected supplier as the best one that shown from the degree of alternative
comparison preference between suppliers.

• According to S. Hossein Cheraghi, Mohammad Dadashzadeh and Muthu

Subramanian, for many organizations effective supplier evaluation and purchasing
processes are of vital importance. As the pace of market globalization quickens, the
number of potential suppliers and the number of factors to consider when selecting
suppliers increases. In this paper we present the critical success factors (CSFs) for
supplier selection reported in the literature emanating from the seminal work of
Dickson and provide an update based on reviewing more than 110 research papers.
Our study indicates significant change in the relative importance of various critical
success factors in the research reported during 1966-1990 versus 1990-2001.
Increased competition and globalization of markets facilitated by Internet-based
technologies have combined to dramatically change the ranking of factors while
introducing new criteria to the supplier selection process. Based on the results of this
study, we conclude that supplier selection criteria will continue to change based on an
expanded definition of excellence to include traditional aspects of performance
(quality, delivery, price, service) in addition to non-traditional, evolving ones (just-in-
time communication, process improvement, supply chain management).

• According to NIKHIL CHANDRA SHIL , Vendor selection methodology is a

highly researched area in supply chain management literature and a very significant
decision taken by supply chain managers due to technological advances in the
manufacturing process. Such research has two basic dimensions: one is related to the
identification of variables affecting the performance of the vendors and the other deals
with the methodology to be applied. Most of the research conducted in this area deal
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 with the upfront selection of vendors. However, it is very common to have a list of
dedicated vendors due to the development of sophisticated production technologies
like just in time (JIT), a lean or agile manufacturing process where continuous flow of
materials is a requirement. This paper addresses the issue of selecting the optimal
vendor from the internal database of a company. Factor analysis, analytical hierarchy
process and regression analysis is used in an integrated way to supplement the vendor
selection process.

• According to William Ho , Xiaowei Xu and Prasanta K. Dey, Supplier evaluation

and selection problem has been studied extensively. Various decision making
approaches have been proposed to tackle the problem. In contemporary supply chain
management, the performance of potential suppliers is evaluated against multiple
criteria rather than considering a single factor – cost. This paper reviews the literature
of the multi-criteria decision making approaches for supplier evaluation and selection.
Related articles appearing in the international journals from 2000 to 2008 are gathered
and analyzed so that the following three questions can be answered: (i) which
approaches were prevalently applied? (ii) which evaluating criteria were paid more
attention to? (iii) is there any inadequacy of the approaches? Based on the inadequacy,
if any, some improvements and possible future work are recommended. This research
not only provides evidence that the multi-criteria decision making approaches are
better than the traditional cost-based approach, but also aids the researchers and
decision makers in applying the approaches effectively.

• According to McConville (as cited in Hadikusumo et al., 2005, pp 48), purchasing is

“a fundamental function of material procurement that refers to the acquisition of
goods and services and an establishment of mutually acceptable terms and conditions
between a seller and a buyer”. Considerable attention has been paid to the purchasing
function in past literature mainly due to its contribution to profitability, survival of
business organisations and firms‟ performances (Bayazit et al., 2006, Carr and
Pearson, 1999). Gadde and Hakansson (2001) found that purchasing is not seen as a
separate function but as an integral part of running a company. As far as the
construction industry is concerned, purchasing can occur in all phases of a
construction project.

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3.1 PRIMARY OBJECTIVE
A study of vendor (supplier) selection and evaluation methods in automobile industry.

3.2 SECONDARY OBJECTIVE

Following methods and process way to find an effective vendor for automobile industry.

1. Quality assurance system:

Evaluation by using validated quality measurement system.

2. Projects analysis methodology:

Analyzing a various projects and protect based methodoly.

3. Project management:
Project management guidance and assurance. (Or) product based management and
assurance.

4. Process design and pre-production;

Pre design support and technical guidance evaluation.

5. Ramp up activity:
Product volume ramp –up capacity evaluation and matrix method.

6. Management Structure:
Validating vendor management and organization structure.

7. Sub supplier management:

Child part – sub assembly part vendor quality evaluation method.

8. Final evaluation methodology:

Based on above evolution methodology to create an evaluating score matrix.

4 METHODOLOGY

Methodology of analytical research is used to carry out the research process in this case

study. Primary and secondary data is used to carry out the calculations and other evaluation in

this case study. Real time data obtained from the various vendors and by using various

quality tools like Taguchi 5Y Analysis, Pareto chart, Histogram, Fishbone diagram, Johari

window are used to analyst the data. In most of the research which is based on supplier

selection and evaluation, authors opined that the purchasing organizations use different

approaches for evaluating and selecting supplier as per their requirements because of no best

way is there.

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5 DATA COLLECTED

Below are the Supliers that are used for the examination of the Supplier selection by using the
below 3 methodologies:

1) Capparo India
2) TI Automotive
3) SKH India
4) Washin India
5) Yapp India

4.1 Basic Methodology

Basic Research Methodology This research is carried out in the following methodology and it

involves the following activities. The research adopted is Analytical research where the

already available data, information, facts, functions is used for analyzing, interpreting, and

the research. Data collected is carefully analyzed.

Techniques:

1) Rejected parts per million (PPM) level

2) Value engineering (VE)

3) AHP Methodology

1.) Rejected parts per million (PPM) level:

PPMeq is a pointer for inward part quality by monitoring the performance of inward parts

during on-going production, once parts is handed over by Component Development Materials

Management (CDMM) to Supplier Quality Assurance (SQA) and procured by Supply Chain

Management (SCM). This guideline sets the procedure of calculating the PPM Equivalent

(PPMeq) and declaring non-conforming parts in the supplier deliveries. The suppliers’

performance has assessed by the index PPM which has based only on rejection of parts at

receiving stage and on line. But this index did not reflect the performance of the suppliers

whose parts has mostly reworked on lines, the parts for which deviations/concessions were

sought. Also much effort has been put in for segregating parts if any non-conformity has
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found in a lot. Some supplier parts also get rejected at the final assembly stage due to which

the whole assembly faces rejection. To capture the effect of all the above conditions, a new

index PPMeq has been formed. Formula:

Supplier RPPM (rejected parts per million) is calculated on the basis of the amount of

rejected parts versus the total amount of parts received in a given fiscal month. This

computation is then normalized to replicate a continuous basis of one million units received. •

PPMeq can be calculated as:

○ Auto Sector-wise PPMeq

○ Plant-wise PPMeq

○ Supplier-wise PPMeq

○ Supplier Part-wise PPMeq

The agreement on PPM values does not signify a quality level accepted by Customer. All

purchasing parts which are recognized as defective basically not be accepted and has been

charged to the supplier.

PPMeq for a period is calculated as shown in Eq. (1)

PPMeq = N rej + N rew + N rej 951 + 0.5 N dew + 0.5 N conc + 5.0 N rej at F.A. X 1000000

Ntotal

where Nrej is the total inspection and line rejected quantity; Nrew is the total inspection and

line quantity reworked; Ndev at F.A., is the total no. of quantity accepted under variation

(inspection and line); Nconc is the total no. of quantity accepted under concession (inspection

and line); Nrej at F.A., is the total no. of quantity rejected at Final Assembly; NTotal is the

total no. of quantity received; and Nrej 951 is the total Quantity rejected on movement 951

for scrap at our end.

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Example:

A supplier ships 100,000 parts to a plant, of those 7 are found to be non-conforming. The

scorecard calculation will be (7/100,000) × 1,000,000 = 70 RPPM’S. The Supplier’s score for

this example has 12 points.

Table 1 shows parts per million ranges and their respective scores. From table it clear that,

maximum score has been assigned to minimum rejected part per million and so on. Following

are the minimum requirements from the suppliers end during the inspection of their submitted

lot for acceptance to the OEMs.

Minimum expectations: it is expected that the minimum score should be 85%, (combined

total of 51 points out of 60 possible).

Corrective actions: those suppliers who cannot meet the minimum expectation should be

applied following corrective actions.

1. First month: announcement letters has been sent to Suppliers for giving justification

regarding not meeting minimum score, reason for the same and what corrective action will be

taken in future.

2. Second consecutive month: a second announcement letter has been sent stating that

failing to meet minimum score and why. A corrective action plan is required.

3. Third consecutive month: if the problem is not solved in first and second notice then

purchase manager either visited or called meeting with supplier to discuss performance.

Within this period, suppliers may be on probation.

• Rejection: any parts that not meeting customer specifications has rejected.

• Rework: if doing any minor correction on part, it becomes fit for use then it comes under

rework.

• Deviation: any supplied part whose critical dimensions or material specifications cannot be

reworked/repaired is termed as deviation.

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• Concession: when approval of product development has not taken for the minor repair that

are not specified in the drawing and which does not affect the product quality, it is termed as

concession.

• Segregation: division of accepted/rejected parts, done with permission of QA personnel of

that area, is known as segregation. Industrial Engineering.

• Rejection at final assembly: due to supplier part if final assembly gets rejected, then it

comes under rejection at final assembly.

To simplify communication and wherever technically practical and feasible, only one target

value should be agreed for each product family delivered by suppliers or if possible for all

products delivered. General rules to declare Non-conforming parts:

1. Rejection: a part has been rejected if it falls out of the engineering specification. After

proper inspection a part has been rejected. For example, in case of incorrect dimension, if the

supplier has not produced a part as per specified dimensions, rejection will be done otherwise

part will be accepted if it falls within specified specification.

2. Rework: parts shall be declared as rework if they are non-conforming only if the supplier

is responsible. An analysis agreed by the supplier shall define the accountability for the

rework (supplier); the supplier can take part in the investigation process. All records related

to Deviation, Concession and Segregation, rework quantities are kept.

3. Deviation: the variation for the use of non-conforming part has been agreed by the

Product development and respective plant quality head.

4. Concession: the dispensation has rose by the Manufacturing Quality and approved by the

respective plant quality head.

5. Segregation: the quantities accepted after separation of the supplier parts has been taken

into account in the calculation of PPMeq. This has not been interpreted as the total quantity

which is separated.

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6. Quantity of non-conforming parts: it has been declared with the conformity of the

supplier and customer. Sample has not used to declare the non-conformance.

7. Re-acceptance: after correcting the parts it has been reaccepted within same month of

rejection of that part so as to have correct performance of that supplier on monthly basis

2.) Value engineering (VE)

Value engineering originated from Myers of United States electrical engineers in 1947 (Yong
and Qi, 2012). The basic idea of VE is that to improve the value of the product and it is
known as a scientific analysis in management. Further, this method evaluates the product
necessary functions with the lowest cost. Therefore, value (V), function (F), and cost (C) are
considered as the core elements in the value of the project as shown below (Yong and Qi,
2012)

V=F/C

Where, V=Object’s Value

F=Object’s Function
C=Cost of an Object.

Firstly, an evaluation index system should be implemented for the material considered and
this should reflect the various functions of the materials (e.g. quality, price, freight, supply
capacity, credibility, etc.). Quantitative marking can be conducted according to the
importance of factors considered by seasoned front-line experts, including project manager,
project engineer, technical engineer, procurement engineers, etc.). Secondly, function
evaluation coefficient should be calculated (CF). Front-line experts can be used to evaluate
the suppliers for each factors considered. Let Ki denotes the importance of each factor, and
Kij denotes the each factor importance of each supplier. Following formula can be used to
test how the supplier’s capabilities meet the total score and functional coefficient.

Fj = Ki X Kij
CF = Fj / FT
Where, Fj = The total value of each supplier' evaluation
FT = The total value of all suppliers‟ function

Thirdly, Cost evaluation coefficient (CC) should be calculated. Phase quantity of materials
should be determined by project’s actual demand. The total cost of its purchase would be
calculated with product, the transport distance and the shipping price.

Cc = Cj / CT
Where, Cj = The total cost of each supplier
CT = The total cost of all manufactures

Fourthly, comprehensive evaluation coefficient (Cv) should be calculated. Finally, there

should be a comparison of evaluation coefficient of comprehensive value of each supplier
and the supplier with the highest comprehensive coefficient is selected.

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3.) AHP Methodology:

Analytical Hierarchy Process is a methodology which in multi-criteria decision model has

been used to derive weight or scores for the object in a multi-attribute space [14]. A hierarchy

consists of a minimum of three levels where the first level consists of the objective of the

problem, while then last level consists of the alternatives. Between these two levels exists one

or various levels of criteria and sub-criteria [11]. In this research, the hierarchy to supplier

selection in concrete industry is presented Figure 2.

Objective (level 1)

Criteria (level 2)

Sub-Criteria (level 3)

Alternative Supplier (level 3)

Based on AHP calculation of priority weight on level 2 are quality with weight 0.5319,
consisting of elements K1 (conformity with quality standards of raw materials are determined
by the company) with a weight 0.3477, and K2 (consistency of quality) with a weight of
0.1832. This means that the sub-criteria are considered to have an influence to the
performance of supplier.

6 DATA ANALYSIS
One of the major benefits that can be achieved is that the company performing suppliers’
evaluation gets to know the suppliers in a more profound way, creating a good basis for
future cooperation. By conducting this evaluation, the suppliers learn more about their
customers’ specific needs and demands. In addition, an evaluation provides suppliers with
knowledge about areas in need of improvement, which they were unaware of, leading to
improved performance.The three methodologies studies so far are each provides a best
Performance in different way but still we need to find the best and effective way to find the
best supplier for the welfare of the organization.

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7 WORK TO BE DONE

Final Report needs to be prepared by including two more methodologies to find the best

method to select the supplier.

8 LIMITATIONS

Study and calculations are useful only up to product based vendor selection only.

The study matrix will help only new vendor selection time only.

9 EXPECTED DELIVERABLES

Outcome of the project is useful to select an effective vendors in automobile industry.

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