Supplier Selection and Evaluation Methodology – a case for Indian Railways

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INTRODUCTION

Supplier selection in Indian Railways is based solely on the criterion of price and currently there is no scientific system for evaluation of supplier on the other very important criteria. The interesting part is that IR without formally entering into long term contracts, is in effect in long term contracts with most of its Part I suppliers without taking advantage of being one from the suppliers.

The areas of concern from supplier selection point of view are:

  1. Although the Ministry has prescribed a Supplier Rating formula in 1997, but there is no such system in vogue. It is a fairly simple formula, where Quality Rating has been given 60% weightage and Delivery Rating 40% weightage. But even this formula is not complete and does not capture a very important aspect of service, assuming cost to be same.
  2. There is a certain lack of objectivity in rating the supplier or selecting a new supplier which leads to complaints and can hamper even good decision makers to take a chance. As a result many times old non-performing suppliers are carried forward.
  3. The suppliers are not formally made aware of their bad performance from all points of view and the recording system is not scientific. Each supplier is viewed in isolation. The suppliers are also not aware of each other’s performance.

The reason perhaps is lack of knowledge on techniques to quantify other criteria like delivery, quality and service. A study undertaken for several major manufacturers is summarized in Table I.

Table I Summary of Selection/Evaluation Methodology

Company Attributes Weighted Scored used or not (in %) Remarks
BHEL, India Quality, Delivery, Service 60,30,10 Score used for rating, categorized into 5 categories
ABB Quality, Delivery, Cooperation

D – 40-60

Q – 20-40

3 categories of suppliers, evaluation both formal and informal
VOLVO Quality Performance Measurement Level, Field Failure, Delivery Precision, Rejected Parts Per Million Level, Breakdown Failure, Unplanned Stop, Production Feedback, Warranty Claims and Safety Problem Only target values Scorecard used
ALCOA HOWMETT Quality, Delivery, Service, Total Cost

Q- 55, D- 35, S- 10

Total cost not used for rating

3 categories
General Dynamics Delivery, Quality , Financial Stability, and Compliance D- 40, Q- 30, FS- 10, C- 20 Within each category the weights are further assigned
Ordnance Factories Board (OFB), India Quality, Delivery, Price, Service

Q- 60, D- 25, P-10,  S- 5

 

Within each category the weights are further assigned
Rail Coach Factory (RCF), India Delivery, Quality D- 40, Q- 60 Warranty claim also related to Quality Rating
Coal India Limited (CIL), India Quality, Delivery, Price Q- 40, D- 20, P- 40 Suppliers classified into groups
SAIL, India Quality, Delivery, Price Q- 50, D- 35, P- 15 Vendor is scored for each order. Vendors divided into classes after getting average scores
Lockheed Martin Aeronautics Company Pre-Install defects, Line rejections, Corrective Action Request (CAR) Quantity, CAR Responsiveness, Customer Escapes due to Supplier Vendor Quality Rating The elements are deducted from maximum score of 100
United Technologies Corporation Quality, Delivery, Lean, Customer Satisfaction N/A Suppliers are categorized
SCHAEFFLER Technologies AG & CO. KG Quality, Delivery Q – 65, D – 35 Each criterion has sub criteria.
Bureau of Indian Standards, New Delhi Quality, Delivery, Price, Service, System Not defined Only advisory

 

From the study of these systems it was found that they do not employ very sophisticated systems, in fact even the well established Multi Criteria Decision Making techniques are not used. This analysis conveys the fact that criteria for supplier evaluation are more or less common. Some companies do have exhaustive and scientific methods to assess the performance. They have formal feedback systems also. The four factors namely, quality, delivery, price and service are the criteria for assessing supplier performance by most of the organizations.  The Bureau of Indian Standards, New Delhi has issued a comprehensive standard IS 12040:2001 on “Guidelines for development of Supplier Rating System”. The purpose was to give guidelines to organizations in India on methodology for supplier rating.

As per the standards, the suppliers can be rated based on any or all of the following factors:

  1. Quality
  2. Delivery
  3. Price
  4. Service
  5. System

Based on past research, with the evaluation of criteria applicable and manageable in present context of increasing the perceived fairness and transparency, the four salient criteria which are identified as important in supplier evaluation and selection are,

  1. Quality
  2. Delivery
  3. Price
  4. Service

System factor of the IS specification has been avoided as it again leads to subjectivity; moreover we are trying to devise a method for rating the existing supplier, who has already been in business with IR. The principle adopted is “You can’t manage what you don’t measure”.

Taking cue from what happens in PU in tenders, we find that an open tender is issued for all items with a rider that only Part I suppliers will be given full order with some part being shelved to Part II sources if the need arises. This tender principle is perhaps adopted so that new suppliers are also found. But this is an unscientific method, as the focus of Tender committee is fulfilling the immediate requirement of material and NOT TO DEVELOP A SOURCE. These have to be two different tenders/ request for proposal and handled by different set of officers/managers.

Thus SUPPLIER EVALUATION and SUPPLIER CAPABILITY ASSESSMENT have to be separated.

Supplier Evaluation System

We can define target values of loss due to non conformity of supplier to our requirement.

The supplier should be made aware of his rating on a continual basis, in fact other suppliers should also be allowed to see the continuous ratings. With advent of web based systems this can very easily be accomplished.

The important point here is how to quantify each criterion. There is a method known as Taguchi Loss function (Taguchi et al. 2004) in Quality engineering, which is used for measuring loss to society due to non-conformance. It may however seem very complex to the manager and therefore become unacceptable in the managerial context of supplier evaluation. But it is worth considering as it is probably the most widely accepted technique for quantifying loss in engineering and science experimentation. The Taguchi loss function defines specification limits beyond which product is not accepted and loss is 100% to society. The loss function is given by Eq. 1

L(y) = k (y – m)2                     (1)

where L(y) is the loss associated with a particular value of quality character y, m is the nominal value of the specification, k is the loss coefficient, whose values are constant depending on the cost limits and the range of the specification. The other two functions are the one-sided minimum-specification limit and the one-sided maximum-specification limit function, called smaller-is-better and higher-is-better, respectively. The loss functions are given by Eqs. 2 and 3, respectively:

Smaller is better         L (y) = k(y)2                            (2)

Higher is better          L (y) = k/y2                             (3)

where L (y), y and k have the same meanings as in Eq. 1.

The target value of criteria and weightage can be similar to one depicted in Table II.

Table II Target Value of criteria and weightage

Criteria Target Value Range Specification limit Weightage
Quality 0% 0-5% 5% rejection 50%
Delivery 0 0-15 15 days 20%
Price Lowest 0-10% 10% higher 20%
Service 100% 100%-50% 50% lower 10%

 

Without going into details of the technique, the methodology is depicted in Table III.

Table III Calculation of Taguchi Loss coefficient

Criteria Taguchi Function Specification limit

Loss

(assuming 100% loss at specification limit)

Value of k
Quality ky2 5% rejection 100=k x (0.05)2 40000
Delivery ky2 15 days 100=k x (15)2 0.4444
Price ky2 10% higher 100=k x (0.10)2 10000
Service k/y2 50% lower 100=k / (0.50)2 25

 

Here, y is the value of the criterion.

Table IV is the representation for the calculation of loss by a supplier.

Table IV Calculation of loss by each supplier for each criterion

Loss due to

Quality

LQ

Delivery

LD

Price

LP

Service

LS

Value of Taguchi constant, k k= 40000 k=0.4444 k=10000 k=25
Loss k×(value)2 k×(value)2 k×(value)2 k/(value)2
Weight 0.5 0.2 0.2 0.1
Total loss due to Supplier 0.5 x LQ + 0.2 x LD + 0.2 x LP + 0.1 x LS

 

The suppliers can be rated according to least loss to system by them.

Alternative Supplier Rating System

If this system seems complex and unwieldy, a nice method has been deployed by BHEL. It has a scientific method of Supplier Performance monitoring and rating system.

Supplier Performance Rating (SPR):

Supplier performance is assessed with respect to the following main factors and it is calculated for each consignment/ purchase order:

Rating Weightage
Quality 60
Delivery 30
Service 10
Total 100

 

Quality Rating (QR) is given 60% weightage.

Quality rating is based on acceptable quantity of material offered for inspection or delivered by supplier

Quality Rating(QR) = ((Q1+0.75×Q2+0×Q3)×60)/Q

where,

Q      =Quantity inspected

Q1    =Quantity accepted

Q2    =Quantity accepted with concession / deviation/ rectification

Q3    =Quantity rejected

 

The pre-inspection report (at supplier’s works) includes the quantity accepted after rework in Q2 category.

Delivery Rating (DR) is given 30% weightage

Supplier is rated on delivery parameters as follows.

Adherence to P.O delivery date                                             30

One mark is deducted for each day’s delay.

Service Rating (SR) is given 10% weightage

Service Rating is given on the basis of the following criteria.

SR
Cooperation and readiness to help in emergency, submission of Support documents such as GA Drawings, TC,GC etc. as applicable,  submission of final technical documents, O&M Manuals and as built drawings complete and in time. 5
Promptness in reply/attending quality problems at site/shop 5

 

Thus, the Supplier Performance Rating (SPR) = QR+DR+SR

The period for calculation of SPR is previous year plus elapsed period of current year or period for last three executed purchase orders whichever is more.

There is a system of FEEDBACK FROM SHOP FLOOR at BHEL. If non-conformance/defects in components are noted while processing at shop floor overall performance rating will be multiplied by demerit factor (DF). The demerit factor is calculated in the following manner:

DF
Components used after rectification 0.9
Components replaced by supplier 0.8
Supplier does not rectify/ replace/respond 0.0

 

Supplier Rating

Now based on total score the supplier performance is rated.

Total Score Rating Action
98-100 A1 Supplier can be considered as Preferred Supplier for self–certification and long term contract.
90 to less than 98 A

Supplier can be considered for self–certification 100% Quality Rating consistently.

Supplier can be considered for reduced witness points during inspection. Supplier can be considered for long-term contracts.

75 to less than 90 B

Supplier to be informed about deficiency for immediate corrective and preventive action.

Supplier can be considered for long-term contracts.

60 to less than 75 C

Supplier to be informed about deficiency for immediate corrective and preventive action. Response to be obtained from supplier. Necessary technical help may be provided to the supplier.

Inspection stages may be reviewed for tightened inspection.

Enquiry to be sent only after approval at higher level.

Less than 60 D Supplier to be put under hold and informed.

 

In order to provide motivation to A1 and A category rating supplier, BHEL has suggested the following steps,

  1. May be considered for self-certification
  2. May be preferred for long term contracts
  3. In tenders, where quantity is to be split amongst suppliers, 10% quantity may be reserved for A1 category supplier in addition to normal distribution of remaining 90% quantity as per normal practice.
  4. Appreciation/commendation in structured get-together/suppliers meets.

The feed back to the supplier is given annually in a prescribed format. The system at BHEL is very structured, and has transparency inbuilt. It is done so as it is a Public Sector Unit subjected to various statutory audits, investigations etc.

 

Assessment of Supplier’s Capability or new supplier assessment

The capability assessment of a new supplier is an extremely tricky task as no data is available on the supplier except for market image. The methodology which has been developed takes care of all the major parameters for choosing a new supplier and a very simple system for assessment of supplier in a very objective manner has been envisaged. The criteria and their rating method have been explained also. Capability factors for evaluation of potential supplier are enlisted in Table V;

Table V Capability factors for evaluation of potential supplier

Capability factors Code
1.     Quality systems of the supplier Q
2.     Financial capability of the supplier F
3.     Production facilities and capacity P
4.     Business volume/amount of past business V
5.     Technological capability/R&D capability T
6.     Supplier’s proximity/geographic location G

 

The Quality systems of the supplier can be assessed by examining the following parameters,

  1. Input material quality control system – availability and adequacy
  2. Process Control – record system and work instruction
  3. ISO Certification or Qualified Inspection Team – availability and assessment
  4. Calibration System/ Equipments – availability and assessment
  5. Customer Complaint handling system – availability and assessment

Scores can be assigned, 2 marks for each parameter and totaling to 10. The decision to give 0 or 1 on the sub-parameter may be based on the observations of the committee, which may be recorded with reasons. The supplier may be given an opportunity to represent the case for each parameter.

The Financial capability of the supplier may be assessed by the following parameters,

Net worth – this has be assessed by the committee, as it will depend on type of item its cost and technological complexity. It is not possible to define any upper or lower limit.

Quick Ratio is defined as (Current Assets – Inventory)/Current liability. This is an indication of the organization’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. It should be atleast 1:1, higher the better.  The committee may assess it on a scale of 5.

The Production facilities and capacity of a supplier may be assessed by following parameters,

Manufacturing Capability – the committee has to assess this parameter by taking the list of machinery and plant available. It may be assessed on a scale of 5.

Ratio of outsourcing to total production – if the OEM itself is going to outsource the item, then it is not advisable that the supplier itself has a high ratio of outsourced items. Thus on the practical considerations, the ratio may be allowed from 10% to 30%, where more than 30% gives a score of 0 to the supplier on this parameter, and less than 10%, a full score of 5.

The Business volume/amount of past business may be assessed on basis of,

Growth of net worth, the average of last 3 years – if the supplier’s net worth has more than 25% growth in last 3 years then it may be assigned a score of 5 on a scale of 5. If no growth then 0, and for intermediate stages assessment may be done by the Committee.

Profitability (before tax) – If the profitability is more than 20%, which is fairly good, then the supplier may be assigned a score of 5 on a scale of 5. For 0% or less, it will obviously be 0, otherwise assessment may be done by the Committee.

Technological capability/R&D capability of the supplier is a difficult criteria to score, it may be done by adjudging the,

Design capability in terms of equipment, lab etc.- this parameter has be left to assessment by the Committee, as it is not possible to assign any marks on any ratio or quantity.

Qualified Personnel for Technology upgradation – the same condition applies to this parameter. It has to be the conclusion of the committee on assessing the quality of personnel, their experience and perhaps some personal interviews.

Supplier’s proximity/geographic location is difficult to quantify. However it may be assessed in following manner,

Distance from Manufacturer – this parameter is an indication of transportation cost and also the time taken for delivering the item. Geographical closeness is always preferable, but not at the cost of other important parameters. This has been taken care of in the pairwise comparison of criteria. Thus the scale of 5 is proposed, with less than 100 km distance being assigned highest score and only 1 to distance more than 2000 km. For intermediate stages assessment may be done by the Committee based on factors like mode of transport, quality of road network between supplier and OEM etc.

Indigenous or Foreign source – indigenous sources may always be preferred as it is the policy of the Government, thus on a scale of 5, they may be given 5. Foreign sources may be assigned score of 1.

Using these ideas a score sheet like Table VI can be used by the examiners.

Table VI SCORE SHEET for Supplier Capability assessment

1.       Quality systems of the supplier
Parameter   Maximum score
 i.     Input material quality control system

Available – 1 else 0

Adequacy – 1 else 0

2
ii.     Process Control

Record system – 1 or 0

Work instruction – 1 or 0

2
iii.     ISO Certification or Qualified Inspection Team

Available 1 else 0

Assessment 1 or 0

2
iv.     Calibration System/ Equipments

Available 1 else 0

Assessment 1 or 0

2
v.     Customer Complaint handling system

Available 1 else 0

Assessment 1 or 0

2
2.       Financial capability of the supplier
Parameter   Maximum score
 i.     Net worth Assessment by Committee 5

ii.     Quick Ratio

iii.     (Current Assets – Inventory)/Current liability

Atleast 1.0:1 5
3.       Production facilities and capacity
Parameter   Maximum score
 i.     Manufacturing Capability Assessment by Committee by finding machinery and plant available 5
ii.     Ratio of outsourcing to total production

Less than 10% – 5

More than 30% – 0

Otherwise assessment by Committee

5
4.       Business volume/amount of past business
Parameter   Maximum score
 i.     Growth of net worth, the average of last 3 years

More than 25% -5

If no growth – 0

Otherwise assessment by Committee

5
ii.     Profitability (before tax)

More than 20% – 5

0% or less – 0

Otherwise assessment by Committee

5
5.       Technological capability/R&D capability
Parameter   Maximum score
 i.     Design capability in terms of equipment, lab etc. Assessment by Committee 5
ii.     Qualified Personnel for Technology upgradation Assessment by Committee 5
6.       Supplier’s proximity/geographic location
Parameter   Maximum score
 i.     Distance from Manufacturer

Less than 100 km – 5

More than 2000 km – 1

Otherwise assessment by Committee

5
ii.     Indigenous or Foreign source

Indigenous – 5

Foreign Source – 1

5

 

The score sheet assigns 10 marks to each criterion. After the tabulation of these scores, Table VII may be used to calculate the weighted score of the supplier, and then according to the need suppliers may be selected for inclusion into the purchase process.

Table VII Final score sheet of Supplier’s Capability assessment

Criterion Q F P V T G Total weighted score
Weight 50% 20% 10% 10% 5% 5%
Supplier Score Score Score Score Score Score
A              
B              
C              

 

By deploying this method the suppliers can be assessed objectively with all players in the system knowing their respective positions, which would also encourage developing or improving upon their capacities.

The primary motive of the whole exercise is to reduce discretion and lead to optimal decision making. The supplier must feel confident in doing business with railways and that cannot be achieved without a perceivable fair and just system.

Further Scope

 

The system that has been described is certainly not fool proof and more empirical studies may be required, but it may lead to increase in perception of fairness. Some scientific methodology is must to continuously assess the Vendor/supplier’s health.  Constant monitoring is the key and with the advent of IT systems this can be an automated task with least amount of human intervention.

 

References

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Rajnish Kumar

National Academy of Indian Railways

rajnishkumar1971@gmail.com

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