Measurement methods

The methods used to collect data for supplier performance measurements may vary but generally two types can be found, subjective and objective method. Subjective methods are used when companies evaluate suppliers’ through personal judgements, for example by combining various departments’ experiences with supplier. An objective method is to quantify the supplier’s performance. A subjective method is used in the relationship criteria, while the three remaining are done by objective method.

There are a number of methodologies, which have been developed to measure supplier to assist in evaluating prospective supplier. According to Humphreys (Humphreys, 1998, p. 176-180) studies four main methods can be indicated like shown in the table 1.

Plan Implementation Clarity of results Characteristics Situational requirements

Cost Cost/ Benefit

Categorical Easiest Least clear Small organisation, few decision makers, limited resources

Lowest Lowest

Cost ratio Most difficult Moderate Large organisations, several decision makers, major resource base, computerised cost accounting system

Highest Middle

Weighted point Moderate Clear medium-sized organisation, several decision makers, modest clerical resources

Middle High

Dimensional analysisDifficult Clearest-establishes performance measures for buyer and supplier

Potentially large and medium sized organisation

Table 1. Comparison of the supplier rating methods (Humphreys, 1998, p. 179) The models described above have a number of important applications, apart from being used to select preferred suppliers. With the tendency to reduce the size of the companies’ supplier base and at the same time moving towards more collaborative relationships with the suppliers, there is a need to establish an acceptable threshold of performance for supplier organisations.

3.3.3.1 Categorical method

The categorical method as the name implies involves categorising each supplier’s performance in specific areas, defined by a list of relevant performance variables.

Method consists of a procedure whereby the buyer keeps a record of all suppliers to be monitored, along with their actual performance by product. A list of significant performance factors are developed for evaluation purposes and the buyer assigns a grade in simple categorical term such as good neutral and unsatisfactory, indicating the supplier’s actual performance in each area. For example a rating score of two good, two neutral and one unsatisfactory would give a score of one positive.

(Humphreys, 1998, p. 176) The main advantage of this approach is that it is inexpensive, requires a minimum of performance data, lends some structure to evaluation process and allows a number of personnel from related areas to contribute to the evaluation. However this technique is largely an intuitive process relying heavily on memory on personal judgement and experience of the buyer. This method is the least precise of the evaluation techniques.

3.3.3.2 Cost ratio method

The cost ratio method evaluates supplier performance by using the tools of standard cost analysis. The total cost of each purchase will be evaluated and calculated as a selling price of the purchased item. To this price the buyer’s internal operating costs, like quality, delivery and service elements are added. The calculation methodology involves a four-step approach. The first step is to determine the internal costs associated with quality, delivery and service. Second, factors are converted to a cost ratio, which express the cost as a percentage of the total value of the purchase. The third step is to sum the three individual cost rates to obtain an overall cost ratio.

Finally, the overall cost ratio is applied to the supplier’s quoted unit price to obtain the net adjusted cost figure. For example, if a supplier has a quality cost ratio of 2 percent, a delivery cost ratio of 4 percent and service cost ratio of minus 2 percent, the total cost adjustment would be 4 percent. (Humphreys, 1998, p. 177) The cost

ratio approach is complex requiring comprehensive accounting systems, which are usually only found in larger companies. The approach also has the disadvantage that performance measures are artificially expressed in the same units.

3.3.3.3 Weighted point method

The weighted point method seeks to combine the qualitative elements of the categorical plan with the systematic nature and quantifiable procedures of the cost ratio plan. With this technique various factors that are important to customers are weighted according to their relative importance. The assigned performance score multiplies each weight. Finally these products are totalled to determine a final rating for each supplier. (Humphreys, 1998, p. 177) The main disadvantage of this approach is that the performance measures used for various criteria must apply a standardised unit.

3.3.3.4 Dimensional analysis method

Dimensional analysis method is an innovative technique for supplier evaluation. This method attempts to resolve some of the difficulties highlighted with the methodologies described before. Methods do not provide a generally applicable methodology for combining multiple criteria or attributes into a single measure of supplier performance. One way of resolving this problem is to apply the mathematical method of dimensional analysis. (Humphreys, 1998, p. 177)

Dimensional analysis combines several criteria of different dimensions and relative importance in a single dimensionless entity for each supplier. The criteria may be expressed in different dimensions with only restriction being that they are assigned ratio scale values.

wi

Xi performance criteria score for supplier X Yi required performance criterion

i 1,2, …, n-th criterion

W_i weight assigned to criteria i (relative importance) Both the weights (wi) and the criteria measures must reflect ratio scale values.

(Humphreys, 1998, p. 177)

In this thesis vendor performance index (VPI) is converted to supplier performance index (SPI) to avoid misunderstanding.

The model combines several different criteria into a single performance measure.

Price is stated in currency used, quality and delivery in percentages, proximity in average shipping days and the rest of the criteria are expressed in various scales. The dimensional analysis is used to measure each supplier against standard set of criteria.

The dimensional analysis allows a minimum supplier performance index score to be established. For example any supplier that achieves a rating of 0.9 or higher could be deemed eligible. Such an approach helps in reducing the level of subjectivity in making such judgements and for those companies who fail to meet this minimum value, it will allow them to identify specific areas of deficiency and provide an impetus for continuous improvements.