Every company has its own culture and a technical vocabulary. Technical vocabularies tend to differ somewhat from one company to another. However, for the purpose of calculating the above mentioned Indices and in order to avoid misunderstandings, we should define exactly what we mean by the tech- nical terms used in the definitions and equations. These definitions should be properly conveyed to the concerned vendor so as to make sure that the company and the vendor are talking about the same things. Some of the technical vocabularies are given below:
Schedule is the agreed quantity of a commodity that has to be delivered by an agreed date.
Creation Date is the date on which a schedule is entered into the company’s Procurement Management System.
Vendor Lead Time (VLT) is the previously agreed fixed period between the date the supplier receives the order and delivery.
Agreement Date is the date, on which the supplier has agreed to deliver, mentioned on the purchase order.
Promise Date is the date on which the supplier promises to deliver.
Receiving Date is the date on which the company actually receives the goods.
First Price is the price quoted by the vendor for the first purchase of the current evaluation period or for the last purchase of the previous evaluation period. (per product family)
Last Price is the price quoted by the vendor for the last purchase of the current evaluation period. (per product family)
Average Price is the average price quoted by the vendor for all the purchases during the current evaluation period. (per product family)
Lowest Price is the lowest price quoted by any vendor for products supplied during the current evaluation period.(per product family)
The purchase order should mention the agreement date, adjusted for transport time according to the local conditions. The supplier should confirm this date by sending back an order confirmation.
On-Time Delivery is when the Receiving Date = the Promise Date = the Agreement Date.
Purchasing Systems and Vendor Rating 75 4.8.1 QUALITY INDEX (QI)
The QI is calculated on a monthly basis, per supplier and per product family for all commodities received in the course of that particular month. It reflects the results of inspection, re-inspection and complaint handling.
QI = 1000 – (R1 + R2) * 500
where, R1 = (the number of problematic schedules) / (the total number of schedules) Problematic sched- ules are:
• Schedules refused at income inspections,
• Items refused at re-inspections,
• Complaints formulated by internal or external customers. The problematic schedules are only taken into account for as far as the supplier can be held accountable for the problem. (decision of the Quality Manager)
R2 = A monthly average of the rejection ratios
= (the number of initially rejected items in schedule)/(the total number of items in that schedule)
For schedules up for re-inspection and for complaints, the rejection ratio would always be 1 by definition. Depending on how delivered schedules are grouped and entered into the formula, the monthly index can be calculated per supplier or per product family or per department.
EVALUATION
Once the quality performance is measured and the index calculated over a certain period (monthly, quarterly) it has to be assessed in terms of what the company’s internal customers expect from this relationship. The QI is evaluated as:
Quality Index Assessment relationship
QI at least 995 Excellent
QI from 990 to 994 Very Good
QI from 950 to 989 Good
QI from 900 to 949 Reasonable
QI less than 900 Poor
4.8.2 DELIVERY RELIABILITY INDEX (DRI)
DRI is calculated on a monthly basis, per supplier and per product family, for all commodities received during that month.
Three Dates play important role in the calculation of the index: the initial Agreement Date mentioned on the purchase order, the possibly altered Promise Date and the actual Receiving Date of the goods.
At the time when the order is placed, Agreement Date and Promise Date are identical, as the supplier promises to deliver on the agreed date.
When the supplier notifies that he won’t be able to make the Agreement Date, he will propose a new Promise Date. The Promise Date is no longer identical to the Agreement Date. It is possible
76 A Modern Approach to Operations Management however that the new Promise Date is caused by a change in specifications, or that it benefits our internal customer. In that case the Agreement Date is changed along with the Promise Date.
DRI = (Rating * Factor)/100
where, Rating = the quantified difference between the Promise Date and the Receiving Date.
Factor = the quantified difference between the Promise Date and the Agreement Date.
Quantifying the differences consists in attributing a number of points in function of the number of days that separate the different dates. The maximum of points i.e. 100 is attributed to a Just-In-Time (JIT) delivery.
The RATING is the average number of points for all deliveries made in that particular month.
The quantification is as follows: (notice that early delivery is penalized only a trifle less gravely than late).
RATING EARLY JIT LATE
Difference – 21 to – 14 to – 7 to – 6 to + 7 to + 14 to + 21
in days < 35
– 34 – 20 – 13 + 6 + 13 + 20 to + 34 > 35
Points 1 10 70 90 100 80 50 10 1
The FACTOR is the average number of points for all deliveries made in that particular month.
The quantification is as follows:
FACTOR EARLY JIT LATE
Diff. in days < 35 – 21 to – 14 to – 7 to – 6 to + 7 to + 14 to + 21 to >35
– 34 – 20 – 13 + 6 +13 + 20
Points 100 100 100 100 100 80 50 10 1
EVALUATION
Once the delivery reliability is quantified and the index calculated over a certain period (monthly, quarterly) it has to be assessed in terms of what the company’s internal customers expect from the relationship.
The DRI is evaluated as:
Delivery Reliability Index Assessment relationship
DRI = 100 Excellent
DRI from 95 to 99 Very Good
DRI from 90 to 94 Good
DRI from 80 to 89 Reasonable
DRI less than 80 Poor
4.8.3 FLEXIBILITY INDEX (FI)
The FI is calculated on a monthly basis, per supplier and per product family for all commodities received in the course of that particular month. It reflects the flexibility contained in short lead-times and the ability to perform even faster.
Purchasing Systems and Vendor Rating 77 FI = FI1 + FI2
where, FI1 = (number of schedules requested and delivered faster than VLT * X) /(number of schedules received)
X being 10 in case the VLT is 1 week.
X being 20 in case the VLT is more than one week.
FI2 quantifies the VLT for all the schedules delivered by a supplier in a certain period (different commodities often having different VLTs) according to the matrix below and takes the average.
Average VLT in weeks 0 1 2 3 4 5
FI2 100 90 80 70 60 50
Average VLT in weeks 6 7 8 9 >=9
FI2 40 30 20 10 0
EVALUATION
Once the average VLT is quantified and the “faster than VLT” deliveries registered, the Flexibility Index for a certain period is known. It has to be assessed in terms of what the company’s internal customers expect from this relationship. The FI is evaluated as:
Flexibility Reliability Index Assessment relationship
FI at least 80 Excellent
FI from 60 to 79 Very Good
FI from 40 to 59 Good
FI from 20 to 39 Reasonable
FI less than 20 Poor
4.8.4 PRICE PERFORMANCE INDEX (PPI)
PI is calculated on a monthly basis, per supplier and per product family, for all commodities received during that month.
Four Prices play an important role in the calculation of the index: the initial First Price, the Final Price, the Lowest Price and the Average Price of the goods.
CALCULATION
PPI = (P1 * P2) * 100 where, P1 = ratio of Lowest Price to the Average Price
P2 = ratio of First Price to the Final Price EVALUATION
Once the price performance is quantified and the index calculated over a certain period (monthly, quarterly) it has to be assessed in terms of what the company’s internal customers expect from the relationship.
78 A Modern Approach to Operations Management The PI is evaluated as:
Price Performance Index Assessment relationship
PPI ≥ 125 Excellent
PPI from 110 to 124 Very Good
PPI from 100 to 109 Good
PPI from 85 to 99 Reasonable
PPI less than 85 Poor
4.8.5 FREQUENCY OF RATING
If the company has a very diverse and large vendor base, it might not be possible to rate each and every vendor on a monthly basis. In such a case the company is presented with two options. Firstly the company can increase the duration of the evaluation period; with staggered evaluations for different vendors. Secondly the company can classify the vendors on some criterion into three classes and the rate vendors in each of the class on different frequencies. The first method is more suited when the company does not want to keep continuous monitoring of its vendors, whereas the second method is more suited when the company would like to track vendor performance on a preferential basis.
Frequency of Rating Matrix
Monthly Quarterly Half Yearly Yearly
Class A Items ü
Class B Items ü
Class C Items ü
4.8.6 USE OF THE INDICES
To monitor progress and to identify problem areas, an overall survey of indexes could be plotted out on a monthly basis. Buyers and Suppliers can look into performance surveys, grouped per supplier and per product family. Each purchasing officer/executive gets a survey of the performance of suppliers in his/her area, prompting him / her to undertake corrective action where necessary. Corrective action may either focus internally on the company itself (fine-tune agreements, revise specifications) or externally on the supplier (audit his quality system, compare notes with other units of the company, search for alternative sources) or on both (initiate improvement plans together).
When assessing suppliers, all indices should be taken into account and compared to the performances of other suppliers within the same product family i.e. the BENCHMARKING REPORT.
Hence, after Vendor Rating Benchmarking is the next step.
http://www.indiainfoline.com/bisc/omvr8.html