Total-Quality-Cost-Based Supplier Performance Evaluation

In traditional management, manufacturers select suppliers based on price under the key factor of reducing product cost. The performance appraisal for the purchasing staff is focused on reducing the raw material purchase price. It is a mistake to award contracts to suppliers and vendors without a total cost assessment. Supplier selection based upon the lowest bid may motivate supplier to calculate bids based on purchase price variances. This method ignores hidden costs, as it is frequently believed that the lowest bid is composed of the lowest material costs. However, this sentiment fails to take into consideration the cost of quality, which can include scrap and rework cost, high warraty expense and inspection requirements. Other costs that are discounted include, coping with poor delivery performance. Selection on the basis of the lowest bid can be deceptive as the lowest initial cost may actually be the most costly in the long run. A successful customer-supplier relationship depends on factors other than price alone.This research estabishes a performance evaluation system for suppliers and operations from the perceptions and measurements of cost-effectiveness and performance from the orientation of customer satisfaction. The study is undertaken to specify the interaction and mutual movement among the three groups in the supply chain"Vendor-Manufacturer-Customer"and to integrate the results of four factors; incoming inspection, performance of line reject, service quality of vendor and product reliability. It tries to transform these factors into measurable, quantitative, JIT(Just-In-Time) parameters that are utilized in planning and establishment of this rating system of vendor's performance at the first stage. The concept of objective orientation is adopted in the"performance"calculations.The study investigates and proposes the unsatisfied quality events as the pivot of model's establishment to integrate the results of different stages: incoming inspection, internal customers, external customers, and levels in severity of quality events: rejects, sorting, rework, shut-down, scrap, customer return and associated functions into system. A total involved quality cost along with pre-determined cost structures and the principle of Management By Objectives (MBO) are developed and utilized in planning and establishing this evaluation system for supplier's performance. The evaluation system using total involved quality cost as proposed in this study can be very beneficial for manufacturers in selecting the best supplier and driving quality improvements of operations. The merits of measuring supplier quality performance using Total Involved Quality Cost (TIOC) include: 1) a measurement of common language-money, 2) very simple and visible numbers along with ratios of the direct and indirect loss to help management and employees understand the importance of"doing things right the first time".