Performance Based Evaluation Systems Under Total Quality Management

INTRODUCTION Supplier evaluation systems provide a check on initial selection decisions. Many progressive buying organizations monitor their major suppliers' performances at both the contract and the aggregate levels.|1~ This information is used to control contract performance, as a guide to subsequent purchases, and as a means to ensure that satisfactory performers are selected.|2~ Evaluation systems generally involve the three major considerations of quality, delivery and service, and price, weighted in accordance with the requirements of each purchase.|3~ Most formal evaluation plans are tailored to a particular need within the using organization. Since many firms are now moving toward closer relationships with key suppliers to support total quality management (TQM) and just-in-time (JIT) systems, will the role of these evaluation systems change? If systems do change, what factors will the new systems encompass? TQM/JIT|4~ is a more proactive operating system in which much more time is spent with supplier prequalification activities. The initial source selection decision is critical. Figure 1 shows a simplified version of the flow of source selection activities. As shown, prequalification efforts under TQM/JIT are more intensive; an evaluation format of some type is needed to follow and evaluate the progress of key suppliers. Once the prequalification activities are completed, emphasis is placed on further improvement of the process. The research presented in this article suggests that supplier evaluations under TQM/JIT will be much broader in scope and will be oriented toward problem solving. A case analysis based on data obtained from a Fortune 500 firm that successfully implemented a TQM/JIT program is used to highlight significant changes. To understand the impact of TQM/JIT on rating system design, it was necessary to: * Review previous research on supplier rating systems * Propose a framework for TQM/JIT performance measurement * Provide details of the practices of one firm that implemented a TQM/JIT program. LITERATURE REVIEW Many firms use supplier performance evaluation systems that tend to be unique modifications of three basic types of systems: (1) the categorical approach, (2) the weighted point plan, (3) the cost ratio approach. Categorical systems require the user to rate a supplier's performance at one of three levels--significantly above average (+), average (0), or below average (-). Such an evaluation is conducted for any number of performance factors the user finds useful. Individual factor ratings are then aggregated to obtain an overall evaluation for the supplier. The categorical plan is easy to do and can be performed relatively inexpensively. However, it tends to be influenced by recent events and typically involves a high degree of subjective assessment. Weighted point plans quantify the factors being evaluated to the extent possible, thereby providing a quantitative assessment of supplier performance. This approach is more time consuming and somewhat more costly than the categorical method, but it also tends to be more objective. Typically, however, this method does not consider other cost factors beyond price which may affect the total cost of doing business with a given supplier. The cost-ratio approach attempts to capture all costs associated with supplier performance, internal and external, and relate these costs to total purchase dollar expenditures with the supplier. Costs associated with poor quality and delivery, such as expediting, manufacturing downtime, rework, warranty, and failure costs, are factored into price and a total cost is developed. The total cost is then compared with total purchase expenditures, and a ratio is calculated. The cost ratio plan is the most comprehensive of the three, but usually is the most costly and additionally requires a computerized standard cost accounting system. …