Patent Publication Number: US-2005144046-A1

Title: System and method for assisting a buyer in selecting a supplier of goods or services

Description:
BACKGROUND OF THE INVENTION  
      1. Field of the Invention  
      The present invention generally relates to selecting suppliers of goods or services, and more particularly to a system and method which allows a buyer to make an informed decision in selecting a supplier and for then insuring the buyer against any economic damage which may result from that selection.  
      2. Background Description  
      Buyers, both individual and corporate, are faced with the continuing challenge of purchasing goods or services in the most cost-efficient manner possible. In making this decision, there are various trade-offs to consider. Perhaps the most important trade-off involves striking a balance between cost and quality. It is the objective of every buyer to select the supplier who will provide the highest quality goods and services for the cheapest possible price. By making the right selection, buyers can improve their balance sheets and, simultaneously, benefit the consumer by passing along a lower-cost, higher-quality product into the marketplace.  
      With the emergence of the internet and an increase in brick-and-mortar businesses in general, the choice of a supplier is perhaps more difficult today than ever before. New suppliers are always entering the market, and existing suppliers are upgrading their businesses either by branching into new areas or improving their current product lines. As a result, a supplier who may once have been regarded as satisfactory for meeting the needs of a particular buyer may no longer prove to be adequate.  
      The internet has addressed the needs of linking buyers and sellers vis-a-vis so-called business-to-business website applications. B-to-B applications have proven to be a significant step forward in expanding the global market. However, they also magnify long-standing problems which buyers of brick-and-mortar type businesses have had to endure for decades.  
      One of these problems centers around the unfamiliarity buyers have with the business practices of suppliers and the reliability of their products. This is especially true in the case of a supplier who is remotely located from the buyer or one who has newly entered the market. These remotely located or untested suppliers often claim to have superior products than their competitors and for a lower price. Without any first-hand information, however, buyers have no way of substantiating the validity of their claims. The risk of receiving goods or services that are lower in quality than advertised is thus very real. And even if the goods or services are of satisfactory quality, production capacity is adequate, and delivery transportation capacity is adequate, the insurer may feel that the new supplier&#39;s reputation or practices might result in a boycott being organized against the buyer if it purchases from this supplier, i.e., many additional factors may go into the insurance companies risk analysis. It therefore becomes quickly apparent that the wrong choice of a supplier can negatively impact a buyer&#39;s business both in terms of market share and dwindling consumer-confidence in the buyer&#39;s brand name.  
      From the foregoing, it is clear that, presently, buyers have no objective way of selecting suppliers of goods or services that will be the most optimal choice for meeting their particular needs.  
     SUMMARY OF THE INVENTION  
      It is an object of the present invention to provide a system and method which serves as an objective tool for assisting buyers in deciding which of a plurality of suppliers is the best choice for meeting the buyer&#39;s specific needs.  
      It is another object of the present invention to achieve the above object by, first, creating a new form of insurance that would protect buyers (e.g., in the form of a full or partial reimbursement) from economic damage that may result from the buyer&#39;s selection and subsequent purchase of goods or services from a supplier. The system and method of the present invention then allows an insurance company to objectively decide whether a particular supplier is suitable for the buyer. The insurance company objectively decides suitability by examining the particular needs of the buyer&#39;s business, the products or services offered the supplier, the business practices of the supplier, as well as other information.  
      The final decision is then passed on to the buyer in various ways, including a decision not to offer an insurance policy in the first place. If a policy is offered, the size of the premium price may be used to convey suitability. For example, a high premium price would convey to the buyer that there is a high risk associated with buying from the supplier. Conversely, a relatively low premium price would convey that there is a low risk.  
      It is another object of the present invention to embody the insurance company&#39;s decision-making process in software, and more preferably to convey information between the buyer and insurance company in machine-readable form via the internet, for example, through an interactive website.  
      It is another object of the present invention to allow the buyer to make the final decision of selecting a supplier based on the insurance company&#39;s recommendation, specifically by computing an effective price (derived, for example, by adding the supplier&#39;s cost for the requested goods or services and the premium price of the insurance policy) and then comparing this effective price with the price charged by at least one other supplier of the goods or services. The one other supplier may be an existing supplier of the buyer.  
      These and other objects of the invention are realized by creating a new class of insurance so that if any problems arise as a result of the award of the supply contract, the buying company receives money from the insurance company which it can use to address or resolve the problems. This, in turn, motivates suppliers to document their capabilities to the insurance companies in order to achieve a low-risk insurance rating, and further to allow dynamic procurement systems to operate at the buying company.  
      Using a dynamic procurement system, the buying company may add a “per-unit insurance cost” to a “cheaper-supplier unit cost” to compute an “effective unit cost.” If this effective unit cost is less than the price of an existing supplier, the buyer may choose to order from the new supplier with the added confidence that the order would be at least partially protected by the insurance policy issued by the insurance company. If the effective unit cost is more than the price of an existing supplier, or of the insurance policy is not offered in the first place, the system and method of the present invention advantageously provides the buyer with an objective basis from which to conclude that the new supplier is unacceptable.  
      Preferably, this solution offered by the present invention relies on the ability of the procurement and insurance systems to use machine-readable descriptions of what the buying company&#39;s product or service is, who their market is, what their reliability must be, and how crucial the component or service from the supplier is. These machine-readable descriptions are digitally transmitted to the insurance company, where software in conjunction with risk analysis can develop an insurance price. The price may be optimally chosen by the insurance company because it has visibility (data sources) to all (or much of) the business this supplier is doing with other buying companies, its track record (performance history as well as recent process changes), as well as a view of the entire portfolio of insurance that has been written. 
    
    
     BRIEF DESCRIPTION OF THE DRAWINGS  
      The foregoing and other objects, aspects and advantages will be better understood from the following detailed description of a preferred embodiment of the invention with reference to the drawings, in which:  
       FIG. 1  is a flow chart showing information flow between a buyer, an insurer, and one or more suppliers in accordance with an embodiment of the present invention;  
       FIG. 2  is a flow chart showing how a buyer interacts with an insurer in accordance with an embodiment of the present invention;  
       FIG. 3  is a flow chart showing how an insurer decides whether to offer an insurance policy to a buyer in accordance with the present invention;  
       FIG. 4  is a flow chart showing the insurer&#39;s experience follow-up in accordance with the present invention; and  
       FIG. 5  is a flow chart showing the supplier submission of data to improve a rating given by an insurance company in accordance with the present invention.  
       FIG. 6  is a flow chart showing the buyer&#39;s evaluation of many suppliers against a previous and usual supplier, or an evaluation of many suppliers for a first time use of the product or service. 
    
    
     DETAILED DESCRIPTION OF A PREFERRED EMBODIMENT OF THE INVENTION  
      Referring now to the drawings, and more particularly to  FIG. 1 , there is shown a flow chart of information flow between a buyer  102  (e.g., a producer or manufacturer) and primary and alternative suppliers of goods or services. As will be discussed in greater detail below, this information flow may take place over a network such as the internet. As shown in the chart, the method begins with a producer  102  communicating a request for proposal (RFP)  115  to a first supplier, who may be a primary or trusted supplier  108 , and an RFP  120  to at least one alternative supplier  106 , who may be a new supplier either to the market or to the buyer. If desired, alternative supplier  106  may be a supplier which has been in the market for some time. From these initial steps alone, it therefore is apparent that the invention provides a useful tool for assisting buyers in selecting the optimal supplier, irrespective of whether the buyers are new to the market although its application to new suppliers is preferable.  
      Returning to the flow chart, alternative supplier  106  responds at  130  with a price  125 , shown as Price A. Likewise, the primary supplier  108  responds at  140  with a price  135 , shown as Price P. The producer generates at  142  usage and alternate supplier information  142  which are communicated at  144  to the insurer  104  in the form of a request for quote (RFQ) for insurance. The insurer  104  may or may not respond with a price for insurance  146  which is communicated at  148  to the producer  102 . The producer  102  computes in function block  150  an effective price as Price A plus the insurance price. A determination is made by the producer in decision block  155  as to whether the effective price is less than Price P from the primary supplier. If so, the producer  102  commits to the insurance in function block  160  and communicates this to the insurer  104  at  165 . The producer then orders from the alternative supplier  106  in function block  170  by communicating the order at  175 .  
      If, however, the effective price is not less than Price P as determined in decision block  155 , the insurance is canceled in function block  181 , this cancellation being communicated to the insurer  104  at  185 . An order from the primary supplier is placed in function block  190  and communicated to the primary supplier  108  at  195 . If a current supplier is used, not only would the insurance not be available, optionally there would not even be an opportunity to obtain an evaluation from the insurance company.  
      The invention computes an effective, or hedged, price for the buying company or producer  102 . It leverages the ability of the insurance company  104  to quantify risk and to tap data related to the history of the new supplier  108  with other companies, or a primary (trusted) supplier  108 . The invention grows the insurance marketplace in a dramatically new direction. It leads to cheaper costs for buying companies by leveraging the ability of insurance companies to have numerically intensive economic simulations which allow a far more accurate prediction of what the risk exposure actually is.  
      The basic steps are: 
          a) The buyer computes “component requirements and potential supplier insurance request for quotation (RFQ)” data structure. This uniquely identifies the buyer, the supplier, the component or service, the products and services it will be used in, who buys those products and services, what the concerns are if they experience functional failure, inadequate supply, whether a failure in this component can be replaced in the field or whether it would require replacing the entire buyer-produced item, how quickly a failure must be fixed based on the users of the buyer-produced item, etc. (One of these for each supplier may be prepared.)     b) The buyer sends “component requirements and potential supplier insurance RFQ” to one (or more) insurance companies.     c) The insurance company consults a database concerning the component or service, supplier, buyer, market and retrieves parameters. In case of insufficient data in the database, the insurance company investigates the supplier.     d) Parameters are run through an analysis (in software, by human, or a combination) to determine the willingness of the insurance company to carry this policy and pricing.     e) The insurance company computer returns “will not carry” or “cost for insurance” to the buyer&#39;s procurement system.     f) The buyer&#39;s procurement system computes “effective price when bought from this supplier”.     g) The buyer then compares the “effective price” among multiple suppliers to choose from whom to buy.     h) The insurance company tracks on an ongoing basis who is buying from whom and what the successes and failures are, and maintains this data in its database for use in responding to future quotations.        

      The buying organization&#39;s process is illustrated in greater detail in  FIG. 2 . The process begins at input block  200  when a new supplier quotation is received. A determination is made in decision block  210  as to whether the quotation is more expensive than from a trusted supplier. If so, the order is placed with the trusted supplier in output block  290 . However, if the quotation is less expensive than from the trusted supplier, a description of the supplied component is generated in function block  220 . This description includes what the component will be used in, who purchases the component, the warranty for what the component will be used in (including terms and duration), implications of quality or inadequate supply problems (including on sales of other products not using the component), and the longest delay acceptable until the insurer&#39;s quote is received. With this description in hand, a request for quotation (RFQ) is sent to the insurance company in function block  230 .  
       FIG. 3  shows the insurer&#39;s process when the RFQ is received in input block  300 . The RFQ is analyzed against relevant information needed to make a decision and to compute pricing for insurance in function block  310 . The necessary information is accessed from several databases including a suppliers database  312 , a current written policies database  314  (including pending quoted policies (the previous output of step  370  below) and including expected “normal” losses under this policy (see  425 )), an organization database (i.e., organizations which request quotes)  316 , and a database with information about using the supplier&#39;s component or service in the requestor&#39;s product  318 .  
      When all the relevant information has been retrieved, a determination is made in decision block  320  as to whether any information is missing that is necessary to respond to the RFQ. If so, a determination is made in decision block  325  as to whether the RFQ provides any time to obtain the necessary information. If it does, the missing information is obtained in function block  320 , and the information is inserted into the relevant databases in function block  335 . If, however, no time is provided in the RFQ to obtain the missing information, then the RFQ is returned in output block  340  indicating that there is no interest in insuring.  
      Returning to decision block  320 , assuming all information needed to make a decision on insurance has been retrieved, a further decision is made in decision block  350  to determine if this policy would concentrate the risks of the insurer too much. If so, the RFQ is returned indicating no interest insuring in output block  340 . Otherwise, probabilities and costs of payout are calculated at  360 , and based on this calculation the premium price is calculated in function block  350 . The insurers databases are updated in function block  370 , and then the RFQ is returned with the premium prices and the date by which the policy must be confirmed in function block  380 .  
      Let sp(policy-id) be the set of sub-producers: each maker of a component, or transporter of a component, which the supplier depends on, and all of those that those sub-producers critically depend on, transitively. Policy-id is the id of the proposed policy, or is the id of an in-force insurance policy that is already underwritten by this insurance carrier. Let component-ids (policy-id, sp) be the set of component types which a subproducer produces which are essential to the supplied item covered by policy-id. These are retrieved from database  316 . Let fail(sp, ci) be the forecasted probability that a particular subproducer sp fails to deliver timely and functional subcomponent whose component id is ci. This is retrieved from database  312 . Let policy-exposure(policy-id) be the financial payout that might be needed if compensation is due to the buyer from the policy specified by policy-id. This is retrieved from database  314 .  
      Let single-impact-max-limit be a value, chosen by the insurance company, of the maximum financial exposure they are willing to accept that would flow from a failure by one producer or one sub-producer affecting one or more of the policies in force. The decision process with respect to overconcentration  350  has two parts. The first part limits the coverage provided under all policies with the identical seller providing the identical component:  
       exp   =         ∑   op             ⁢           ⁢   policy     -     exp   ⁢           ⁢   o   ⁢           ⁢     sure   ⁡     (   op   )               
 
 where op=any in-force-policy where seller is this-seller and supplied-item is this item. If exp&gt;single-impact-max-limit then Do Not Underwrite  340  as it would overconcentrate. 
 
      If this first test does not identify overconcentration, then a secondary analysis is performed, looking at subproducers, as described by the following exemplary decision algorithm:  
                                  For each subproducer sp involved in the supplied item from the proposed                         policy                         For each component that subproducer sp would supply, call it ci                         f = fail(sp, ci)           exp = policy-exposure for the proposed policy           For each other policy already in force, call it op                         If subproducer sp produces component ci for this           in-force policy op                         Then exp = exp + policy-exposure(op)                         End of For each other policy           If exp*f&gt; single-impact-max-limit                         Then Do Not Underwrite as it would overconcentrate                         End of For each component                 End of For each subproducer                  
 
      This decision algorithm is illustrative, because it assumes that the projected failure for different components from the same or from different subproducers are statistically independent. This is not true in all cases. A more sophisticated implementation would use a richer fail function, which would be a function not just of the subproducer and component id, but also of any other subproducer failures.  
      Various factors may be taken into consideration in performing the calculation in block  360 . For example, if the insurance company knows that the alternative supplier&#39;s maximum monthly output is MO units, and the number of units needed by the producer is Y units, and that the supplier already has contracts with other producers to supply X units, the decision to insure, or the price of the insurance, may depend on whether the SLACK is positive (and by how much) or negative, where SLACK=MO−X−Y.  
      Another factor may be the recognition of dependencies of the producer on one or more suppliers in terms. This factor, for example, may involve the insurer recognizing (based on information from an appropriate database) that the producer is buying a component or service in multiple lots from different suppliers. If the insurer is also able to determine that the different suppliers rely on a common form of transportation infrastructure, then the insurer can in accordance with the present invention recognize that the producer&#39;s business would be compromised if that common transportation infrastructure collapses or is otherwise impaired (e.g., through a strike, a disaster which prevents travel over the roadways, through an embargo, etc). In this instance, the insurance company may recommend two suppliers that do not have such a common dependency.  
      The insurance analysis at block  360  considers a range of possible failures. In this embodiment, we present the equations showing how the economic impact of the possible failures is calculated. It is important to remember that all principles of insurance pricing will apply here. For example, if there is reason to believe that the need for a payout will occur much later than the time that the premium is received from the insured, then the premium can be lower because the premium can be invested and grow before needing to fund any payouts. For another example, the premium offered will cover the proportional share of the insurer&#39;s overhead, and their costs of active post-contract involvement, and not simply the funding of any financial renumeration.  
      Some classes of failures, and how they are quantified, will now be shown:  
      a) delay in supplying sufficient quantity (where economic damage to buyer is in lost sales)  
     
         
          Let nbpnd be the Number of Buyers&#39; Products Not Delivered  
          Let tpo be the total number of buyers&#39; products ordered  
          Let QtySupplied be the total quantity which was supplied by the supplier (could be 0)  
          Let QtySubstitute be the total quantity which was obtained of substitute components, presumably from a spot market  
          Let ppu be the price/unit of each of the buyers products when sold  
          Let nbpwsc be the Number of Buyers Products Delivered Containing More Expensive substitute components  
          Let pd be the price differential between the substitute components and the contracted price for components from this supplier  
          Let poc be the prices paid by the buyer for all the other components which were bought to be used in the buyers product, which were to complement this particular components  
          Let avgAddlProf be the average post-sales profit obtained from each of the buyers products that is purchased and used  
          Let edrsqt pct  be Economic Damage to the buyer related to supply quantity shortfall when pct percent of the order cannot be delivered  
          Let edrsqt be the expected Economic Damage to the buyer related to supply quantity 
 
 Then we have: 
 
 Pd =Price substitute −Price contracted  
 
MaxSubstitutesWanted= Tpo−Qty   Supplied  
 
 Qty   Substitute &lt;=MaxSubstitutesWanted 
 
 Nbpnd=Tpo−Qty   Suppied   −Qty   Substitute  
 
 Nbpwsc=Qty   Substitute  
 
 Edrsqt   pct =( nbpnd*ppu )+( nbpdn*poc )+( nbpnd*avgAddlProf )+( nbpwsc*pd ) 
 
       
    
      Note that these equations are illustrative and may be oversimplified. For example, the Price substitute  for the first batch of backfilled substitute components may be lower than the Price substitute  for later or larger batches of backfilled substitute components. Thus, the term nbpwsc*pd may actually be the summation of subquantities using different price differentials. For conciseness, this is not shown in these equations, but is well-known to those skilled in the arts of quantity procurement.  
      Let nddist be the non-delivery distribution: a table mapping the percentage of supply that cannot be delivered against the likelihood of this occurring can be constructed. For example:  
                                                   % supply not delivered   Forecasted probability (FProb)                           1%   0.0099            2%   . . .            3%   . . .           . . .   . . .            99%   . . .           100%   0.0001                      
 
 For most manufactured components, the forecasted probability decreases as the percentage of supply not being delivered increases. For some components produced with biological processes (e.g. oranges grown in Florida), this slope may not be observed (e.g. if there is a frost, the entire crop gets ruined; if there is a general strike in the country where the factory exists that produces 50% of their widgets, there will be no widgets from that factory until after the general strike ends.). Note that the forecasted probabilities plus the probability that all of the supply is delivered, must equal 1. This table is illustrative in that the insurance company most probably uses an equation that can specify forecasted probability at any value between 0 and 100, such as 2.5759% of supply was not delivered, and not just at integer percentages. In that case, Edrsqt would be the integral of that equation:  
       Edrsqt   =       ∑     P   =     0   ⁢   …1                 ⁢           ⁢     (       Frob   ⁡     (   p   )       *     Edrsqt   pct       )           
 
 b) Damage to the buyer&#39;s reputation from functional failures of the supplied component (Edrsff) 
      Let wc be the warranty charges that the buyer will have to pay per failing product unit.     Let nfp be the number of failed product units, after purchase from the buyer.     Let nac be the number of affected customers.     Let acrc be the affected Customer Retention Costs (such as future discounts, consolation gifts, etc.).     Let aP Rcosts be additional Public Relations Costs.     Let edrsff be the expected Economic Damage to the buyer&#39;s reputation related to functional failures. 
 
 Then, 
 
 Edrsff =( nfp*wc )+( nac*acrc )+ aP Rcosts  
   

      Referring back to  FIG. 2 , when a response is received from the insurance company, a determination is made in decision block  240  as to whether the insurance company is willing to insure. If not, the order is placed with the trusted supplier in output block  290 . However, if the insurance company is willing to insure, then the insurance cost is added to the new supplier cost to get the effective cost in function block  250 . A test is then made in decision block  260  to determine if the effective cost is still less than from the trusted supplier. If not, the insurance company is notified in function block  265  that the insurance will not be used, and the order is placed with the trusted supplier in output block  290 . If, however, the effective cost is less than from the trusted supplier, the insurance is paid for in function block  270 , and the order is placed with the new supplier in output block  280 .  
      The responses to the insurance company communicated in function blocks  265  and  270  are received at input block  375  in  FIG. 3 . However, while waiting for a reply, a determination is made in decision block  385  as to whether the time for responding has expired. This time was set in the date function of output block  380 . Assuming first that no response is received within the time period set, the databases are cleaned up reflecting that a policy will not be issued in function block  388 , and the process completes in block  395 . If a response is received before the time period has expired, a determination is made in decision block  390  as to whether the insured wants the policy activated (function block  270 ) or not (function block  265 ). If not, the databases are cleaned up in function block  388 ; otherwise, the databases are updated and the payment is credited in function block  392 .  
      A part of the insurance company procedure is an experience follow-up which is used to update its information database on suppliers. This process is shown in  FIG. 4 . The follow-up procedure  400  is performed for each policy still in force (or each previously issued where there is a possibility of new data). The buyer is polled in function block  405  to get experience data. The experience data is analyzed in decision block  410  to determine if there is new information on the supplier. If so, the information database on suppliers  415  is updated, and a test is made in decision block  420  to determine if there is still time to work with the supplier on improvements. If so, a further test is made in decision block  425  to determine if supplier performance has decreased versus expectations. If so, the insurer works with the supplier in block  430  to improve the supplier&#39;s performance. This feedback process is done until all policies still in force have been processed, as indicated at  495 .  
      Since the willingness of an insurer to insure a transaction and the price of the policy makes a difference to the supplier as to whether a supplier receives an order, the supplier may submit data to improve its rating by the insurance company. This process is shown in  FIG. 5 . The supplier submits information on the quality, capacity and time-to-deliver ability to the insurer in block  505 . The insurer analyzes this data in function block  510  and then determines in decision block  515  whether the submitted data warrants modifying the supplier profile. If so, the information database about suppliers  520  is updated. In either case, the data submitted by the supplier is acknowledged in function block  525  before the process finishes at  530 .  
       FIG. 6  shows a process which may be performed by the buying organization when multiple alternative suppers are being considered. It could easily occur that two new suppliers quote prices for products which are less expensive than the prices charged by a current (or usual) supplier. It is not necessarily the case that the least expensive quote is the best, because the insurance cost of that supplier might be higher than the insurance cost for a slightly more expensive alternative supplier. Therefore, the buyer may want to get insurance quotes for several suppliers (depending on whether the insurance company changes a fee for providing quotes, and how rapidly multiple quotes can be delivered).  
      The method of the present invention may provide for this situation by choosing as a tentative best supplier either the supplier which the buyer organization currently buys from or simply the first supplier which returned a quote. (Step  605 ). For all alternative suppliers (Step  610 ), the process shown in  FIG. 2  (Steps  200  through  260 ; here shown as Step  615 ) may be used to determined the effective cost. Next, the method determines whether this supplier is superior to the tentative best supplier. (Step  620 ). If so, the tentative best supplier is replaced. (Step  625 ).  
      If there is sufficient time remaining to obtain additional insurance quotes before production must begin, and if insurance quotes require payment of a fee and the budget for obtaining such quotes has not been exhausted (Step  630 ), the method continues with the next supplier, if one exists (Step  635 ).  
      This process results in one supplier left as the best tentative supplier, and in Step  640 , an order is placed with them, the insurance policy for them is activated (Step  645 ), and any other quotations requested on other suppliers are closed with the insurance company (Step  650 ).  
      The economic damage which the present invention is intended to insure against includes not only that which those skilled in the art would generally consider as financial injury to a business, but also any damage that occurs after selection of the supplier including, for example, damage resulting before, during, or at the time of delivery of the goods or services, that resulting from a failure of the goods or services to be as represented and even where the goods or services start failing well after the time of delivery.  
      Also, the present invention covers the situation where the insurance company never heard of the supplier before the RFQ arrived and needs to investigate before giving a quotation. Therefore, the information need not be in the database to begin with but may work if the information can be input into the database in time for a premium quote to be returned to the buyer during their decision window.  
      While the invention has been described in terms of a single preferred embodiment, those skilled in the art will recognize that the invention can be practiced with modification within the spirit and scope of the appended claims.