Cost-Effectiveness Based Performance Evaluation for Suppliers and Operations

Abstract

This research establishes a cost-effectiveness based performance evaluation system for suppliers and operations. The purpose is to provide a methodology for “integrating supplier and manufacturer capabilities through a common goal, profitability improvement, based on towering the cost of purchased materials.” The merits of measuring supplier quality performance using total involved quality cost (TIQC) include: 1) a common measurement language— money, and 2) very simple and visible numbers along with direct and indirect toss ratios to help management and employees understand the importance of doing things right the first time. This study investigated the interactions and mutual movements among the three groups in the supply chain, (supplier, manufacturer, and customer), and integrated the results from different stages (incoming inspection, internal customers, external customers) and identified severity levels for quality events (rejects, sorting, rework, shutdown, scrap, and customer returns). A TIQC along with a predetermined cost structure and the principle of management by objectives were developed and used in planning and establishing this evaluation system for supplier performance. Very satisfactory and exacting results were obtained in the system simulation and demonstration. The evaluation system using TIQC as proposed in this study can be very beneficial for manufacturers in selecting the best suppliers and driving operational quality improvements.