This is Week 2, we're continuing on supplier selection and management. So the first thing we're talking about is that we got to determine the method for supplier evaluation and selection. Obviously, we talked a lot about the information coming back, RFIs, RFQs, RFPs, wherever [inaudible]. One we haven't covered too much is that supplier visits particularly for a large commodity or critical commodity, you're going to take you, or at least maybe a cross-functional team to be able to go visit the supplier and see it firsthand. This is very important for large complex items or even for overseas suppliers. You're going to have this preferred list that we talked about that you're going to be the go-to place if you need suppliers. In certain industries, you can use third parties to evaluate. This is very common in the electronics industry where you pay a third-party consultant, so to speak, and they go and inspect the suppliers for you. Just as an example in Colgate, we did not use these. We felt it was so important that the spire selection has to be done by the individual that's responsible for it, and we didn't want to delegate that to some third party. More importantly, when there's a problem, it's not the third-party problem, it's your problem, so we didn't use them at Colgate, but I can tell you that my friends in electronic industry do it all the time. So we're going to start looking at some key supplier evaluation criteria. There are many of them, and we're going to go through each one of these, so I'm not going to read the slide. But the point would be is that, we're going to go deeper than we did when we talked about it in the DIJIK sourcing course. So let's go through each one of these things. So let's talk about cost. Well, certainly, you could have a very simplistic thing we just have a price. But for your large strategic suppliers, you may want to say, "Look, I want open book costing, I want to have what we call should be costing." Well, I want to know your direct materials, indirect cost, and then you can evaluate the supplier on his total cost and look for opportunities to work together to reduce costs and be able to make comparison across multiple suppliers. They're probably going to give you this information if it's a large contract for them, but it is used for large strategic items. We talked about fragrance and flavor as being very strategic as one example. In that particular instance, we had all open-book costing, all should be costing. We knew exactly what it was in a fixed profit margin. One of the caveats here, which is interesting because we've been through this many times at Colgate and in Mars, is that when you do this, if sometimes you find out that you know more than the supplier where it is an interesting process to go through. But in any case, from a cost structure standpoint, you have to decide you're going to just have a cost, so to speak, or do you want to go deeper than that? Obviously, quality, performance, systems, or philosophies. When you're particularly interviewing the people in senior manager, what's their view of quality? Particularly, if it's a raw material on packaging, you're going to be using statistical process control. You may be looking at level defects if it's existing supplier. If it's a new supply, you may have to estimate them. You're going to be looking at things like safety and training. Are they maintaining their equipment? There are also processes such as the Malcolm Baldrige award that I reference here or if you're from outside the United State, it's also used within the United States ISO 9,000, which certify suppliers. All these things can be used to really determine how well their quality performance would be in systems. Management capability. You're going to be talking to these people, particularly if you're planning on doing business in a long-term. What's their vision? What are they looking to improve if they had a high turnover along as a CEO been in place? What are their educational backgrounds? Remember that these the people that are going to run your product and you want to make sure that they're had the skills in order to do that, their management capability. Customer focused would be another one. You require any type of capital investment by this company. So these are all things about around the management capability that you want to evaluate. Employees, again, you want to make sure they're committed and things such as quality and continuous improvement. Has there been any work stoppages? Are there any union problems that might affect your contract? So one thing I used to do when I used to go in, I'd always asked when I was visiting a particular site, I said, "Do you mind if I talk to your employees?" They might say, "Yeah. No problem, you can talk to them." So I would walk up to the line and start talking to them saying that, "Basically, I see you have a statistical process control here, are you managing that statistical process control chart?" If the person says, "No," if you're familiar with statistical process control, it's done by somebody else in the quality lab, then you got a problem because you would want the employee to have the capability to measure quality and shut the line down if there's problems. Little things like that. But it is important to least get a feel for what type of employees that are going to be making your product. So one of the ones we're going to talk a little deeper now is financial capability. So again, we're going to ask you just to take a couple of notes there, but how would you check out of supplier's financial situation? So I'll give you about 30 seconds and you can come back. So any questions that you might want to think about as we're going through this. But certainly, financial stability is one of the key criteria. We've mentioned this numerous times both in the supplier selection and valuation, and we mentioned strategic sourcing. It's one of the critical ones. The reason that you want to do this is that you want to make sure that, number one, the suppliers couldn't go out of business. You want to make sure that they're going to put that investment that they said they would into plant and equipment. You, on the other hand, don't want to be too dependent upon the supplier, and then if you pull your business, they have financial problems. So all these things are maybe indicator of other problems. So we're going to go a little deeper dive in this particular one. You can generally get this kind of information, as I said earlier, with Dun & Bradstreet, or you can get it from Bloomberg. If you're not getting it now in procurement, go to your financial people, I guarantee they'll probably have it at least at a bare minimum to check out customers. They want to know how secure the customers are. So a lot of this work, you don't have to calculate yourself. One of the questions always comes up, and I've covered here, what do you do if it's a private company? This is very common in China. Well, first thing you do is you don't have any Dun & Bradstreet checkout, which you might do, say, "Will you give me your financials?" They might say, "Yes, we'd be happy to do that," or they might say, "No." If not, you say, "Look, maybe you could give your financial to a third party." We can pick a third party together, some accounting firm that would evaluate and give us the highlights of what they think. You have to be careful, sometimes people have multiple books. Overseas, this can happen and so you've got to be careful. But it's better than nothing. So even private companies, you can usually get some information. Then you in the end have to determine whether you feel comfortable. If you don't have financial information, do you feel comfortable doing business in selecting the supplier? So let's look at some ratios. Here they are. I'm not going to go through each one of these, you can come back and review them. But current ratio, you might have heard this, it should be greater than one. Quick ratios, I'm just going to highlight a few of these things. Inventory turnover is a common one, which is basically cost of goods sold divided by inventory. All these things have an interpretation such as the inventory turnover means that things are tied up in inventory and you may have some cash flow problems. So I haven't got time to go through each one of these. What I can tell you that many of these things come off automatically against Dun & Bradstreet or Bloomberg report. What is good about it is they'll compare it against industry averages. This is critical. You don't want to compare Apple versus a chemical company because the chemical company has a huge asset base, whereas Apple outsources everything. You want to have all Apple type companies and you won't have all chemical companies in different buckets. These systems will do that for you. If you want to look at who are you comparing these numbers with, it should be industry group that you're familiar with. Here's some more here. Obviously, net profit margins' important, debt ratio can be very important. So these are all things and again, you can come back and look at these things. There are Indicators like in debt-to-equity rate or should be greater than three. But again, you must compare it against industry average. Process and technological capability. If you're planning on leveraging their technology or design capability, you want to evaluate that. You may have to have your research and development. People go with you on the site visit to determine if they're going to really help you with this type of activity. You might want to look at what their percent of investment in R&D, and we talked about Fragrance and Flavors as an example. When we did select those suppliers, remember we said going from 80, I think to five. One of the criteria was, what was their investment in R&D? What percent of money was going in? One of the supplier, I won't mention the name, was much higher than the other. We said, "That's good." They really invest heavily in R&D. So all these things are important in process and technological capability. E-commerce, this is very common today. So B2B, that's business to business or electronic data interchange. Do you want to communicate with these people electronically? It makes you efficient and effective. CAD would be drawings, instead of having bulky drawings, you're going to have electronic CAD CAMS that are allow you to share drawings. They are important if you're in a heavy industry like cars, you're sharing a lot of drawings with suppliers. Do you want to have barcoding? Are you familiar with barcoding that's in the grocery store? You can also have what they call RFID. It's another type of coding. Critical one is, do you want them to manage your inventory? Let me just tell you what that is because that's what was very interesting to me. At Colgate, we required a lot of our raw material and packaging suppliers to do supplier managed inventory. What does that mean? Well, that means that we would give them our production schedules, and then we would allow them to schedule what we need to produce the next week. We didn't pay them until we used it on the line. So we kept the inventory off our books until we used it, which was a real plus for us. So you might say, "Well, what was the plus for the supplier?" Well then the suppliers could run their factory, the way they wanted to run the factory. You could instead of just putting an order and delivering it, they'll run it when they think they should run it. They can make sure that they bring in the right quality material on a timely basis. So that's just one example of an E-commerce activity. ASN, we mentioned that, it's advanced shipping notifications. So you're receiving, people know what's coming in ahead of time so they can plan their workload. Then EFT is electronic funds transfer. So instead of sending a check to a supplier, you're going to electronically send it to his bank account. All these things make you more efficient and effective, and it makes your supplier more efficient and effective, and hopefully reduce cost over time. So now, we're coming back to developing a supplier evaluation system. So you want some comprehensive thing, you would probably use your stakeholders or your cross-functional team to come up with a list. We've already seen many of these things. We touched briefly upon this institute sourcing. You want to have a way to measure it, and hopefully it's mathematically straight forward and simple to use. So this is just one example, and this includes all the things we just talked about. Quality systems, managing capabilities, financial costs. Notice that cost is not number one here. That's the way usually is, I've seen hundreds of these types of supplier evaluation spreadsheets. Delivery, technological, information systems, etc, and you allow your people or yourself to rate them, you come up with a rating. It's for numerical, and this is 80.6, it's hard to read in the lower bottom right-hand corner. But suppose, for example, that you have three suppliers that are 90, you would say they were better. The other thing about this which is critical, is by using the supplier evaluation system, particularly fusing stake or she create buy in. So what do I mean by that? So the quality of the people that were on your team felt that they were heard, and they recognize it isn't just a quality decision, there's many criteria that we have to consider. So if there's a problem, they will be the first to say, "Look, I was part of that decision, and I'm going to help in order to correct these type of problems." So versus just being an independent decision that let's say those procurement that people made, you're having a team look at this and making the best decision. So just to wrap this particular area up on identifying and qualifying suppliers, couple key takeaways. Hopefully, you got to feel for the supplier evaluation selections. Probably one of the most important decisions that procurement makes. They own the process and they at least 99 percent of the time make the decision. We learned about supplier evaluation criteria. We covered them. You're not going to use every one of these all the time, but at least you have a good list. You could add other ones if you think they're important to evaluating the supplier. Lastly, if you have a balanced scorecard, and you use supplier surveys in process like this, you can create buy in, in your organization. So that's it for supplier selection and management, I look forward to seeing you in contract management.