Supplier Evaluation and Selection Laura AITER Cengiz ÇOKAY Güven GÜL

Agenda Importance of Supplier Selection Supplier Selection Process Supplier Evaluation Criterias Supplier Evaluation Methods AHP Other Methods

Importance of Supplier Selection - 1 One of the most important processes performed in organizations today is the evaluation, selection and continuous measurement of suppliers. Selecting a vendor is now as important a process as developing new products.

Importance of Supplier Selection - 2 Supplier selection process is a multi-criteria problem, which includes both qualitative and quantitative factors. Purchasing commands a significant position in most organizations sincepurchased parts, components, and supplies typically represent 40 to 60 percent of the sales of its end products. Thus relatively small cost reductions gained in the acquisition of materials can have a greater impact on profits. Suppliers have a large and direct impact on the cost, quality,technology, and time-to-market of new products.

Importance of Supplier Selection - 3 Organization’s ability to produce a quality product at a reasonable cost and in a timely manner is heavily influenced by its suppliers’capabilities. Supplier selection is one of the key issues of SCM because the cost of raw materials and component parts constitutes the main cost of a product Management. A sound supplier selection decision today can reduce or prevent a host of problems tomorrow

Supplier Selection Process Steps in Supplier Selection Process Evaluating Needs and Defining Objectives Gathering a Limited Pool of Vendors Interviewing with Vendors Selecting and Applying the Method

Evaluating Needs and Defining Objectives What need you are looking to satisfy? Increase product quality Which evaluation categories you will use? What are your business, technical and usability requirements? What are the must requirements? Max price, min performance, etc How will you score the requirements? OUTCOME: list of requirements, objective and criterias to evaluate the vendors and the way to score different criterias

Gathering a Limited Pool of Vendors Evaluating all potential vendors takes much time Basic screening and elimination due to lack of must requirements OUTCOME: vendors pool

Interviewing with Vendors One by one interview with vendors Gap analysis between your requirements, objectives and vendor properties Scoring each criteria OUTCOME: criteria-score list for each vendor

Selecting and Applying the Method Select one among various methods AHP, fuzzy logic method, etc Calculate overall vendor score using selected method Select the vendor with best score

Supplier Evaluation Criterias The evaluation criterias are fundamental to choose the best supplier. They are specific to each firm, because they vary according to the needs. The criteria exposed in the following slides are the most common ones.* Six categories of criteria selected (*) We have analysed almost 30 texts in order to select the most common criterias

Supplier Evaluation Criterias The six classes for the suppliers’evaluation measurement: FINANCIAL HEALTH EXPERTISE OPERATIONAL PERFORMANCE METRICS BUSINESS PROCESSES & PRACTICES ENABLING BEHAVIORS OR CULTURAL FACTORS RISK FACTORS

Financial Health In order to evaluate if a potential supplier is in good financial position, a buyer can use indicators such as: Sales Profitability Liquidity ROI Debt ratio Transparency of finances

Expertise The purchasing department of the firm should choose its suppliers according to its capabilities: Network capabilities Quality and production capabilities (dedicated level?) Technical level compared to sector average Spread of technical creation Investment in R&D

Operational Performance There are a large number of criteria in this category, such as: On-time delivery Lead time Responsiveness Inventory management and control: reorder management, forecasting capabilities… Order acceptance, processing & fulfillement Customer service Preventive maintenance Hours of operators training in Total Quality Control (TQC) or JIT

Business Processes and Practices How does supplier provide a product or service at the best value, on time and exactly as required from the buyers? Best practice and quality based information. This evaluation business can help get at the root causes of supplier problems. For example: is the quality standard of the products met by the production process (preventing defection) or by inspecting the quality of the products after production?

Behaviors and Cultural factors The evaluation criteria of such a category focus on the long term sustainability of potential suppliers: What is the improvement culture of the supplier? Are his information capabilities always up-to-date? What is his intention of coordination?

Risk Factors A supplier’s risks are risks for the buyer. Indeed, if a supplier takes too much risk, it can have a great impact on his customer. Risk factors can be uncovered in the previous criteria exposed, but also in criteria such as: trade relations, currency exchange, insurance, legislations.

Criteria Selection In reality, these mesures of supplier performance are difficult to obtain (financial publications, questionnaires, surveys, site visits). Whichever criteria chosen, the assessment system must be optimal for good decision making. Markov chain concept: the decision environment is dynamic, i.e. there must be interaction between the cooperation patterns and the supplier evaluation criteria.

Analytic Hierarchy Process For Complex Decisions raher than Correct Decision Mathematics and Human Psychology Government, Business, Industry, Healthcare, and Education. Decomposition of a problem into a hierarchy Evaluation of various elements comparing them to one another in pairs A numerical weight or priority is derived for each element of the hierarchy Thomas L. Saaty

Ex. Complex Decision Situations Deciding how best to reduce the impact of global climate change Quantifying the overall quality of software systems (Microsoft Corporation) Deciding where to locate offshore manufacturing plants(University of Cambridge) Assessing risk in operating cross-country petroleum pipelines (American Society of Civil Engineers) Deciding how best to manage U.S. Watersheds (U.S. Department of Agriculture) Etc...

AHP Process State the Objectives Define the Criteria Pick the Alternatives Establish Hierarchy Pairwise Comparison Synthesize Judgments Check Consistency Index Comparison between Criteria and Alternatives Calculate Final Rankings

AHP Process Objective is to open an ice cream shop for young children and families. Establish Criteria Neighborhood Visibility Competition Price Identify Alternatives Suburban Shopping Center Main Business District Suburban Mall Location Example based on Decision By Objectives (How to convince others that you are right) By: Ernest Forman, DSc., George Washington University & Mary Ann Selly, Expert Choice Inc.

AHP Process Hierarchical Arrangement

AHP Process Hierarchical Arrangement

AHP Process Pairwise Comparison Matrix 1- Equally preferred 2 - Equally to moderately preferred 3 - Moderately preferred 4 - Moderately to strongly preferred 5 - Strongly preferred 6 - Strongly to very strongly preferred 7 - Very Strongly preferred 9 - Extremely preferred 8 - Very Strongly to extremely preferred

AHP Process Synthesize Judgments Check Consistency Index

AHP Process Comparison between Criteria and Alternatives

AHP Process Recall Ranking for the Criteria Calculate Final Rankings First choice: Shopping Center (59%) Second choice: The Mall (32%) Third choice: Main Street (9%)

AHP Major Benefits Precise assessment of values through hierarchical structuring and pair-wise comparison. Programmable on a computer. Value assessment, forecasting, alternative selection and resource allocation. Widely accepted and applied by major business corporations and government agencies world wide.

AHP Major Pitfalls Human perception can distort pair-wise comparison. Hierarchy is one directional and it is difficult to accommodate feedback. Values are highly aggregated and difficult to reflect the degree of uncertainty.

Other Analytic Vendor Selection Methods

Pre-emptive Goal Programming Wang, Huang, and Dismukes (2004) developed an integrated AHP and pre-emptive goal programming (PGP) methodology to take into account both qualitative and quantitative factors in supplier selection. While the AHP process matched product characteristics with supplier characteristics in order to qualitatively determine supply chain strategy, PGP mathematically determined the optimal order quantity from the chosen suppliers.

Multi Objective Programming Weber, Current,and Desai (2000) combined a multi-objective programming (MOP) and DEA method to provide buyers with a tool for negotiating with vendors that were not selected right away, as well as to evaluate potential suppliers.

Linear Programming Manufacturing supply chain design and evaluation GeWang · Samuel H. Huang · John P. Dismukes Ghodsypour and O’Brien (1998) proposed an integration of an AHP and linear programming to consider both tangible and intangible factors in choosing the best suppliers and giving them optimal order quantities so that the total purchasing value is maximized.

Fuzzy Set Theory Morlacchi (1999) developed a model that combines the use of a fuzzy set with an AHP and implemented it in order to evaluate small suppliers in the engineering and machinery sectors.

Questions ???

Analytic Hierarchy Process The Analytic Hierarchy Process (AHP) is a structured technique for helping people deal with complex decisions. Rather than prescribing a "correct" decision, the AHP helps people to determine one. Based on mathematics and human psychology, it was developed by Thomas L. Saaty in the 1970s and has been extensively studied and refined since then. The AHP provides a comprehensive and rational framework for structuring a problem, for representing and quantifying its elements, for relating those elements to overall goals, and for evaluating alternative solutions. It is used throughout the world in a wide variety of decision situations, in fields such as government, business, industry, healthcare, and education. Several firms supply computer software to assist in applying the process. Users of the AHP first decompose their decision problem into a hierarchy of more easily comprehended sub-problems, each of which can be analyzed independently. The elements of the hierarchy can relate to any aspect of the decision problem—tangible or intangible, carefully measured or roughly estimated, well- or poorly-understood—anything at all that applies to the decision at hand. Once the hierarchy is built, the decision makers systematically evaluate its various elements, comparing them to one another in pairs. In making the comparisons, the decision makers can use concrete data about the elements, or they can use their judgments about the elements' relative meaning and importance. It is the essence of the AHP that human judgments, and not just the underlying information, can be used in performing the evaluations. The AHP converts these evaluations to numerical values that can be processed and compared over the entire range of the problem. A numerical weight or priority is derived for each element of the hierarchy, allowing diverse and often incommensurable elements to be compared to one another in a rational and consistent way. This capability distinguishes the AHP from other decision making techniques. In the final step of the process, numerical priorities are derived for each of the decision alternatives. Since these numbers represent the alternatives' relative ability to achieve the decision goal, they allow a straightforward consideration of the various courses of action.