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Lecture by:

Prof M. K. Tiwari

Department of Industrial Engineering and

Management

Indian Institute of Technology, Kharagpur

Outline

• Aim

• Supplier selection problem

• Analytical Hierarchy Process

• Illustrative example

• Results

Aim

• How to develop a methodology which

facilitates selection of best supplier

from a bunch of suppliers?

– The methodology considers various

selection criteria for this purpose.

• How to handle the vague and unclear

selection criteria?

– The solution is Fuzzy Set Theory.

• How to apply the Analytical Hierarchy

Process (AHP)?

What is supplier

selection?

• A process to select a number of suppliers

from a group of suppliers.

• In order to

• Improve the QUALITY of goods and services.

• Maximize the OVERALL VALUE of

manufacturer.

• Reducing the product supply RISK.

• Maximizing the customer SATISFACTION level.

Why supplier selection?

• To establish a LONG-TERM EFFECTIVE

COLLABORATION with the efficient

organizations.

COMPLEXITY of the current business

scenario.

raw materials.

Analytic Hierarchy Process

(AHP)

• A multi-criteria decision making

(MCDM) process since used to select

alternatives based on many criteria.

approach.

to select alternatives.

AHP…

• In this approach

– Hierarchy is developed from a general

criterion to particular.

– Or from the uncertain or uncontrollable to

the more certain or controllable one.

• This hierarchy is subjected to a pair wise

comparison.

• Traditionally, this comparison is done using a

nine point (1-9) scale.

• This converts the human preferences between

available alternatives as equally, moderately,

strongly, very strongly or extremely preferred.

Standard Preference Table

PREFERENCE LEVEL NUMERICAL VALUE

Equally preferred 1

Equally to moderately preferred 2

Moderately preferred 3

Moderately to strongly preferred 4

Strongly preferred 5

Strongly to very strongly preferred

6

Very strongly preferred

7

Very strongly to extremely preferred

8

Extremely preferred 9

The Analytic Hierarchy Process

Step 1. Decompose the problem into a hierarchy of interrelated

Level 1 Objective

…

Criterion 1 Criterion 2 Criterion K

Level 2

.

.

.

Level P Alternative 1 Alternative 2 … Alternative N

9

The Analytic Hierarchy Process

Step 1. Decompose the problem into a hierarchy of interrelated

Decision maker

Level 1

Identification of Identification of

Level 2 Performance evaluation SCN Optimal transshipment

and vehicle routing

Resource UL,

Capacity, Demand Travel time

Level 3 Response time,

location Total cost of shipment

Product variety

Travel comfort

Level P Alternative 1 Alternative 2

Alternative 3

Hierarchy with P Levels

9

The basic procedure is as follows:

each criterion by

each criterion

• normalizing the resulting matrix

• averaging the values in each row to get the

corresponding rating

• calculating and checking the consistency

ratio

AHP-Steps

• Step 1: Determination of pair wise matrix

A B C D Inverse of entities

given below the

diagonal

B 1 e12

e13

C e21 1 e23

D e31 e32 1

Degree of

preference of rows

over the column

AHP-Steps…

Step2: Determination of Normalized value

Divide j column

elements with

e11/A e12/B e13/C summation of column

A=e11+e21+e31

e31/A e32/B e33/C

B=e12+e22+e32

C=e13+e23+e33

This matrix is

known as the

Normalized matrix

AHP-Steps…

Step3: Determination of principal vector or

Eigen Vector

Represents the

relative importance

selection criteria

C= C2 = K2/3

k1=e11/A+ e12/B +e13/C

C3 K3/3 k2=e21/A+ e22/B +e23/C

k3=e31/A+ e32/B +e33/C

Consistency Ratio

The purpose is to make sure that the original

preference ratings were consistent.

ratio:

1. Calculate the consistency measure for

each criterion.

2. Calculate the consistency index (CI).

3. Calculate the consistency ratio (CI/RI

where RI is a random index).

Approximation of the Consistency

Index

• Multiply each column of the pairwise comparison

matrix by the corresponding weight.

which is maximum Eigen value of the pairwise

comparison matrix.

Consistency ratio…

3. The approximate CI is

λmax − m

m −1

CI - the consistency index

suggests > 0.10), then we are not

consistent enough and the best thing to do

is go back and revise the comparisons.

m RANDOM INDEX (RI)

2 0.00

3 0.58

4 0.90

5 1.12

6 1.24

7 1.32

8 1.41

9 1.45

10 1.51

the CI of a randomly-generated pairwise comparison matrix

18

Limitations

No more than about 7 elements should be

compared at one time because the

inconsistency will be large and determining

which value to change will be difficult

elements should be grouped into clusters of

seven

Which one you choose?? If

– Two criteria are COST and PERFORMANCE.

– The cost for A= $75 and the performance is above

average.

– The cost for B=$20 and the performance is right at

average.

– Price of B is very strongly preferred to A and A is

only moderately preferred to B.

How to create preference matrix?

COST

Since price B is very

A B strongly preferred to

A 1 7 the price of A. The

score of B to A is 7 and

A to B is the reciprocal

B 1/7 1

or inverse of 1/7

QUALITY

Degree of

preference of A B

B over A

A 1 1/3

B 3 1

Example

An organization is trying to select the best supplier from

a set of three suppliers. The company want to use AHP

to help it decide which one to select. The organization

has four criteria they will base their decision that are as

following:

1. Property price

2. Distance

3. Quality

4. Cost of labor.

Matrices given criteria

and preferences

Performance evaluation Identification of SCN Identification of transshipment

A B C

A B C A B C

A 1 3 2

A 1 1/3 1 A 1 6 1/3

B 1/3 1 1/5

B 3 1 7 B 1/6 1 1/9

C 1/2 5 1

C 1 1/7 1 C 3 9 1

Step 1

Performance evaluation

A B C

A 1 3 2

+ + +

First sum (add up) all

B 1/3 1 1/5

the values in each

+ + + column.

C 1/2 5 1

= 11/6 9 16/5

Step 2

A B C

A 111/6 = 6/11 39 = 3/9 216/5 = 5/8

Next the values in each

+ + +

column are divided by

B 1/311/6 = 2/11 19 = 1/ 9 1/516/5 1/16

the corresponding

+ + + column sums.

C 1/211/6 = 3/11 59 = 5/9 116/5 = 5/16

= 1 1 1

Step 3

Next convert fractions to decimals and find the average of each row.

Performance evaluation

A B C Row Average

A 6/11 ~.5455 + 3/9~.3333 + 5/8~ .6250 = 1.5038 3 = .0512

B 2/11~.1818 + 1/9~.1111 + 1/16~.0625 = .3544 3 = .1185

C 3/11~.2727 + 5/9~.5556 + 5/16~.3803 = 1.2086 3 = .3803

1.000

Step 4

Apply Step 1-3 on each criteria that results in the average for

all the criteria.

evaluation SCN Transshipment

A .5012 .2819 .1790

B .1185 .0598 .6850

C .3803 .6583 .1360

Step 5

Rank the criteria in order of importance.

evaluation of SCM of transshipment

Performance

evaluation 1 1/5 3

Identification

of SCN 5 1 9

Identification

STEP 6-9

Criteria Price Distance Quality Row Average

Price .1578 . 1525 .2307 .18033

Distance .7894 . 7627 .6923 .74813

Quality .0526 . 0847 .07704 .07154

1.000

Row average= preference

vector for the criteria

CRITERIA

Price .18033

Distance .74813

Quality .07154

FINAL CALCULATIONS

CRITERIA

Supplier Price Distance QUALITY

A .5012 .2819 .1790 Price .18033

X

B .1185 .0598 .6850 Distance .74813

C .3803 .6583 .1360

QUALITY .07154

And the results are . . .

LOCATION Score

This is the

A .3091 best

supplier

B .1595

C .5314

1.0000

chosen.

Limitations

• Uses only scaled numbers for

judgments and for their

resulting priorities.

inherent uncertainty and

imprecision associated with the

mapping of the decision-maker’s

perception to exact numbers.

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