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Global supplier selection:

An AHP based approach


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.

• An efficient one is capable to handle the


COMPLEXITY of the current business
scenario.

• Reduced cost of OUTSOURCING.

• About 70% of cost of goods corresponds to


raw materials.

• Enhanced QUALITY of products and services.


Analytic Hierarchy Process
(AHP)
• A multi-criteria decision making
(MCDM) process since used to select
alternatives based on many criteria.

• A simple, useful, and systematic


approach.

• Encompasses matrix theory.

• Utilizes Eigen value and Eigen vector


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

decision criteria and alternatives

Level 1 Objective


Criterion 1 Criterion 2 Criterion K
Level 2

Level 3 Subcriterion 1 Subcriterion 2 … Subcriterion L


.
.
.
Level P Alternative 1 Alternative 2 … Alternative N

Hierarchy with P Levels

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The Analytic Hierarchy Process
Step 1. Decompose the problem into a hierarchy of interrelated

decision criteria and alternatives


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

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The basic procedure is as follows:

Develop the ratings for each decision alternative for


each criterion by

• developing a pairwise comparison matrix for


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

M= e21/A e22/B e23/C

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

C1 K1/3 for ith alternative


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.

There are 3 steps to arrive at the consistency


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.

2. Compute the average of the values, denote it by λmax


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

If this ratio (CI/RI) is very large (Saaty


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

Random Index (RI)


the CI of a randomly-generated pairwise comparison matrix

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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

 If there are greater than 7 elements, the


elements should be grouped into clusters of
seven
Which one you choose?? If

– There are two products A & B.


– 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?

• The matrices of these preferences


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 111/6 = 6/11 39 = 3/9 216/5 = 5/8
Next the values in each
+ + +
column are divided by
B 1/311/6 = 2/11 19 = 1/ 9 1/516/5 1/16
the corresponding
+ + + column sums.
C 1/211/6 = 3/11 59 = 5/9 116/5 = 5/16
= 1 1 1

NOTICE: the values in each column sum to 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.

performance Identification Identification


evaluation SCN Transshipment
A .5012 .2819 .1790
B .1185 .0598 .6850
C .3803 .6583 .1360
Step 5
Rank the criteria in order of importance.

Criteria Performance Identification Identification


evaluation of SCM of transshipment

Performance

evaluation 1 1/5 3
Identification

of SCN 5 1 9
Identification

of transshipment 1/3 1/9 1


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

Supplier A score = .18033(.0512) + .74813(.2819) + .07154(.1790) = .2328

Supplier B score = .18033(.1185) + .74813(.0598) + .07154(.6850) = .19639

Supplier C score = .18033(.3803) + .74813(.6583) + .07154(.1360) = .5708


And the results are . . .
LOCATION Score

This is the
A .3091 best
supplier
B .1595
C .5314
1.0000

Based on the scored supplier C should be


chosen.
Limitations
• Uses only scaled numbers for
judgments and for their
resulting priorities.

• Inadequate to handle the


inherent uncertainty and
imprecision associated with the
mapping of the decision-maker’s
perception to exact numbers.