Professional Documents
Culture Documents
6 May 2013
Executive summary
Direct and indirect consequences resulting from poor decision making in supplier selection are becoming more severe with the role of the purchasing function becoming more strategic within the organization. Factors both internal and external to the purchasing function, like faster changing customer preferences, shorter product life cycles, integrated supply chain models, total quality management, globalization, increased outsourcing, e-procurement and the internet, environmental and sustainability concerns and government trade regulations increase the number of decisions made and the importance of objective supplier selection decisions. Supplier selection decision models should be seen as instruments that guide and correct a persons subjective preferences and uncertainties, rather than a rigid format replacing supplier management from a relational perspective.
This report takes into account the diversity in purchasing situations and their complexity, classifies supplier selection decisions into purchasing portfolio matrix groups and follows the supplier selection phases as laid out below. The two main supplier selection decision making moments are the supplier pre-qualification (Phase 3) and the final choice-phase supplier selection (Phase 4).
Preferred supplier pre-qualification (Phase 3) methods per purchasing situation are identified as follows: 1. New supplier pre-qualification task: k-means cluster analysis (CA) 2. Modified rebuy (leverage items): Case based reasoning (CBR) 3. Straight rebuy (routine items): Jointing-tree cluster analysis (CA) 4. Straight or modified rebuy of bottleneck items: N/A. Focus on supplier relationship management. If needed, use k-means CA with distinguishing CA factors focusing on supplier reliability and historical delivery performance data. 5. Straight or modified rebuy of strategic items: N/A. Focus on supplier relationship management. If needed, use k-means CA with distinguishing factors focusing on price, total cost and product value.
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Preferred final choice-phase supplier selection (Phase 4) methods per purchasing situation are: 1. New supplier selection task: Compensatory weighing model 2. Modified rebuy (leverage items): Analytical network process (ANP), or Total cost ownership approach if TCO is already being implemented for other supplier decisions support 3. Straight rebuy (routine items): Compensatory weighing model 4. Straight or modified rebuy of bottleneck and strategic items: Total cost ownership (TCO).
The choice for the supplier (pre-)selection methods identified above is further explained in Chapter 4.
The current models used in practice and informed choices made in this report towards preferred supplier selection methods point in most cases to methods and techniques that either follow a simple classification method, or have a cost-focus. Most of these methods have been in use for decades and it is surprising that newer mathematical programming (MP) or artificial intelligence (AI)-based models have not developed faster with the growth of calculating power and software modelling capacity of standard computer systems over the past 10 to 15 years. Based on the amount of research on these models, and their use in financial forecasting and decision making in the financial sector, it is clear that hybrid models with fuzzy logic or AI-elements for final choice-phase supplier selection have the future. In 5 to 10 years the discussion on supplier selection methods will possibly have become one between software programmers and mathematicians instead of buyers.
Another point which can be derived from all research papers reviewed for this report is that the multitude of research, interest and innovation in the field of supplier selection modelling takes place in Asia, with most work being doing in China and Taiwan. In the long run this might contribute to the decline of global competitiveness of the US and Europe vis--vis Asian economies and companies.
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Table of Contents
Executive summary .................................................................................................................................. 2
Table of Contents..................................................................................................................................... 4 List of abbreviations................................................................................................................................. 6 List of figures ........................................................................................................................................... 7 List of tables ............................................................................................................................................ 7
1.
Introduction ..................................................................................................................................... 8 1.1 Phases in the supplier selection process ......................................................................................... 8 1.2 Classification of purchasing situations ............................................................................................ 9 1.3 Purchasing portfolio matrix .......................................................................................................... 10 1.4 De Boers modified supplier selection framework......................................................................... 10 1.5 Report outline .............................................................................................................................. 12
2.
Supplier pre-qualification approaches ............................................................................................ 13 2.1 Categorical methods .................................................................................................................... 13 2.2 Linear weighted average method ................................................................................................. 14 2.3 Data envelopment analysis........................................................................................................... 14 2.4 Cluster analysis ............................................................................................................................ 14 2.5 Case-based reasoning method ..................................................................................................... 15
3.
Approaches in final choice-phase supplier selection ....................................................................... 16 3.1 Linear weighing models ................................................................................................................ 16 3.1.1 (Non-)compensatory weighing models .................................................................................. 16 3.1.2 Analytical hierarchy process .................................................................................................. 16
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3.1.3 Analytical network process .................................................................................................... 18 3.1.4 Fuzzy sets theory, and combined approaches ........................................................................ 18 3.2 Total cost approach...................................................................................................................... 18 3.3 Total cost ownership .................................................................................................................... 19 3.4 Mathematical programming models............................................................................................. 19 3.4.1 Data envelopment analysis .................................................................................................... 19 3.4.2 Linear programming .............................................................................................................. 20 3.4.3 Multi-objective programming ................................................................................................ 20 3.4.4 AHP/ANP-MP combinations................................................................................................... 20 3.4.5 Multi attribute utility theory .................................................................................................. 20 3.4.6 Simple multi-attribute rating technique ................................................................................. 20 3.5 Statistical models ......................................................................................................................... 21 3.6 Artificial Intelligence-based models .............................................................................................. 21 3.6.1 Genetic Algorithm-based models ........................................................................................... 21 3.6.2 Neural Networks ................................................................................................................... 21 3.6.3 Rough set theory ................................................................................................................... 21 3.6.4 Case-based reasoning ............................................................................................................ 22
4.
Preferred supplier selection approaches ........................................................................................ 23 4.1 Pre-qualification methods ............................................................................................................ 23 4.2 Final choice-phase supplier selection methods ............................................................................. 25
5.
Conclusions .................................................................................................................................... 28
References ............................................................................................................................................. 29
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List of abbreviations
AHP AI ANP BPA CA CBR CRP DEA EFHNN ERP FEAHP FNN FST GA GP JIT LP MAUT MCDM MOP MOLP MP MRP MRP II Analytical hierarchy process Artificial intelligence Analytical network process Blanket purchasing agreement Cluster analysis Case-based reasoning Capacity requirements planning Data envelopment analysis Evolutionary fuzzy hybrid neural networks Enterprise resource planning Fuzzy extended analytic hierarchy process Fuzzy neural network Fuzzy sets theory Genetic algorithm Goal programming Just in time Linear programming Multi attribute utility theory Multi-criteria decision making Multi-objective programming Multi-objective linear programming Mathematical programming Materials requirements planning Manufacturing resource planning
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Neural networks Rough set theory Simple multi-attribute rating technique Total cost approach Total cost ownership Technique for order performance by similarity to ideal solution Total quality management
List of figures
Figure 1: Phases in the supplier selection process .................................................................................... 8 Figure 2: Purchasing portfolio matrix ..................................................................................................... 10 Figure 3: De Boers modified supplier selection framework .................................................................... 11 Figure 4: Overview of supplier pre-qualification approaches .................................................................. 13 Figure 5: Overview of final choice-phase supplier selection methods ..................................................... 17 Figure 6: Preferred pre-qualification methods vis--vis level of complexity ............................................ 23 Figure 7: Preferred final choice-phase supplier selection methods vis--vis level of complexity .............. 26
List of tables
Table 1: Classification of purchasing situations......................................................................................... 9 Table 2: Most used techniques in supplier selection literature ............................................................... 25
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1. Introduction
Over the past 40 years the purchasing function has developed from a separate function aimed merely at the successful procurement of goods and services for the successful operation of an organization towards a more strategic role as one of the organizations boundary -spanning functions. As purchasing becomes a more strategic element within the organization, the direct and indirect consequences resulting from poor decision making in supplier selection will also become more severe. Faster changing customer preferences, shorter product life cycles, integrated supply chain models, total quality management, globalization, increased outsourcing, e-procurement and the internet, environmental and sustainability concerns and government trade regulations increase the number of decisions made and the importance of objective supplier selection decisions. (Chen, Paulraj and Lado 2004; Long 2004; Paulraj, Chen and Flynn 2006; Quayle 2006; Ting and Cho 2008; Aksoy and Oztrk 2011; Omurca 2013) Towards the late 90s more research emerged on the role of supplier relationship management as part of strategic procurement and supplier management (Cox 1996; Goffin, Szwejczewski and New 1997; Chen, Paulraj and Lado 2004; Nollet and Beaulieu 2005; Ramsay 2005; Svahn and Westerlund 2009). One might wonder whether hard and cold mathematical supplier selection decision models capture the intricacies of supplier relationship management. Supplier selection decision models should be seen as instruments that guide and correct a persons subjective preferences and uncertainties, rather than a rigid format replacing supplier management from a relational perspective.
Finally, there should be a consideration for the diversity of purchasing situations. This could come down to recognizing the differences between first time buys, straight rebuys, modified rebuys, routine items, leverage items, strategic items and bottleneck items (Robinson, Faris and Wind 1967; Kraljic 1987; Weber, Current and Benton 1991). The purchasing environment could also be part of the buyer situation, where you could distinguish between the type of business or production strategy and related systems, for example JIT, MRP, MRP II, CRP, ERP, etc. (Weber, Current and Benton 1991; Degraeve, Labro and Roodhooft 2000; De Boer, Labro and Morlacchi 2001) Without challenging the importance of distinguishing between specific purchasing environments, I argue in line with De Boer, Labro and Morlacchi (2001) and Bhutta and Huq (2002) that the situation and the choice for specific supplier selection decision making methods are best captured by: 1. the number of suppliers available, 2. the importance of the purchase and 3. the level of uncertainty related to the decision.
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Figure 3: De Boers modified supplier selection framework A first distinction is between new supplier selection tasks and repeated supplier selections. It can be noticed that new supplier selection tasks have not been rated according to the importance of items purchased, given that the steps to be taken for the selection of suppliers should not depend on the importance of the items in the product portfolio, but should follow the basic phases to be followed in the supplier selection process. The supplier selection process in rebuy situations is different and linked to the importance of the item. For routine items there will be a wide variety of suppliers, but given the low value and low importance of the item, to justify a frequent change and choice for a new supplier.
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Leverage items generally result in modified rebuys. With many suppliers available and a high savings potential due to the high profit impact of the item, there might be a frequent change and selection of suppliers. This does not necessarily need to follow all supplier selection phases every time; ie. phases 1 to 3 (Figure 1) could result in a vendor list, which would then be used for final supplier selections. In the case of bottleneck and strategic items the supplier choice is often limited, or even non-existent, and the focus is on supplier performance and relationship management. The high level of supply risk either comes down to very unique specifications resulting in only a few suppliers being able to deliver, or because of the scarcity of the resource needed also resulting in a very limited number of suppliers to choose from. The distinction between a modified and a straight rebuy for bottleneck and strategic items lays in the negotiation on changed requirements, which could result in a change and thus selection of a new supplier if the current one would not be able to deliver in line with changed requirements.
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problem solving capacity, etc. on a scale (eg. positive, neutral and negative) and an overall rating following the same scale. Categorical methods are easy to use, are inexpensive and have limited data need, but highly rely on the evaluators judgment and all criteria are assumed equally important. (Timmerman 1986; De Boer, Labro and Morlacchi 2001; Mendoza 2007; Ordoobadi and Wang 2011)
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k-means clustering is a CA method that starts with k random clusters and then moves suppliers between the clusters to minimize differences within each cluster and maximize differences between clusters. (Holt 1998; De Boer, Labro and Morlacchi 2001; Mendoza 2007)
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3.1.3 Analytical network process The analytical network process (ANP) approach is a more sophisticated version of AHP, differing in its ability to consider interrelationships between decision criteria. This makes it more accurate, but also increases its complexity with increasing criteria. The ANP approach also gives more guidance in a multiple-supplier selection situation. (Saaty 1999; Sarkis and Talluri 2002; Gencer and Gurpinar 2007; Lin, et. al. 2010; Ordoobadi and Wang 2011) 3.1.4 Fuzzy sets theory, and combined approaches Fuzzy sets theory (FST) can be used to model uncertainty and vague preferences in the supplier selection process, and though linear in nature this method can also be seen as a mathematical programming (MP) model (paragraph 3.4), or artificial intelligence (AI) model (paragraph 3.6) in the case of fuzzy neural network (FNN) methods analyzing the data. (Li et. al. 2012; Xiao, Chen and Li 2012; Omurca 2013) FST has been combined with AHP in a number of instances to improve the quality of AHP by means of fuzzy sets aiming to resemble human reasoning and adding more extensive multi-criteria decision making (MCDM) capabilities to AHP. The fuzzy extended analytic hierarchy process (FEAHP) by Chan and Kumar (2007) is one example. (Tahriri et. al. 2008; Van der Rhee, Verma and Plaschka 2009) Another example is fuzzy TOPSIS (technique for order performance by similarity to ideal situation), simultaneously considering ideal situations and their best alternatives. Fuzzy TOPSIS also adds more extensive MCDM to the analysis method and takes into account trade-offs between different criteria considered. It has to be pointed out that though these techniques are strongly discussed, debated and tested in the academic sphere, practical application of FST approaches is still in the development phase. (Boran et. al. 2009; Deng and Chan 2011; Kara 2011; Ordoobadi and Wang 2011; Chai, Liu and Ngai 2013)
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3.4.2 Linear programming The linear programming (LP) approach seeks to develop a mathematical model in which requirements to base decisions on are represented in linear relationships. One important class of LP approaches are called MOLPs (multi-objective linear programming), where MP and LP approaches are combined with AHP or ANP, as discussed in sub-paragraph 3.4.4. (Chai, Liu and Ngai 2013) 3.4.3 Multi-objective programming The multi-objective programming (MOP) approach is generally used in the JIT scenarios, given it focuses on multiple and conflicting mathematical objectives, allows a varying number of suppliers into the solution and provides suggested volume allocation by supplier. However, the process is complex and in many cases impractical to implement (Weber and Ellram, 1993; Bhutta and Huq 2002; Tahriri et. al. 2008). 3.4.4 AHP/ANP-MP combinations An extension of the MOP approach is called goal programming (GP), where conflicting objectives are given a goal value that needs to be achieved (Chai, Liu and Ngai 2013). Given that GP as decision tool is often combined with the AHP or ANP process tools, it is seen as part of AHP/ANP-MP group of approaches. AHP/ANP-MP/LP combinations are often seen as MOLP (multi-objective linear programming) approaches. The AHP/ANP part is used to identify a set of candidate suppliers, ie. a prequalification, while the mathematical programming model optimizes the selection around a set of optimization objectives (eg. delivery reliability) and a set of constraints (eg. purchasing budget). (De Boer, Labro and Morlacchi 2001; Tahriri et. al. 2008; Ting and Cho 2008) 3.4.5 Multi attribute utility theory Multiple attribute utility theory (MAUT) can handle multiple conflicting attributes being part of the selection criteria at the same time, identifying relative importance of all attributes. It also enables the purchasing manager to evaluate "what if" scenarios by giving the possibility to se how well alternative supplier selection decisions would rate. (Bard 1992; Von and Weber 1993; Bhutta and Huq 2002) 3.4.6 Simple multi-attribute rating technique The simple multi-attribute rating technique (SMART) is a simplified, more practically applicable form of MAUT, which is at times perhaps more realistic in valuing trade-offs (Huang and Keska, 2007; Ho, Xu and Dey 2010). Barla (2003) used SMART in a supplier selection procedure in a glass manufacturing company.
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RST has been used in decision support systems in financial and market analysis, the banking industry and business intelligence, with its main advantage being that it does not require preliminary information about data on for example probability. A disadvantage would be that although receiving quite the interest from researchers, it has not yet been tested as a practical tool in supplier selection decisions. (Pawlak 2002; Chai, Liu and Ngai 2013; Omurca 2013) 3.6.4 Case-based reasoning The Case-based reasoning (CBR) method was already mentioned as supplier pre-qualification approach. Choy, Fan and Lo (2003) are the first to implement CBR in a supplier selection and supplier relationship management software environment. Zhao and Yo (2011) improved supplier selection procedures by using CBR in a case study of Chinese petroleum enterprises. (Ng and Skitmore 1995; De Boer, Labro and Morlacchi 2001; Chai, Liu and Ngai 2013)
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1. New supplier pre-qualification task: k-means cluster analysis. New supplier pre-qualification tasks are at the highest level of supplier selection decision making complexity, given there are no historical records on this specific set of suppliers, nor is it unlikely a similar decision has been made in the past. The preferred pre-qualification methods in this case is k-means cluster analysis, because depending on the number of suppliers you can change the number of factors (clusters) that distinguish suppliers. CA does not need historical data, though it can make use of historical data if available. It also sorts rather than ranks the suppliers, which is preferred in this situation. 2. Modified rebuy (leverage items): Case based reasoning. A modified rebuy of leverage items is characterized by a large set of suppliers, a high savings potential, and historical data on these suppliers is available, perhaps because all are part of an extensive vendor list. Case based reasoning is preferred, because of the profit impact and thus savings potential for this type of item. CBR also takes into account historical data and combines sorting and ranking. 3. Straight rebuy (routine items): Jointing-tree cluster analysis. This type of decision does not justify the use of CBR, given the low savings potential and low risk. Jointing-tree CA is the preferred prequalification method, because it identifies the number of factors (clusters) that distinguish suppliers from one another. K-means CA is not preferred, because of the large set of suppliers makes it harder to identify the number of distinguishing factors one wants to take into account with the decision. 4. Straight or modified rebuy of bottleneck items: N/A. It is questionable whether pre-selection is needed with a very small set of suppliers to choose from and it being more about supplier relationship management than supplier selection with bottleneck items. If a pre-qualification selection would need to be made, k-means cluster analysis would be preferred given the very small set of suppliers and possibly limited data on previous supplier selection decision. Distinguishing CA factors should focus on supplier reliability and historical delivery performance data. 5. Straight or modified rebuy of strategic items: N/A. What applies to the straight or modified rebuy of bottleneck items also applies to strategic items. The focus should be on relationship management, but if a pre-qualification selection would need to be made, k-means CA is preferred with CA factors that should focus on price, total cost and product value.
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Table 2: Most used techniques in supplier selection literature Two other approaches, being Compensatory weighing model and Total cost ownership (TCO), will be taken into account as well, because they were not part of Chai, Liu and Ngais (2013) review and used quite often in practice. An overview of preferred methods vis--vis level of decision complexity is presented on the next page in Figure 7 and further explained below. 1. New supplier selection task: Compensatory weighing model. There are no historical records on the specific set of suppliers and it is unlikely a similar decision has been made in the past. The preferred supplier selection method is the use of compensatory weighing models, given its easy to use and focuses on ranking. The subjectivity in ranking by the decision maker will be lower than in rebuy situations, given the lack of historical data on the suppliers and decision criteria.
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Figure 7: Preferred final choice-phase supplier selection methods vis--vis level of complexity 2. Modified rebuy (leverage items): Analytical network process (ANP). Given the high savings potential, initial problem definition being more, fewer or other suppliers (Figure 3), multiple-supplier selection might be giving the highest cost savings potential. ANP has been chosen as preferred method, based on the guidance it gives towards multiple-supplier selection decisions. If TCO is implemented by the organization for other decisions support, this would be a good second choice as supplier election method. TCO focuses on cost and supplier selection decisions concerning leverage items are cost-focused. Also, TCO 3. Straight rebuy (routine items): Compensatory weighing model. Compensatory weighing is the preferred selection method for straight rebuys of routine items, given its simplicity as a method and because we dont want to spend too much time on routine items. The ranking subjectivity element can be circumvented by making use of archived historical supplier performance data.
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4. Straight or modified rebuy of bottleneck and strategic items: Total cost ownership (TCO). Implementing the TCO method can take some effort, given it will possibly result in changing the way the organization manages costs and accounts. It is nevertheless worth it, because the technique can also be used for decisions in other purchasing situations, and as supplier performance evaluation and related relationship management approach.
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5. Conclusions
The current models used in practice and informed choices made towards preferred supplier selection methods point in most cases to methods and techniques that either follow a simple classification method, or have a cost-focus. Most of these methods have been in use for decades and it is surprising that newer mathematical programming or artificial intelligence-based models have not developed faster with the growth of calculating power of standard computer systems over the past 10 to 15 years. Though based on the amount of research on these models, and their use in financial forecasting and decision making, it is clear that hybrid models with fuzzy logic or AI-elements for final choice-phase supplier selection have the future. In 5 to 10 years the discussion on supplier selection methods will possibly have become one between software programmers and mathematicians instead of buyers.
Another point which can be derived from all research papers reviewed for this report is that the multitude of research, interest and innovation in the field of supplier selection modelling takes place in Asia, with most work being doing in China and Taiwan. In the long run this might contribute to the decline of global competitiveness of the US and Europe vis--vis Asian economies and companies.
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References
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