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A SUPPLIER SELECTION METHODOLOGY

USING ANALYTIC HIERARCHY PROCESS

Group No. 04 Batch: 2005-2006

Name Seat No.


Wali ul Islam Hashmi IM-05042

Muhammad Umair Khanzada IM-05027

Hassan Hameed IM-05029

Faizan Ahmed IM-05023

Internal Advisor: Mr. Sayed Muhammad Irfan

External Advisor: Mr. Fahham Hasan Qaiser

DEPARTMENT OF INDUSTRIAL & MANUFACTURING


ENGINEERING
NED UNIVERSITY OF ENGINEERING & TECHNOLOGY
CERTIFICATE

Submitted in partial fulfillment of the requirement of degree of Bachelor


of Engineering (Industrial and Manufacturing Engineering)

A Supplier Selection Methodology using Analytic Hierarchy


Process
2005-2006

Group No. 04 Batch: 2005-2006

Name Seat No.

Wali ul Islam Hashmi IM-05042


Muhammad Umair Khanzada IM-05027
Hassan Hameed IM-05029
Faizan Ahmed IM-05023

_____________________ _____________________
Internal Advisor External Advisor

_____________________ _____________________
Examiner-1 Examiner-2

DEPARTMENT OF INDUSTRIAL & MANUFACTURING


ENGINEERING
NED UNIVERSITY OF ENGINEERING & TECHNOLOGY

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ABSTRACT

Purchasing commands a significant position in every organization since purchased


parts, components, and supplies typically represent 40 to 60 percent of the sales of its
end products. A key and perhaps the most important process of the purchasing
function is the efficient selection of suppliers, because it brings significant savings for
the organization. The objective of the supplier selection process is to maximize the
total value for the buyer, and it involves considering a series of strategic variables (i.e.,
the key performance dimensions).

In our project we have developed a supplier selection model for a manufacturing


company using Analytic Hierarchy Process (AHP). AHP is a decision-making
method developed by Thomas L. Saaty, designed to solve complex multi-criteria
decision problems and it facilitates decision making by organizing perceptions,
feelings, judgments, and memories into a framework that exhibits the forces that
influence a decision.

The AHP model provides a comprehensive and rational framework for structuring the
supplier selection problem, for representing and quantifying the criterion involved in
supplier selection, for relating those criterions to the overall goal, and for evaluating
alternate suppliers using both subjective as well as objective criterion more effectively.
The criterion are ranked and prioritized using the pair wise judgments made by the
evaluator, thus the relative weights of each criteria calculated by the synthesis of these
judgments have a strong mathematical background. Moreover, after the suppliers are
ranked, sensitivity analysis is performed to find the most ‘critical’ criteria and the
effect of changes in importance on the overall ranking of the alternatives.

A Visual Basic application has been also designed to provide flexibility and ease in
creating multiple hierarchies, performing pair wise comparisons, creating automated
supplier ranking forms and to use different evaluation techniques for subjective and
objective criteria.

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ACKNOWLEDGMENT

We would like to express our deep and sincere gratitude to our internal advisor,
Associate Professor Sayed M. Irfan, for his wide knowledge and logical way of
thinking which has been of great value for us, and for his detailed and constructive
comments, and for his important support throughout this work.

We are also deeply grateful to our external advisor, Mr Fahham Hasan Qaiser,
Assistant Manager (Buying), Crescent Steel & Allied Products, for his understanding,
encouraging and personal guidance has provided a good basis for the present work.

We also express our warm and sincere gratitude to project coordinator, Assistant
Professor Ali Zulqarnain, and Chairperson Prof Dr. Amir Iqbal, Industrial &
Manufacturing Department, for their utmost support and co-operation and providing
help in difficult situations, without their support and motivation the fulfillment of the
project would have been difficult.

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TABLE OF CONTENTS

Chapter Page
Title
No. No.

1.INTRODUCTION………………………………………………………………..1

1.1. PROBLEM DESCRIPTION 1

1.2. ABOUT CRESCENT STEEL AND ALLIED PRODUCTS LIMITED


(CSAPL) 2

1.3. SUPPLIER SELECTION AND ITS IMPORTANCE: 2

1.4. SUPPLIER SELECTION TECHNIQUES 3

1.5. ANALYTIC HIERARCHY PROCESS - INTRODUCTION AND


MATHEMATICAL BACKGROUND 4

1.6. PROJECT WORK FLOW 9

2. DEVELOPING THE HIERARCHY AND DETERMINATION OF


RELATIVE WEIGHTS………………………………………………….… ………11

2.1. DEVELOPING THE HIERARCHY 11

2.2. DETERMINATION OF CRITERION WEIGHTS 18

2.3. CALCULATIONS FOR WEIGHTS OF LEVEL 2 CRITERIA 20

2.4. CALCULATIONS FOR WEIGHTS OF LEVEL 3 CRITERIA 23

2.5. SUMMARY OF RESULTS 29

3. SUPPLIER EVALUATION AND RANKING…………………………… 32

3.1. SUPPLIER RANKING AND EVALUATION 32

3.2. CALCULATIONS FOR SUPPLIER EVALUATION 34

3.3. RESULT OF SUPPLIER EVALUATION 49

4. SENSITIVITY ANALYSIS……………………………………..………... 52

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4.1. SENSITIVITY ANALYSIS IN AHP 52

4.2. PERFORMANCE SENSITIVITY ANALYSIS 53

4.3. GRADIENT SENSITIVITY ANALYSIS 55

4.4. RESULT OF SENSITIVITY ANALYSIS 62

5. DEVELOPMENT OF VISUAL BASIC APPLICATION FOR SUPPLIER


SELECTION USING ANALYTIC HIERARCHY PROCESS………….... ………63

5.1 VISUAL BASIC APPLICATION FOR ‘SUPPLIER SELECTION USING


AHP’ 63

5.2 DATA STORAGE AND RETRIEVAL 63

5.3 STRUCTURE OF APPLICATION 63

5.4 FEATURES OF THE APPLICATION 64

5.5 SOFT WARES USED 66

5.6 SYSTEM REQUIREMENTS 66

5.7 INTRODUCTION TO APPLICATION INTERFACE 66

5.8 SETUP AND PACKAGING 80

6. CONCLUSION………………………………………………………..…... 81

7. REFERENCES……………………………………………………………..83

8. APPENDIX………………………………………………………………… 85

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LIST OF TABLES

Table Page
Table Caption
No. No.

1: Different Supplier Selection Techniques…………………………………….3

2: The Fundamental Scale of Analytic Hierarchy Process……………………...6

3: Comparison of Existing and Proposed supplier selection criteria…………...16

4: Local and Global weights of Primary and Secondary Criteria……………....30

5: Evaluation Methods for the Lowest Level Criteria………………………….32

6: Supplier Performance with respect to Primary Criteria……………………..49

7: Supplier Performance with respect to Secondary Criterion…………………50

8: Calculations for Gradient Sensitivity of Financial Stability Criterion………56

9: Calculations for Gradient Sensitivity of Delivery Criterion………………....57

10: Calculations for Gradient Sensitivity of Delivery Criterion……………….58

11: Calculations for Gradient Sensitivity of Quality Criterion………………...59

12: Calculations for Gradient Sensitivity of Technical Capability Criterion…..61

13: Calculations for Gradient Sensitivity of Delivery Criterion……………….62

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LIST OF FIGURES

Figure Page
Figure Caption
No. No.
1: Project Flow Chart………………………………………………….………..10

2: The Supplier Selection Hierarchy…………………………………………....17

3: Relative Weight of Primary Criteria…………………………………………31

4: Global Weights of Secondary Criteria……………………………………….31

5: Supplier Performance (Primary Criteria)…………………………………….50

6: Supplier Performance (Secondary Criteria)………………………………….51

7: Performance Sensitivity Analysis for Scenario 1……………………………54

8: Performance Sensitivity Analysis for Scenario 2……………………………55

9: Gradient Sensitivity Analysis of Financial Stability Criterion………………56

10: Gradient Sensitivity Analysis of Delivery Criterion………………………..57

11: Gradient Sensitivity Analysis of Supplier Relationship Criterion………….58

12: Gradient Sensitivity Analysis of Quality Criterion…………………………59

13: Gradient Sensitivity Analysis of Technical Capability Criterion....................60

14: Gradient Sensitivity Analysis of Cost Criterion……………………….……61

15: Structure of Application……………………………………………….……65

16: Splash Screen………………………………………………………………67

17: Main Menu………………………………………………………………...67

18: Supplier Database Screen…………………………………………………..68

19: Edit/Create Hierarchies Tab………………………………………………..70

19: Define Hierarchy Tab………………………………………………………71

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20: Pair wise Comparisons Tab............................................................................72

21: Adjust Inconsistency Window………………………………………….......73

22: Results Tab……………………………………...……………………….....74

23: Select/Edit Suppliers Tab…………………………………………………..76

24: Evaluation Method Selection Tab………………………………………….77

25: Results Window.............................................................................................78

26: Example of automated Excel spread sheet for Supplier Ranking.................79

27: About Window………………………………………………………………80

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CHAPTER` 1

INTRODUCTION

1.1. PROBLEM DESCRIPTION

To select the best supplier of Hot Rolled Steel Coils for Crescent Steel and Allied
Products Limited using the multi criteria approach of Analytic Hierarchy Process.

The selection has to be made among the three suppliers in the suppliers pool of
CSAPL, they are:

• Shanghai Baosteel Group Corporation, commonly referred to as Baosteel, is


the largest Chinese iron and steel conglomerate. It is a state-owned enterprise,
headquartered in Shanghai [1].
• Saudi Iron & Steel Company (Hadeed), the first fully integrated steel producer
in kingdom of Saudi Arabia, started producing re bars and wire rods in 1983, in
Jubail Industrial city [2].
• Taiyuan Iron & Steel (Group) Co., Ltd. (TISCO) has the largest stainless steel
producing plant in Asia situated in Taiyuan [3], which is integrated with iron
mining, iron and steel production, processing, delivery and trading [4].

Hot Rolled Steel Coils are the basic raw material for steel pipe manufacturing. The
Hot Rolled Coils are de-coiled and formed to produce a cylindrical hollow body at a
pre-determined forming angle. Inside, and later, outside welding is performed by an
automatic submerged arc process [5].

The existing supplier selection method at CSAPL uses a weighted-point model. Nine
criteria are used for supplier ranking having an equal weight. Suppliers are rated using
a 1-5 scale and an average score is calculated. The major draw back of this method is
that all the criteria have an equal importance and the rating given to each supplier is
based purely on human judgment using a numeric scale.

The objective is to create a system in which each criterion weight is defined


systematically based on their actual importance and to define a method which
effectively evaluates the suppliers using both the subjective and objective criterion.

1
1.2. ABOUT CRESCENT STEEL AND ALLIED PRODUCTS LIMITED
(CSAPL)

Crescent Steel and Allied Products Limited is a steel pipe manufacturing and coating
company which is listed on all the Stock Exchanges of Pakistan. The manufacturing
facilities consist of a Spiral Pipe Production line and a multi-layer Polyolefin, stand-
alone Epoxy Coating and Heat Shrink Tape Coating line, both located side by side at
the Sindh Industrial Trading Estate, Nooriabad in Jamshoro district of Sindh,
Pakistan.

The company has the unique distinction of having the authorization to use API
monogram of the American Petroleum Institute since its inception in 1987, the highest
international standard accredited for quality of steel line pipe. In 1997, the Company
was awarded ISO 9001 Quality Management Standard Certificate which it continues
to maintain as ISO 9001:2000. In addition, CSAPL has become the first Pakistani
company to have acquired oil and gas industry specific ISO 9000-2000 Quality
Management System certification from API [6].

1.3. SUPPLIER SELECTION AND ITS IMPORTANCE:

Supplier selection is a broad comparison of suppliers using a common set of criteria


and measures. The objective of supplier selection is to identify suppliers with the
highest potential for meeting a firm’s needs consistently and at an acceptable cost.
Supplier selection is of great importance because selecting the right supplier
significantly reduces the purchasing costs and improves corporate competitiveness.

Supplier selection and management is a key issue for any firm because the cost of raw
materials and component parts constitutes the main cost of a product, such that in
some cases it may account for up to 70% and most of the firms have to spend
considerable amount of their sales revenues on purchasing. In high technology firms,
purchased materials and services represent up to 80% of total product cost. Selecting
the right suppliers significantly reduces the purchasing cost and improves the
corporate competitiveness.

2
Supplier selection problem involves trade-offs among multiple criteria that involve
both quantitative and qualitative factors. Hence, supplier selection problem can be
modeled and solved by means of utilizing multi-criteria decision analysis [7].

1.4. SUPPLIER SELECTION TECHNIQUES

Experts agree that no best way exists to evaluate and select suppliers, and thus
organizations use a variety of approaches. The overall objective of the supplier
selection and evaluation process is to reduce risk and maximize overall value to the
purchaser. An organization must select suppliers it can do business with over an
extended period of time [7].

The complexity of methods of selecting the best supplier is basically due to the
involvement of strategic decisions which need to incorporate tangible, intangible,
strategic, and operational factors into any analysis. A methodology that allows for the
synthesis of these factors and helps management structure the decision problem can
prove to be a valuable resource [8]. Few of the major Supplier Selection Techniques
along with their advantages and disadvantages are discussed in Table 1 [7]:

Table 1: Different Supplier Selection Techniques

Method Advantages Disadvantages

• The evaluation process • Attributes are weighted


Categorical
is clear and systematic equally
• Inexpensive • Subjective
• Requires a minimum • Imprecise
performance data

Weighted Point • Attributes weighted by • Subjective


importance • Difficult to effectively
consider qualitative
criteria

3
Cost Ratio • Subjectivity is reduced • Complexity and
• Flexibility requirement for a
developed cost
accounting system
• Performance Measures
(cost ratios) are
artificially expressed in
the same units

Total cost of • Substantial Cost savings • Complex


ownership • Allows various
purchasing policies to be
compared with one
another
Analytic Hierarchy • Simplicity • Inconsistency in human
Process (AHP) • Captures both qualitative judgment
and quantitative criteria

1.5. ANALYTIC HIERARCHY PROCESS - INTRODUCTION AND


MATHEMATICAL BACKGROUND

The basic characteristic of decision making is to choose the best option in a set of
competitive alternatives, which are evaluated under conflicting criteria. Analytic
Hierarchy Process (AHP) provides us with a comprehensive framework for solving
such problems. It was developed by Thomas L. Saaty in the 1970s. The AHP offers a
methodology to rank alternative courses of action based on the decision maker’s
judgments concerning the importance of the criteria and the extent to which they are
met by each alternative. For this reason, AHP is ideally suited for the supplier
selection problem.

AHP is designed to cope with the intuitive, the rational and the irrational, while
making multi-objective and multi-criterion decisions. It breaks down a problem into
its smaller constituent parts and then brings in simple pair-wise comparison
judgments to obtain the priorities in the hierarchy. There are three principles that one

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can recognize in the problem solving. They are the principles of Decomposition,
Comparative Judgment and Synthesis of Priorities [9].

Among the many applications of AHP made by companies and governments, it has
been used by Xerox, IBM, British Airways, Ford Motor Company, Institute of
Strategic Studies in Pretoria, The Turkish Government, American Army and many
others [20].

A number of commercial soft-wares are commercially available for multi criteria


decision making using AHP; a few of them are listed below:

• Expert choice [10]


• Decision Pad by Apian Software [11]
• Right Choice DSS [12]

1.5.1. AHP Hierarchy

The Principle of Decomposition breaks the problem into a hierarchy, in order to


capture its basic elements. The most effective way to do this is to work downwards
from the focus or objective at the top level to second level, followed by the third level
criteria and so on from the more general to the more specific. In general, the bottom
level of the hierarchy contains the resources to be allocated, or the alternatives from
which the choice is to be made [9].

1.5.2. The Comparison Matrix

A judgment or comparison is the numerical representation of a relationship between


two elements. The set of all such judgments for all the elements of a particular cluster
can be represented in a square matrix in which the set of elements is compared with
itself. Each judgment represents the dominance of an element in the column on the
left over an element in the row on the top. It reflects the answers to two questions:
which of the two elements is more important with respect to a higher level criterion,
and how strongly, using the 1-9 scale called the fundamental scale (Section 1.5.3). If
the element on the left is less important than that on the top of the matrix, we enter the
reciprocal value in the corresponding position in the matrix. For an n x n matrix, the

number of comparisons required will be [13].


5
1.5.3. The Fundamental Scale

The fundamental scale is a scale of absolute numbers developed by Thomas L. Saaty,


used to assign numerical values to judgments made by comparing two elements with
the smaller element used as the unit and the larger one assigned a value from this
scale as a multiple of that unit. Table 2 shows the semantic scale along with the
numerical intensity [13; 14; 15].

Table 2: The Fundamental Scale of Analytic Hierarchy Process

Intensity of
Definition Explanation
Importance

1 Two activities contribute equally to


Equal Importance
the objective

2 Weak or slight

Experience and judgment slightly


3 Moderate importance
favor one activity over another

4 Moderate plus

Experience and judgment strongly


5 Strong importance
favor one activity over another

6 Strong plus

An activity is favored very strongly


Very strong or
7 over another; its dominance
demonstrated importance
demonstrated in practice

8 Very, very strong

The evidence favoring one activity


9 Extreme importance over another is of the highest
possible order of affirmation

Reciprocals If activity i has one of the A logical assumption

6
above non zero numbers
assigned to it when
compared with activity j,
then j has the reciprocal
value when compared
with i

1.5.4. Deriving Priorities from the Comparison Matrix

In order to determine the relative priorities or weights of the elements from the near
consistent pair wise positive reciprocal comparison matrix, a number of mathematical
methods can be used, as listed below [16]:

• Eigen Value approach:


o Right Eigen Value Method
o Left Eigen Value Method
o Mean of Normalized Values Method
• Methods minimizing the distance between the user defined matrix and the nearest
consistent matrix:
o Geometric Mean Method
o Least Square Method
o Weighted Least Squares Method

However Saaty justifies the use of Eigen value approach. This method is based upon
deriving the Eigen matrix of the comparison matrix which represents the priority
matrix [17]. With in the Eigen value approach several simplified methods have been
developed, we have used the Mean of Normalized value method which is also adopted
in many of the Operations Research text books and research papers [13; 18; 19]. The
mathematical basis of this method is beyond the scope of this report and therefore
only the steps to derive the priorities are given below.

• Normalize the Comparison Matrix.


• Take average of each row of the Normalized Matrix which gives the priorities of
the corresponding elements in the form of a priority vector.

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1.5.5. Consistency

Consistency of a comparison matrix is a concept developed to assess the quality of the


judgments made during a series of pair wise comparisons. It is the measure of the
internal consistency of the comparisons [19].

Mathematically the consistency of a comparison matrix is judged by calculating its


Consistency Ratio (C.R.). It is the ratio between the consistency of the comparison
matrix and the consistency of an absolutely random reciprocal matrix. Values of C.R.
less than or equal to 0.1 are acceptable [19; 20]. The value of C.R. can be calculated
as [15; 18; 19]:

. .
.
. 1

.

Where,

C.I. is the consistency index of the comparison matrix. For a perfectly consistent
matrix the maximum positive Eigen value (λmax) will be equal to the order of the
matrix (n) [15], which increases with increasing inconsistency. Hence C.I. is the
measure of the deviation of λmax from n [13]. λmax can be calculated by first
multiplying the comparison matrix with the priority vector and then summing all
elements of the resultant vector which gives λmax or the maximum positive Eigen
value of the comparison matrix. The value of C.I. can be calculated as [15; 18; 19]:

  
. . 2
1

And R.I. is the Random Consistency Index or the average of the consistency indexes
of 50,000 randomly generated reciprocal matrices of a particular order [20]. The
values of R.I. are generalized using the formula [18]:

1.98  2

. . 3


In case the CR exceeds the acceptable limit of 0.1 then the decision maker is supposed
to identify the most inconsistent judgment, determine the range of values to which
that judgment can be changed corresponding to which the inconsistency will be

8
acceptable and consider if the judgment could be modified to a value in the acceptable
range [20].

In order to find the most inconsistent judgment we can make use of the fact that in a
perfectly consistent matrix (CR=0) each element (i, j) is given by Pi/Pj where Pi and Pj
are the elements of priority vector. Thus if ai, j is the element in ith row and jth column
of the comparison matrix then the ratio of each ai, j to its corresponding Pi/Pj shows the
level of inconsistency associated with that judgment. The greater this value, greater
will be the inconsistency [15]. Based on this the following formula could be derived
[15; 20]:


  . 4


Where the value of  represents the deviation from the consistent matrix due to the
comparison ai, j.

1.6. PROJECT WORK FLOW

After studying the supplier selection procedure, Analytic Hierarchy Process and their
integration, the supplier selection process was broken down into smaller steps and
objectives and a detailed project flow chart was created as depicted in Figure 1. Based
on this a Gantt chart was also created.

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Figure 1: Project Flow Chart

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CHAPTER 2

DEVELOPING THE HIERARCHY AND DETERMINATION OF


RELATIVE WEIGHTS

2.1. DEVELOPING THE HIERARCHY

The first step in formulating an AHP model is to structure the problem into the form
of a hierarchy with multiple levels. The first level of the hierarchy represents the
overall goal or the objective which in our case was to select the best supplier that suits
the requirements of CSAPL and provides maximum financial and long term benefits.
The second level of the Hierarchy contains the major factors that influence this goal.
The third level goes into much finer detail of each level 2 criterion. The final or fourth
level of the hierarchy contains the alternatives or the suppliers.

In order to define the primary criteria it was necessary to identify the basic
requirements of CSAPL regarding their raw material suppliers. This was done by
having detailed discussions with the buying personnel of CSAPL, Mr. Fahham Hasan
Qaiser (AM Buying); as a result the following areas of major importance were
identified.

• The supplier should provide the product at a competitive cost.


• The product supplied should meet the desired quality standards of CSAPL.
• Product should be delivered on the time agreed by CSAPL and the supplier
and within the shortest possible lead time.
• Supplier should be financially stable, in order to make sure the completion of
the order and to avoid risk.
• Supplier should have the capabilities to meet the quality and quantity
requirements of CSAPL and provide technical support and after sales services
• Supplier should be able to maintain long term relationship involving mutual
benefit and cooperation

Based on these findings the following primary criteria were identified

• Cost
• Quality

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• Delivery
• Financial Stability
• Technical Capability
• Supplier Relationship

These primary criteria were than further elaborated by defining their respective
secondary criterion. This initial hierarchy was discussed with the buying personnel of
CSAPL to identify any weaknesses and redundancy. As a result of these discussions a
number of criterion were added, removed and modified. This process was continued
until a final hierarchy was agreed upon. While selecting a criterion it was kept in
consideration that there was enough data and information available to compare and
evaluate suppliers on basis of that criterion and the meaning and purpose of each
criterion could be easily and clearly understood. Following is a brief description of all
the selected primary and secondary criterion.

2.1.1.Cost

Cost represents the price per unit, as well as the logistics cost and if the supplier is
willing to provide any payment flexibility including mode of payment, the amount of
advance payment required by the supplier, credit period etc. Based on this the primary
criterion was further divided into:

2.1.1.1.Unit Price

The actual cost per unit of the product as quoted in the quotation provided by the
supplier. This price also includes the cost of delivering the product to the port i.e.
logistics cost.

2.1.1.2.Payment Terms

Flexibility in payment terms provided by the supplier including mode of payment, the
amount of advance payment required by the supplier, credit period etc

2.1.2.Quality

Quality refers to the conformance of supplied products to the buyer’s standards. An


important aspect of quality control and assurance is the ISO 9001 Certification. The

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past performance of deliveries also serves as an indicating factor to predict the quality
of future deliveries. The relationship between the supplier and firm does not end after
the shipment is received but in case of any quality problems the supplier will be
required to provide immediate and efficient response to these problems. Based on
these factors, Quality was further sub-divided into the following criterion:

2.1.2.1.Quality of Deliveries

Past performance of supplier in terms of quality (number of defective parts, lots


accepted or rejected etc)

2.1.2.2.ISO 9001 Certification

Suppliers with ISO 9001 Quality Management System implemented are preferred by
CSAPL.

2.1.2.3.Response to Quality Problems

Response to quality problems refers to the ability of a supplier to provide immediate,


effective and reliable solutions to quality problems and its past performance in doing
so.

2.1.3.Delivery

Delivery employs that supplier must be able to deliver shipment on the pre negotiated
and agreed time. The delivery lead time is also critical to prevent any delays in
production due to unavailability of raw material. Delivery was sub divided into the
following level three criteria:

2.1.3.1.On-time Delivery

On-time delivery is the ability and past performance of the supplier to manufacture
and ship products on time.

2.1.3.2.Delivery Lead Time

Delivery lead time is the total time taken by supplier to manufacture and ship
products.

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2.1.4.Financial Stability

The Financial Stability of the supplier is important to reduce risk of a supplier going
out of business and to select suppliers in sound financial conditions who are expected
to remain in business for the longer period of time. A supplier in poor financial
condition bore the risk of going out of business and not able to complete the order.
Most of the suppliers provide limited financial information due to its sensitivity and
confidentiality. Therefore the data available in supplier evaluation and rating forms
was used, this includes the total revenues and banking history.

2.1.4.1.Total Revenues

Total revenues provide information about supplier’s size and its total sales in the
recent years.

2.1.4.2.Banking History

Banking history indicates any problems in supplier’s transactions and cash inflow and
out flow.

2.1.5.Technical Capability

Technical capability indicates if the supplier is technically sound to meet the


requirements of the firm. A supplier must have the technical expertise and production
facilities to produce the amount of product that will be required by the firm. Supplier
must also be able to provide technical support before and after supplying the product.
Therefore the Technical Capability criterion was sub divided into:

2.1.5.1.Annual Capacity

Annual capacity identifies the production capacity of the supplier and if it is sufficient
to meet the buyer’s requirements.

2.1.5.2.Technical Support

Technical support indicates the quality, effectiveness and timeliness of technical


support and information sharing by the supplier and/or ability to do so in the future.

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2.1.6.Supplier Relationship

It involves accessing a supplier’s willingness to develop long term relationships that


may evolve into alliance or partnership. For CSAPL it is important to have long term
relations with its suppliers in order to avoid the risks associated with working with
new suppliers, ease of negotiations and to build a relationship of mutual trust and
cooperation. Keeping this in mind the following sub factors were selected which
influence the supplier’s ability to have professional and long lasting relations with a
supplier:

2.1.6.1.Reciprocal Considerations

It is the understanding between the buyer and the supplier to provide each other
technical support and expertise from which both parties can benefit and to give
priority to their demands and needs.

2.1.6.2.Primary or Secondary

It is preferred to work with a primary supplier rather than a secondary one in order to
cut the middle man out. A primary supplier would have a better understanding of the
product and could provide better technical support.

2.1.6.3.Desire for Business

Does working with CSAPL a financial interest for the supplier and will the size of its
order and business make CSAPL an important customer?

2.1.6.4.Supplier Response

It covers the interaction between the two firms. Does the supplier provide immediate
and complete information about the status of the order? How is the behavior and
attitude of supplier’s personnel?

In all six (6) primary (Level 2) and fifteen (15) secondary (Level 3) criterion were
selected. The number of primary and secondary criterion was kept to a minimum in
order to reduce the number of pair wise comparisons required to determine the weight
of each criterion. The final Hierarchy is shown in figure 2.

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The proposed hierarchy covers almost all of the existing criteria of CSAPL while
adding a few new ones. A comparison of the existing and proposed criteria is shown
in Table 3.

Table 3: Comparison of Existing and Proposed supplier selection criteria

S. No. Existing Criterion Proposed Criterion

1 Timely Delivery On time Delivery

2 Price Unit Price

3 Size and Stability Total Revenues, Banking History

4 Past Performance Quality of Deliveries, On time Delivery

5 Primary or Secondary Primary or Secondary

Delivery Lead time, Logistics Cost


6 Geographic Proximity
(Covered by Unit Price)

7 Technical Innovativeness -

8 Ability to Supply Annual Capacity

9 Reciprocal Considerations Reciprocal Considerations

10 - Payment Terms

11 - ISO 9001 Certification

12 - Response to Quality Problems

13 - Technical Support

14 - Desire for Business

15 - Supplier Response

[Existing Criteria from Vendor Ranking Form of CSAPL, Form PI-9)]

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Figure 2: The Supplier Selection Hierarchy

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2.2. DETERMINATION OF CRITERION WEIGHTS

After structuring the hierarchy and finalization of primary and secondary criterion the
next step was to determine the relative weight or priority of each criterion. The method
employed for this purpose is laid down by Thomas L. Saaty in his books, The Analytic
Hierarchy Process (1980) and Decision making for Leaders: The Analytic Hierarchy
Process for Decision making in a Complex World (1982) and his various research papers
[13; 17; 20] and is also discussed in various Operations Research books [18; 19].

The core of this process is pair wise comparisons. In pair wise comparisons all criteria of
a cluster are compared against each other, two criteria at a time. The fundamental scale of
AHP as discussed in earlier chapter is used for making the comparison which converts
the semantic judgment of the decision maker into a predefined standard numerical value.
These values are fed into the positive pair wise reciprocal comparison matrix and solved
by using approximation to Eigen value method (Mean of Normalized Values Method)
discussed in Section 1.5.4 which extracts the numerical values of the priority or
importance of each criterion.

In order to facilitate the decision maker in performing the pair wise comparisons, MS
Excel spread sheets were developed for level 2 and level 3 of the hierarchy. The decision
maker could select the verbal judgment for the relative importance of one criterion as
compared to another from a drop down list. The preference of one criterion as compared
to another i.e. less preferred or more preferred could be selected from another drop down
list. The inputs are converted into the corresponding numerical values and the relative
weights and CR is calculated automatically by using the method discussed in Section
1.5.5.

In case the CR exceeds the acceptable limit of 0.1 then the decision maker is supposed to
identify the most inconsistent judgment, determine the range of values to which that
judgment can be changed corresponding to which the inconsistency will be acceptable
and consider if the judgment could be modified to a value in the acceptable range [20]. In
order to facilitate this process, an automated consistency chart was created which uses
real time inputs to identify the most inconsistent judgment and the range of acceptable

18
values of input for each comparison. It also serves as a tool for sensitivity analysis in
terms of CR to identify the effect of modifications in judgments upon the CR. The rank
of each comparison on basis of its inconsistency is also identified in the spread sheet (1
being most inconsistent). Green and Black colored cells represent input values
corresponding to each comparison, resulting in consistent or inconsistent matrix
respectively; yellow colored cells represent the current selection. In order to find the most
inconsistent judgment the method explained in Section 1.5.5 was used. A copy of this
form filled by buying personnel of CSAPL for level 2 and level 3 along with the
consistency chart is shown in Appendix.

2.2.1.Results of Comparisons

The spread sheets created for pair wise comparisons were provided to the buying
personnel of CSAPL. A brief introduction of the pair wise comparisons, fundamental
scale, consistency ratio etc was also provided in order to better understand the process.
After pair wise comparisons the following results were obtained for the Primary or Level
2 Criteria:

Financial Stability 45.676%


Delivery 15.845%
Supplier Relationship 14.592%
Quality 14.179%
Technical Capability 05.325%
Cost 04.384%

The obtained results reflected the priorities of the purchasing department of CSAPL and
were approved by the purchasing personnel of CSAPL. The results show that Financial
Stability (45.676%) is the most important criteria followed by Delivery (15.845%) and
Cost is the least preferred criterion (4.384%). This might appear contrary to the general
understanding that cost, quality and delivery are the most important criteria respectively.
However Price is regarded as only one of the elements in the marketing mix. Surveys
indicate that only in minority of transactions, price is the dominant factor. Price is the

19
most important factor only if all other things are equal (which is not often the case), or
when there are financial difficulties on part of the buyer [22]. But since in case of
purchase of raw materials by CSAPL the contracts are of million of dollars, thus the
financial stability of the supplier becomes extremely important to make sure that the
supplier is financially strong enough to complete the contract efficiently and stay in
business in order to develop a long term relationship.

2.3. CALCULATIONS FOR WEIGHTS OF LEVEL 2 CRITERIA

Following are the calculations for criteria weights, consistency ratio and the degree of
inconsistency in the judgments. The calculations for determination of weights was based
on the formulas discussed earlier and are given in Sections 1.5.4 and 1.5.5.

The Primary or Level 2 criteria are:

• Cost (CC)
• Quality (Q)
• Delivery (D)
• Financial Stability (FS)
• Technical Capability (TC)
• Supplier Relationship (SR)

The Pair wise comparisons performed by the decision maker are:

S. No. Criterion 1 Relative Importance Criterion 2

1 Cost is Moderately less preferred than Quality


2 Cost is Strongly less preferred than Delivery
is Strongly to Very Strongly less preferred Financial
3 Cost
than Stability
Technical
4 Cost is Equally to Moderately less preferred than
Capability
Supplier
5 Cost is Moderately less preferred than
Relationship
6 Quality is Equally preferred as Delivery
Financial
7 Quality is Strongly less preferred than
Stability

20
Technical
8 Quality is Strongly more preferred than
Capability
Supplier
9 Quality is Equally preferred as
Relationship
Financial
10 Delivery is Strongly less preferred than
Stability
Technical
11 Delivery is Strongly more preferred than
Capability
Supplier
12 Delivery is Equally preferred as
Relationship
Financial Technical
13 is Strongly more preferred than
Stability Capability
Financial is Moderately to Strongly more preferred Supplier
14
Stability than Relationship
Technical Supplier
15 is Strongly less preferred than
Capability Relationship

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

(CC) (Q) (D) (FS) (TC) (SR)


(CC) 1 0.3333333 0.2 0.1666667 0.5 0.3333333
(Q) 3 1 1 0.2 5 1
(D) 5 1 1 0.2 5 1
(FS) 6 5 5 1 5 4
(TC) 2 0.2 0.2 0.2 1 0.2
(SR) 3 1 1 0.25 5 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

(CC) (Q) (D) (FS) (TC) (SR)


(CC) 0.0500 0.0391 0.0238 0.0826 0.0233 0.0442
(Q) 0.1500 0.1172 0.1190 0.0992 0.2326 0.1327
(D) 0.2500 0.1172 0.1190 0.0992 0.2326 0.1327
(FS) 0.3000 0.5859 0.5952 0.4959 0.2326 0.5310
(TC) 0.1000 0.0234 0.0238 0.0992 0.0465 0.0265
(SR) 0.1500 0.1172 0.1190 0.1240 0.2326 0.1327

From the Normalized Matrix the weights of criteria can be calculated, which are:

Cost 0.0438
Quality 0.1418
Delivery 0.1585

21
Financial Stability 0.4568
Technical Capability 0.0532
Supplier Relationship 0.1459

Consistency of the Comparison Matrix can be calculated as follows:

0.2741783
0.9352507
(Pair wise Reciprocal 1.0229241
Comparison Matrix) x (Priority
Vector) = 3.0708695
0.3215035
0.9580888

Lambda max 6.5828149


Consistency Index 0.116563
Random Consistency Index 1.32
Consistency Ratio 0.0883053

In order to determine the comparisons with most inconsistency, the method defined in
Section 1.5.5 was used.

S. No. Value Criterion 1 Criterion 2 ε


8 5 Quality Technical Capability 1.87773
15 0.2 Technical Capability Supplier Relationship 1.82455
3 0.1666667 Cost Financial Stability 1.73661
10 0.2 Delivery Financial Stability 1.73451
13 5 Financial Stability Technical Capability 1.71564
11 5 Delivery Technical Capability 1.68022
4 0.5 Cost Technical Capability 1.64655
7 0.2 Quality Financial Stability 1.55207
2 0.2 Cost Delivery 1.38328
14 4 Financial Stability Supplier Relationship 1.27784
6 1 Quality Delivery 1.11755
5 0.3333333 Cost Supplier Relationship 1.10955
12 1 Delivery Supplier Relationship 1.08590
1 0.3333333 Cost Quality 1.07813
9 1 Quality Supplier Relationship 1.02914

22
2.4. CALCULATIONS FOR WEIGHTS OF LEVEL 3 CRITERIA

Following are the calculations for criteria weights, consistency ratio and the degree of
inconsistency in the judgments. Calculations are performed using the method defined
earlier in Sections 1.5.4 and 1.5.5.

2.4.1.Calculations for “Cost” Cluster

The sub criteria of Cost (Secondary criteria) are:

• Unit Price (UP)


• Payment Terms (PT)

The Pair wise comparison(s) performed by the decision maker are:

S. No. Criterion 1 Relative Importance Criterion 2


1 Unit Price is Moderately more important than Payment Terms

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

(UP) (PT)
(UP) 1 3
(PT) 0.3333333 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

(UP) (PT)
(UP) 0.7500 0.7500
(PT) 0.2500 0.2500

From the Normalized Matrix the weights of criteria can be calculated, which are:

Unit Price 0.7500


Payment Terms 0.2500

Consistency of the Comparison Matrix can be calculated as follows:

(Pair wise Reciprocal Comparison 1.5


Matrix) x (Priority Vector) = 0.5

23
Lambda max 2
Consistency Index 0
Random Consistency Index 0
Consistency Ratio 0

2.4.2.Calculations for “Quality” Cluster

The sub criteria of Quality (Secondary criteria) are:

• Quality of Deliveries (QD)


• ISO 9001 Certification (ISO)
• Response to Quality Problems (RQP)

The Pair wise comparisons performed by the decision maker are:

S. No. Criterion 1 Relative Importance Criterion 2


1 Quality of Deliveries is Equally important as ISO 9001 Certification
2 Quality of Deliveries is Equally important as Response to Quality Problems
3 ISO 9001 Certification is Equally important as Response to Quality Problems

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

(QD) (ISO) (RQP)


(QD) 1 1 1
(ISO) 1 1 1
(RQP) 1 1 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

(QD) (ISO) (RQP)


(QD) 0.3333 0.3333 0.3333
(ISO) 0.3333 0.3333 0.3333
(RQP) 0.3333 0.3333 0.3333

From the Normalized Matrix the weights of criteria can be calculated, which are:

Quality of Deliveries 0.3333


ISO 9001 Certification 0.3333

24
Response to Quality Problems 0.3333

Consistency of the Comparison Matrix can be calculated as follows:

(Pair wise Reciprocal Comparison 1


Matrix) x (Priority Vector) = 1
1

Lambda max 3
Consistency Index 0
Random Consistency Index 0.66
Consistency Ratio 0

2.4.3.Calculations for “Delivery” Cluster

The sub criteria of Delivery (Secondary criteria) are:

• On Time Delivery (OD)


• Delivery Lead Time (DLT)

The Pair wise comparisons performed by the decision maker are:

S. No. Criterion 1 Relative Importance Criterion 2


is Moderately to Strongly more Delivery Lead
1 On time Delivery
important than Time

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

(OD) (DLT)
(OD) 1 4
(DLT) 0.25 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

(OD) (DLT)
(OD) 0.8000 0.8000
(DLT) 0.2000 0.2000

From the Normalized Matrix the weights of criteria can be calculated, which are:

25
On Time Delivery 0.8000
Delivery Lead Time 0.2000

Consistency of the Comparison Matrix can be calculated as follows:

(Pair wise Reciprocal Comparison 1.6


Matrix) x (Priority Vector) = 0.4

Lambda max 2
Consistency Index 0
Random Consistency Index 0
Consistency Ratio 0

2.4.4.Calculations for “Financial Stability” Cluster

The sub criteria of Financial Stability (Secondary criteria) are:


• Total Revenues (TR)
• Banking History (BH)

The Pair wise comparisons performed by the decision maker are:

S. No. Criterion 1 Relative Importance Criterion 2


is Moderately to Strongly more important Banking
1 Total Revenues
than History

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

(TR) (BH)
(TR) 1 4
(BH) 0.25 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

(TR) (BH)
(TR) 0.8000 0.8000
(BH) 0.2000 0.2000

From the Normalized Matrix the weights of criteria can be calculated, which are:

Total Revenues 0.8000

26
Banking History 0.2000

Consistency of the Comparison Matrix can be calculated as follows:

(Pair wise Reciprocal Comparison 1.6


Matrix) x (Priority Vector) = 0.4

Lambda max 2
Consistency Index 0
Random Consistency Index 0
Consistency Ratio 0

2.4.5.Calculations for “Technical Capability” Criterion

The sub criteria of Technical Capability (Secondary criteria) are:

• Annual Capacity (AC)


• Technical Support (TS)

The Pair wise comparisons performed by the decision maker are:

S. No. Criterion 1 Relative Importance Criterion 2


1 Annual Capacity is Moderately less important than Technical Support

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

(AC) (TS)
(AC) 1 0.3333333
(TS) 3 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

(AC) (TS)
(AC) 0.2500 0.2500
(TS) 0.7500 0.7500

From the Normalized Matrix the weights of criteria can be calculated, which are:

Annual Capacity 0.2500


Technical Support 0.7500

27
Consistency of the Comparison Matrix can be calculated as follows:

(Pair wise Reciprocal Comparison 0.5


Matrix) x (Priority Vector) = 1.5

Lambda max 2
Consistency Index 0
Random Consistency Index 0
Consistency Ratio 0

2.4.6.Calculations for “Supplier Relationship” Cluster

The sub criteria of Supplier Relationship (Secondary criteria) are:


• Reciprocal Considerations (RC)
• Primary or Secondary (PS)
• Desire for Business (DB)
• Supplier Response (SR)

The Pair wise comparisons performed by the decision maker are:

S. No. Criterion 1 Relative Importance Criterion 2


Reciprocal Primary or
1 is Moderately to Strongly more important than
Considerations Secondary
Reciprocal Desire for
2 is Equally important as
Considerations Business
Reciprocal Supplier
3 is Moderately less important than
Considerations Response
Primary or Desire for
4 is Very Strongly less important than
Secondary Business
Primary or is Strongly to Very Strongly less important Supplier
5
Secondary than Response
Desire for Supplier
6 is Moderately to Strongly less important than
Business Response

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

(RC) (PS) (DB) (SR)


(RC) 1 4 1 0.3333333
(PS) 0.25 1 0.1428571 0.1666667
(DB) 1 7 1 0.25
(SR) 3 6 4 1

28
After Normalization of the Comparison Matrix we obtain the following Normalized
Matrix:

(RC) (PS) (DB) (SR)


(RC) 0.1905 0.2222 0.1628 0.1905
(PS) 0.0476 0.0556 0.0233 0.0952
(DB) 0.1905 0.3889 0.1628 0.1429
(SR) 0.5714 0.3333 0.6512 0.5714

From the Normalized Matrix the weights of criteria can be calculated, which are:

Reciprocal Considerations 0.1915


Primary or Secondary 0.0554
Desire for Business 0.2213
Supplier Relationship 0.5318

Consistency of the Comparison Matrix can be calculated as follows:

(Pair wise Reciprocal Comparison 0.8117


Matrix) x (Priority Vector) = 0.2235
0.9336
2.3238

Lambda max 4.2927


Consistency Index 0.0976
Random Consistency Index 0.99
Consistency Ratio 0.0985

2.5. SUMMARY OF RESULTS

Table 4 shows the Local and Global weight of each criterion. The local weight represents
the contribution of each sub criterion to its respective upper level criterion, where as
global weight gives the contribution of each criterion to the overall objective i.e. selecting
the best supplier. The pie chart in Figure 3 represents the relative weights of primary
criteria, whereas the bar chart in Figure 4 shows the relative global weights of the
secondary criteria.

29
Table 4: Local and Global weights of Primary and Secondary Criteria

Local Global
S. No. Primary Criterion Secondary Criterion
Weight Weight
1 Financial Stability 45.676%
i Total Revenues 80% 36.541%
ii Banking History 20% 9.135%
2 Delivery 15.845%
i On time Delivery 80% 12.676%
ii Deliver Lead Time 20% 3.169%
3 Supplier Relationship 14.592%
i Supplier Response 53.18% 7.760%
ii Desire for Business 22.12% 3.228%
iii Reciprocal Considerations 19.15% 2.794%
iv Primary or Secondary 5.54% 0.809%
4 Quality 14.179%
i Quality of Deliveries 33.33% 4.726%
ii ISO Certification 33.33% 4.726%
Response to Quality
iii 33.33% 4.726%
Problems
5 Technical Capability 5.325%
i Technical Support 75% 3.994%
ii Annual Capacity 25% 1.331%
6 Cost 4.384%
i Unit Price 75% 3.288%
ii Payment Terms 25% 1.096%

30
Technical Cost
Capability 4.38%
5.32%
Quality Financial
14.18% Stability
45.68%
Supplier
Relationship
14.59%

Delivery
15.85%

Figure 3: Relative Weight of Primary Criteria

40%
35%
30%
Global Weight

25%
20%
15%
10%
5%
0%
Primary or Secondary
Banking History

On time Delivery

Annual Capacity
Quality of Deliveries

Response to Quality Problems

Payment Terms
Technical Support

Unit Price
ISO Certification
Total Revenues

Desire for Business


Deliver Lead Time

Supplier Response

Reciprocal Arrangement

Financial Delivery Supplier Quality Technical Cost


Stability Relationship Capability
Primary and Secondart Criteria

Figure 4: Global Weights of Secondary Criteria

31
CHAPTER 3

SUPPLIER EVALUATION AND RANKING

3.1. SUPPLIER RANKING AND EVALUATION

Supplier ranking is the process in which each supplier is assessed and evaluated on the
basis of each lowest level criterion. Some of these criteria were qualitative or subjective
whereas others were quantitative or objective therefore different techniques within the
scope of AHP were employed namely Pair wise Comparisons, Pair wise Comparisons
using Equivalent Scale and Direct Method [23]. Spread sheets were developed for
supplier evaluation and ranking which were provided to the buying personnel of CSAPL.
The excel spread sheets provided means for pair wise comparisons as well as direct input
of numeric data based on the nature of criterion. These inputs were then used in the
comparison matrices to calculate relative weights or performance of each supplier. These
weights were multiplied by the weight of their respective criterion and summed to give
the overall weight of the supplier. The fifteen lowest level criteria are shown in Table 5
along with their evaluation methods:

Table 5: Evaluation Methods for the Lowest Level Criteria

S. No. Lowest Level Criterion Evaluation method used


1 Unit Price Pair wise Comparisons using Equivalent
Scale
2 Payment Terms Pair wise Comparisons
3 Quality of Deliveries Pair wise Comparisons
4 ISO 9001 Certification Pair wise Comparisons
5 Response to Quality Problems Pair wise Comparisons
6 On time Delivery Pair wise Comparisons
7 Delivery Lead Time Pair wise Comparisons using Equivalent
Scale
8 Total Revenues Direct Method
9 Banking History Pair wise Comparisons
10 Annual Capacity Direct Method
11 Technical Support Pair wise Comparisons
12 Reciprocal Considerations Pair wise Comparisons
13 Primary or Secondary Pair wise Comparisons
14 Desire for Business Pair wise Comparisons
15 Supplier Response Pair wise Comparisons

32
Since criteria like Payment Terms, Response to Quality Problems, Banking History,
Technical Support, Reciprocal Considerations, Desire for Business, Supplier Response,
Quality of Deliveries and On time Delivery are either purely or predominantly subjective
criterion or it was difficult to measure them quantitatively. Therefore the most
appropriate choice of evaluation method was pair wise comparisons. Two suppliers were
compared at a time on basis of each criterion, using the fundamental scale and their
relative performance was calculated.

Total Revenues and Annual Capacity were measured using actual data. The evaluation
method used is direct input. In the case of direct input of numeric data we use the ratio of
two numeric values in the comparison matrix [24] therefore for each comparison the ratio
between the corresponding values of each supplier were calculated and substituted in the
comparison matrix to calculate the weights. Total capacity and annual revenues both have
a direct relation with the objective.

In case of case of Unit Price and Delivery Lead Time, actual quantitative data is also used
but direct method is not suitable in this case since they are not purely objective. When we
use direct method, we are not concerned with the actual values but how large or small
they are relatively. In case of these two criterions this is not true since the actual unit
price and time taken for delivery is also important to the decision maker.

For example if two suppliers have quoted a price of 25,000 Rs and 50,000 Rs
respectively then the input in comparison matrix for this comparison will be 2. However
if the prices quoted are 100,000 Rs and 200,000 Rs respectively, the input in the matrix
will still be 2. But the absolute price difference in both cases is 25,000 Rs and 100,000 Rs
which does not have the same meaning for the decision maker. That’s why the use of
direct method for evaluating suppliers on basis of price is not suitable. Moreover the
decision to prefer one supplier over another on the basis of cost difference might be
effected by the firm’s financial conditions or decision maker’ s own judgment and
perception. Hence it was necessary to develop an equivalent scale in which each value
corresponds to an absolute price or time difference (in case of delivery lead time). This
also saves decision maker’s effort to compare each supplier, rather the decision maker

33
could respond to questions like “What price difference would make one supplier equally
preferred as another?” or “What price difference would make one supplier strongly
preferred over another?” and so on. The answers to these questions formed the equivalent
scale for the comparisons, the intermediate values were interpolated. Hence the absolute
price difference values corresponding to the 1-9 scale were developed and used for the
comparisons

The question of whether a supplier has ISO 9001 Certification will result in a YES or NO
answer but we must also know that how much a supplier with ISO 9001 Certification is
preferred over a supplier without the certification. The decision maker was asked this
question and the result was used in the pair wise comparisons. Since the resulting priority
is a relative weight therefore the weight of supplier depends not only whether the supplier
has ISO Certification or not but also on how many other suppliers are being compared
and how many of them have ISO Certification.

Similarly the question of whether a supplier is primary or secondary could be replied by


either ‘Primary’ or ‘Secondary’ but we must also determine the extent to which a primary
supplier is preferred over a secondary one. A similar method, as used for ISO 9001
Certification was used to determine the weights of the suppliers.

The data for supplier evaluation was provided by the buying personnel of CSAPL by
filling in the Supplier Evaluation Form developed for this purpose. A copy of this form is
shown in Appendix. The calculations performed for supplier evaluation are as follows:

3.2. CALCULATIONS FOR SUPPLIER EVALUATION

The Suppliers being evaluated are


• Shanghai Baosteel Group Corporation, referred to as Baosteel in the calculations.
• Taiyuan Iron & Steel (Group) Co. Ltd., referred to as TISCO in the calculations.
• Saudi Iron & Steel Company (Hadeed), referred to as Hadeed in the calculations.

3.2.1. Calculations for “Unit Price” Criterion

The Unit Price quoted by the suppliers is:

34
Baosteel 765.00 $/unit
TISCO 750.00 $/unit
Hadeed 830.00 $/unit

The equivalent scale for Price per Unit was created by using the answers of the following
questions given by the decision maker.
What Price difference between two Suppliers will make;

One supplier equally preferred as another: 14.50 $/unit


One supplier strongly preferred over another: 42.00 $/unit
One supplier extremely preferred over another: 75.00 $/unit

The equivalent scale is as follows:

Fundamental Scale in
terms of Absolute Cost
Difference
1 14.5
2 21.375
3 28.25
4 35.125
5 42
6 50.25
7 58.5
8 66.75
9 75

Using the equivalent scale the suppliers were compared as follows:

Alternate 1 Alternate 2 Preferred Difference Intensity


Baosteel 765 TISCO 750 TISCO 15 2
Baosteel 765 Hadeed 830 Baosteel 65 8
TISCO 750 Hadeed 830 TISCO 80 9

On the basis of the comparisons the following Comparison Matrix can be constructed

Baosteel TISCO Hadeed


Baosteel 1 0.5 8
TISCO 2 1 9
Hadeed 0.1250 0.1111 1

After Normalization of the Comparison Matrix we obtain the following Normalized Matrix:

35
Baosteel TISCO Hadeed
Baosteel 0.3200 0.3103 0.4444
TISCO 0.6400 0.6207 0.5000
Hadeed 0.0400 0.0690 0.0556

From the Normalized Matrix the weights of criteria can be calculated, which are:

Baosteel 0.3583
TISCO 0.5869
Hadeed 0.0548

3.2.2. Calculations for “Payment Terms” Criterion

On basis of Payment Terms, the pair wise comparisons performed by the decision maker
are:

Baosteel is Equally preferred as TISCO


Baosteel is Equally to Moderately less preferred than Hadeed
TISCO is Moderately less preferred than Hadeed

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

Baosteel TISCO Hadeed


Baosteel 1 1 0.5
TISCO 1 1 0.3333
Hadeed 2 3 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

Baosteel TISCO Hadeed


Baosteel 0.2500 0.2000 0.2727
TISCO 0.2500 0.2000 0.1818
Hadeed 0.5000 0.6000 0.5455

From the Normalized Matrix the weights of criteria can be calculated, which are:

Baosteel 0.2409
TISCO 0.2106
Hadeed 0.5485

Consistency of the Comparison Matrix can be calculated as follows:

36
Lambda Max 3.0222
Consistency Index 0.0111
Random Consistency Index 0.66
Consistency Ratio 0.0168

3.2.3. Calculations for “Quality of Deliveries” Criterion

On the basis of Quality of deliveries, the pair wise comparisons performed by the
decision maker are:

Baosteel is Extremely more preferred than TISCO


Baosteel is Equally preferred as Hadeed
TISCO is Extremely less preferred than Hadeed

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

Baosteel TISCO Hadeed


Baosteel 1 9 1
TISCO 0.1111 1 0.1111
Hadeed 1 9 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

Baosteel TISCO Hadeed


Baosteel 0.4737 0.4737 0.4737
TISCO 0.0526 0.0526 0.0526
Hadeed 0.4737 0.4737 0.4737

From the Normalized Matrix the weights of criteria can be calculated, which are:

Baosteel 0.4737
TISCO 0.0526
Hadeed 0.4737

Consistency of the Comparison Matrix can be calculated as follows:

Lambda Max 3.0000


Consistency Index 0.0000
Random Consistency Index 0.66
Consistency Ratio 0.0000

37
3.2.4. Calculations for “ISO 9001 Certification” Criterion

Does the Supplier have ISO 9001 Certification?

Baosteel Yes
TISCO Yes
Hadeed Yes

How much a Supplier with ISO 9001 Certification is preferred over a Supplier without ISO 9001
Certification?
Very Strongly to Extremely

The Supplier Comparisons are as follows:

Alternate 1 Alternate 2 Preferred Intensity


Baosteel Yes TISCO Yes Both 1
Baosteel Yes Hadeed Yes Both 1
TISCO Yes Hadeed Yes Both 1

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

Baosteel TISCO Hadeed


Baosteel 1 1 1
TISCO 1 1 1
Hadeed 1 1 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

Baosteel TISCO Hadeed


Baosteel 0.3333 0.3333 0.3333
TISCO 0.3333 0.3333 0.3333
Hadeed 0.3333 0.3333 0.3333

From the Normalized Matrix the weights of criteria can be calculated, which are:

Baosteel 0.3333
TISCO 0.3333
Hadeed 0.3333

38
3.2.5. Calculations for “Response to Quality Problems” Criterion

On the basis of Quality of deliveries, the pair wise comparisons performed by the
decision maker are:

Baosteel is Moderately more preferred than TISCO


Baosteel is Equally preferred as Hadeed
TISCO is Equally to Moderately less preferred than Hadeed

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

Baosteel TISCO Hadeed


Baosteel 1 3 1
TISCO 0.3333 1 0.5
Hadeed 1 2 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

Baosteel TISCO Hadeed


Baosteel 0.4286 0.5000 0.4000
TISCO 0.1429 0.1667 0.2000
Hadeed 0.4286 0.3333 0.4000

From the Normalized Matrix the weights of criteria can be calculated, which are:

Baosteel 0.4429
TISCO 0.1698
Hadeed 0.3873

Consistency of the Comparison Matrix can be calculated as follows:

Lambda Max 3.0206


Consistency Index 0.0103
Random Consistency Index 0.6600
Consistency Ratio 0.0156

3.2.6. Calculations for “On Time Delivery” Criterion

On the basis of Quality of deliveries, the pair wise comparisons performed by the
decision maker are:

39
Baosteel is Strongly more preferred than TISCO
Baosteel is Moderately to Strongly more preferred than Hadeed
TISCO is Moderately less preferred than Hadeed

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

Baosteel TISCO Hadeed


Baosteel 1 5 4
TISCO 0.2 1 0.3333
Hadeed 0.25 3 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

Baosteel TISCO Hadeed


Baosteel 0.6897 0.5556 0.7500
TISCO 0.1379 0.1111 0.0625
Hadeed 0.1724 0.3333 0.1875

From the Normalized Matrix the weights of criteria can be calculated, which are:

Baosteel 0.6651
TISCO 0.1038
Hadeed 0.2311

Consistency of the Comparison Matrix can be calculated as follows:

Lambda Max 3.1314


Consistency Index 0.0657
Random Consistency Index 0.66
Consistency Ratio 0.0996

3.2.7. Calculations for “Delivery Lead Time” Criterion

The Delivery Lead Times provided by the suppliers are:

Baosteel 60 Days
TISCO 60 Days
Hadeed 35 Days

The equivalent scale for Price per Unit was created by using the answers of the following
questions given by the decision maker

40
What Delivery Lead Time difference between two Suppliers will make;

One supplier equally preferred as another 5 Days


One supplier strongly preferred over another 15 Days
One supplier extremely preferred over another 25 Days

The equivalent scale is as follows:

Fundamental Scale in
terms of difference in
delivery lead time (Days)
1 5
2 7.5
3 10
4 12.5
5 15
6 17.5
7 20
8 22.5
9 25

Using the equivalent scale the suppliers were compared as follows:

Alternate 1 Alternate 2 Preferred Difference Intensity


Baosteel 60 TISCO 60 Equal 0 1
Baosteel 60 Hadeed 35 Hadeed 25 9
TISCO 60 Hadeed 35 Hadeed 25 9

On the basis of the comparisons the following Comparison Matrix can be constructed

Baosteel TISCO Hadeed


Baosteel 1 1 0.1111
TISCO 1 1 0.1111
Hadeed 9.0000 9.0000 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

Baosteel TISCO Hadeed


Baosteel 0.0909 0.0909 0.0909
TISCO 0.0909 0.0909 0.0909
Hadeed 0.8182 0.8182 0.8182

41
From the Normalized Matrix the weights of criteria can be calculated, which are:

Baosteel 0.0909
TISCO 0.0909
Hadeed 0.8182

3.2.8. Calculations for “Total Revenues” Criterion

The Total Annual Revenues of the Suppliers are:

Baosteel 21.50 Billion USD


TISCO 14.77 Billion USD
Hadeed 6.80 Billion USD

The Supplier Comparisons are as follows

Alternative 1 Alternative 2 Preferred Intensity


Baosteel 21.5 TISCO 14.77 Baosteel 1.4557
Baosteel 21.5 Hadeed 6.8 Baosteel 3.1618
TISCO 14.77 Hadeed 6.8 TISCO 2.1721

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

Baosteel TISCO Hadeed


Baosteel 1 1.4557 3.1618
TISCO 0.6870 1 2.1721
Hadeed 0.3163 0.4604 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

Baosteel TISCO Hadeed


Baosteel 0.4992 0.4992 0.4992
TISCO 0.3429 0.3429 0.3429
Hadeed 0.1579 0.1579 0.1579

From the Normalized Matrix the weights of criteria can be calculated, which are:

Baosteel 0.4992
TISCO 0.3429
Hadeed 0.1579

42
3.2.9. Calculations for “Banking History” Criterion

On the basis of Quality of deliveries, the pair wise comparisons performed by the
decision maker are:

Baosteel is Strongly to Very Strongly more preferred than TISCO


Baosteel is Equally preferred as Hadeed
TISCO is Strongly to Very Strongly less preferred than Hadeed

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

Baosteel TISCO Hadeed


Baosteel 1 6 1
TISCO 0.1667 1 0.1667
Hadeed 1 6 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

Baosteel TISCO Hadeed


Baosteel 0.4615 0.4615 0.4615
TISCO 0.0769 0.0769 0.0769
Hadeed 0.4615 0.4615 0.4615

From the Normalized Matrix the weights of criteria can be calculated, which are:

Baosteel 0.4615
TISCO 0.0769
Hadeed 0.4615

Consistency of the Comparison Matrix can be calculated as follows:

Lambda Max 3
Consistency Index 0
Random Consistency Index 0.66
Consistency Ratio 0

3.2.10. Calculations for “Annual Capacity” Criterion

The Total Annual Capacities of the Suppliers are:

43
Baosteel 20.00 Million Tons/Year
TISCO 10.00 Million Tons/Year
Hadeed 5.50 Million Tons/Year

The Supplier Comparisons are as follows:

Alternative 1 Alternative 2 Preferred Intensity


Baosteel 20 TISCO 10 Baosteel 2.0000
Baosteel 20 Hadeed 5.5 Baosteel 3.6364
TISCO 10 Hadeed 5.5 TISCO 1.8182

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

Baosteel TISCO Hadeed


Baosteel 1 2.0000 3.6364
TISCO 0.5000 1 1.8182
Hadeed 0.2750 0.5500 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

Baosteel TISCO Hadeed


Baosteel 0.5634 0.5634 0.5634
TISCO 0.2817 0.2817 0.2817
Hadeed 0.1549 0.1549 0.1549

From the Normalized Matrix the weights of criteria can be calculated, which are:

Baosteel 0.5634
TISCO 0.2817
Hadeed 0.1549

3.2.11. Calculations for “Technical Support” Criterion

On the basis of Quality of deliveries, the pair wise comparisons performed by the
decision maker are:

Baosteel is Moderately preferred as TISCO


Baosteel is Equally to Moderately preferred as Hadeed
TISCO is Moderately less preferred than Hadeed

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

44
Baosteel TISCO Hadeed
Baosteel 1 3 2
TISCO 0.3333 1 0.3333
Hadeed 0.5 3 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

Baosteel TISCO Hadeed


Baosteel 0.5455 0.4286 0.6000
TISCO 0.1818 0.1429 0.1000
Hadeed 0.2727 0.4286 0.3000

From the Normalized Matrix the weights of criteria can be calculated, which are:

Baosteel 0.5247
TISCO 0.1416
Hadeed 0.3338

Consistency of the Comparison Matrix can be calculated as follows:

Lambda Max 3.0654


Consistency Index 0.0327
Random Consistency Index 0.66
Consistency Ratio 0.0495

3.2.12. Calculations for “Reciprocal Consideration” Criterion

On the basis of Quality of deliveries, the pair wise comparisons performed by the
decision maker are:

Baosteel is Equally preferred as TISCO


Baosteel is Equally preferred as Hadeed
TISCO is Equally preferred as Hadeed

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

Baosteel TISCO Hadeed


Baosteel 1 1 1
TISCO 1 1 1
Hadeed 1 1 1

45
After Normalization of the Comparison Matrix we obtain the following Normalized
Matrix:

Baosteel TISCO Hadeed


Baosteel 0.3333 0.3333 0.3333
TISCO 0.3333 0.3333 0.3333
Hadeed 0.3333 0.3333 0.3333

From the Normalized Matrix the weights of criteria can be calculated, which are:

Baosteel 0.3333
TISCO 0.3333
Hadeed 0.3333

Consistency of the Comparison Matrix can be calculated as follows:

Lambda Max 3
Consistency Index 0
Random Consistency Index 0.66
Consistency Ratio 0

3.2.13. Calculations for “Primary or Secondary” Criterion

The information about supplier being primary or secondary is as follows:

Baosteel Primary
TISCO Primary
Hadeed Primary

How much a Primary Supplier is preferred over a Secondary Supplier?


Moderately to Strongly

The Supplier Comparisons are as follows

Alternate 1 Alternate 2 Preferred Value


Baosteel Primary TISCO Primary Both 1
Baosteel Primary Hadeed Primary Both 1
TISCO Primary Hadeed Primary Both 1

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

46
Baosteel TISCO Hadeed
Baosteel 1 1 1
TISCO 1 1 1
Hadeed 1 1 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

Baosteel TISCO Hadeed


Baosteel 0.3333 0.3333 0.3333
TISCO 0.3333 0.3333 0.3333
Hadeed 0.3333 0.3333 0.3333

From the Normalized Matrix the weights of criteria can be calculated, which are:

Baosteel 0.3333
TISCO 0.3333
Hadeed 0.3333

3.2.14. Calculations for “Desire for Business” Criterion

On the basis of Quality of deliveries, the pair wise comparisons performed by the
decision maker are:

Baosteel is Moderately less preferred than TISCO


Baosteel is Equally preferred as Hadeed
TISCO is Moderately more preferred than Hadeed

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

Baosteel TISCO Hadeed


Baosteel 1 0.3333 1
TISCO 3 1 3
Hadeed 1 0.3333 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

Baosteel TISCO Hadeed


Baosteel 0.2000 0.2000 0.2000
TISCO 0.6000 0.6000 0.6000

47
Hadeed 0.2000 0.2000 0.2000

From the Normalized Matrix the weights of criteria can be calculated, which are:

Baosteel 0.2000
TISCO 0.6000
Hadeed 0.2000

Consistency of the Comparison Matrix can be calculated as follows:

Lambda Max 3
Consistency Index 0
Random Consistency Index 0.66
Consistency Ratio 0

3.2.15. Calculations for “Supplier Response” Criterion

On the basis of Quality of deliveries, the pair wise comparisons performed by the
decision maker are:

Baosteel is Moderately more preferred than TISCO


Baosteel is Moderately more preferred than Hadeed
TISCO is Equally to Moderately more preferred than Hadeed

The Pair wise Reciprocal Comparison Matrix for these comparisons can be expressed as:

Baosteel TISCO Hadeed


Baosteel 1 3 3
TISCO 0.3333 1 2
Hadeed 0.3333 0.5 1

After Normalization of the Comparison Matrix we obtain the following Normalized


Matrix:

Baosteel TISCO Hadeed


Baosteel 0.6000 0.6667 0.5000
TISCO 0.2000 0.2222 0.3333
Hadeed 0.2000 0.1111 0.1667

From the Normalized Matrix the weights of criteria can be calculated, which are:

48
Baosteel 0.5889
TISCO 0.2519
Hadeed 0.1593

Consistency of the Comparison Matrix can be calculated as follows:

Lambda Max 3.0704


Consistency Index 0.0352
Random Consistency Index 0.6600
Consistency Ratio 0.0533

3.3. RESULT OF SUPPLIER EVALUATION

The over all performance of the three suppliers in terms of local and global weights for
the primary and secondary criterion is shown in Tables 6 and 7 and Figures 5 and 6.
Where A, B and C represents Baosteel, TISCO and Hadeed respectively. Analysis of the
results shows that Shanghai Baosteel Group Corporation (Baosteel) is the best supplier
with a considerable margin. The performance of Baosteel is better than the other three
suppliers in 5 out of 6 primary and 11 out of 15 secondary criteria. Hence Baosteel is the
recommended supplier. Table 6 gives the supplier performance on basis of each
primary criterion.

Table 6: Supplier Performance with respect to Primary Criteria

Local Performance Global Performance


Weight (%) (%)
S. No.
Criterion
(%)
A B C A B C
1 Cost 4.38 32.89 49.28 17.83 1.44 2.16 0.78
2 Quality 14.18 41.66 18.53 39.81 5.91 2.63 5.64
3 Delivery 15.85 55.02 10.13 34.85 8.72 1.60 5.52
4 Financial Stability 45.68 49.17 28.97 21.86 22.46 13.23 9.99
5 Technical Capability 5.32 53.44 17.66 28.91 2.85 0.94 1.54
6 Supplier Relationship 14.59 43.97 34.90 21.13 6.42 5.09 3.08

Figure 5 shows the graphical representation of individual supplier performance on basis


of the primary criteria

49
60%

SupplierPerformance 50%

40%

30%

20%

10%

0%
Cost Quality Delivery Financial Technical Supplier
Stability Capability Relationship
PrimaryCriteria

Supplier Performance Baosteel Supplier Performance TISCO


Supplier Performance Hadeed

Figure 5: Supplier Performance (Primary Criteria)

Table 7 gives the supplier performance on basis of each secondary criterion

Table 7: Supplier Performance with respect to Secondary Criterion

Global Local Performance Global Performance


S.
Criterion Weight (%) (%)
No.
(%) A B C A B C
1 Unit Price 3.29 35.83 58.69 5.48 1.18 1.93 0.18
2 Payment Terms 1.10 24.09 21.06 54.85 0.26 0.23 0.60
3 Quality of Deliveries 4.73 47.37 5.26 47.37 2.24 0.25 2.24
ISO 9001
4 4.73 33.33 33.33 33.33 1.58 1.58 1.58
Certification
Response to Quality
5 4.73 44.29 16.98 38.73 2.09 0.80 1.83
Problems
6 On Time Delivery 12.68 66.51 10.38 23.11 8.43 1.32 2.93
7 Delivery Lead Time 3.17 9.09 9.09 81.82 0.29 0.29 2.59

50
8 Total Revenues 36.54 49.92 34.29 15.79 18.24 12.53 5.77
9 Banking History 9.14 46.15 7.69 46.15 4.22 0.70 4.22
10 Annual Capacity 1.33 56.34 28.17 15.49 0.75 0.37 0.21
11 Technical Support 3.99 52.47 14.16 33.38 2.10 0.57 1.33
Reciprocal
12 2.79 33.33 33.33 33.33 0.93 0.93 0.93
Considerations
Primary or
13 0.81 33.33 33.33 33.33 0.27 0.27 0.27
Secondary
14 Desire for Business 3.23 20.00 60.00 20.00 0.65 1.94 0.65
15 Supplier Response 7.76 58.89 25.19 15.93 4.57 1.95 1.24
Total Weight 47.79 25.66 26.56

Figure 6 shows the graphical representation of individual supplier performance on basis


of the secondary criteria

90%

80%

70%
Supplier Performance

60%

50%

40%

30%

20%

10%

0%

Secondary Criteria

Supplier Performance Baosteel Supplier Performance TISCO


Supplier Performance Hadeed

Figure 6: Supplier Performance (Secondary Criteria)


51
CHAPTER 4

SENSITIVITY ANALYSIS

4.1. SENSITIVITY ANALYSIS IN AHP

Sensitivity analysis identifies the impact of changes in the priority of criteria on the
suppliers' performance. After obtaining the initial solution with the given weights of the
criteria, sensitivity analyses were carried out to explore the response of the overall
ranking of alternatives to the changes in the relative importance of each primary criterion.
This is important because a decision maker might be very interested to know the
consequences of variation in weights of criteria. Some influence could have been
underestimated or a slight variation in one criteria weight could lead to a completely
different decision. A comprehensive sensitivity analysis would ensure the robustness of
the system and eliminate risk of selecting the ‘wrong’ supplier because some
comparisons in the model were not made accurately [25].

Sensitivity Analysis was performed only on the Level 2 criteria so that the decision
maker is not over burdened with information and only the very important and critical
criteria are considered. In order to perform Sensitivity Analysis the weight of a criterion
is perturbed slightly at a time and its effect on the overall supplier ranking is observed. If
a slight variation in an important criterion results in rank reversal it shows that there is
uncertainty in the model. An increase in a criterion weight would result in a
corresponding decrease in the weight of remaining criteria in the same cluster and vice
versa, this change is proportional to the weight of these criteria. Therefore the priorities
of criteria after perturbation could be easily calculated using the following simple relation
[10]:

    (5)


    % 6
 ! " ! # ! $ 

52

    % 7
 ! " ! # ! $ 

Where:
P1, P2 ... Pn = priorities of criterion 1, 2 and n after perturbation.
P1a, P2a ... Pna = actual priorities of criterion 1, 2 and n.
n = number of criterion.
x = amount of perturbation.
If weight of criterion 1 is increased, then the weights of all remaining criteria will be
decreased and vice versa.

The widely used AHP software Expert Choice™ provides different means of sensitivity
analysis. For our study we selected two methods, namely Performance Sensitivity and
Gradient Sensitivity analysis and developed MS Excel spreadsheets to perform these
analyses for our primary level criteria.

4.2. PERFORMANCE SENSITIVITY ANALYSIS

In performance sensitivity the decision maker has the freedom to modify the weights of
primary criteria and to observe their impact on overall ranking. In this way an infinite
combination of priorities can be analyzed and important what if questions can be
answered. In order to modify weights in the Excel spread sheets, form controls are
embedded with VBA coding which perturb the relative weights. Different degrees of
precision can also be selected. The results are displayed graphically in the form of charts.

4.2.1. Scenario 1: All criteria have equal priority

Using the form controls on the performance sensitivity analysis spread sheet, the weight
of each criterion is maintained at 16.667%. In this situation the overall weights of
supplier performance are: 46.03%, 26.58% and 27.4% for Baosteel, Hadeed and TISCO
respectively. The resulting ranking is the same as the current ranking. Therefore it shows
that even when all the criterion have the same weight, Baosteel is clearly the best
supplier. Figure 7 shows the result for Scenario 1.

53
Figure 7: Performance Sensitivity Analysis for Scenario 1

4.2.2. Scenario 2: Cost is the most important criterion

We want to see what will happen if cost was the most important criterion rather than
Financial Stability, to find out we increase the overall weight of cost to 45%, the
remaining priorities are 24.84%, 15.27%, 6.45% ,6.09%, 3.25% for quality, delivery,
supplier relationship, financial stability and technical capability respectively. The result
shows that still Baosteel is the best supplier followed by TISCO and Hadeed with overall
performance of 40.64%, 32.75% and 26.6% respectively. The ranks of TISCO and
Hadeed have been interchanged but still Baosteel is the better supplier with quite a
considerable margin. Figure 8 shows the result for Scenario 2.

Similarly a number of different scenarios can be created and their results can be analyzed.
The two scenarios considered show that the system is not effected by small changes and
the best supplier remains to be Baosteel.

54
Figure 8: Performance Sensitivity Analysis for Scenario 2

4.3. GRADIENT SENSITIVITY ANALYSIS

In gradient sensitivity only one criterion is observed at a time. The weight of a certain
criteria is plotted on the x-axis and the overall supplier priority on the y-axis. The overall
weight of each supplier is represented by a straight line. This graph represents whether
the weight of supplier is increasing or decreasing with changing the weight of that
criterion. Most importantly it identifies the point at which rank reversal is taking place.
Individual graphs for each primary criterion were plotted. In order to plot gradient
sensitivity of a particular criterion, the relative weights of all the other criteria in the
cluster are calculated using eqns. 5 to 7, when that criterion has weights of 0% and 100%
respectively. These perturbed weights are used to calculate the overall supplier
performances and a graph is then plotted using these values.

4.3.1. Gradient Sensitivity of Financial Stability Criterion:

Financial Stability is the most important Primary Criteria with a global weight of 45.68%.
At this weight Baosteel is the best supplier, followed by Hadeed and TISCO. The
sensitivy analysis in Figure 9 shows that no matter how much the weight of Financial
Stability is increased or decreased, Baosteel continues to be the best supplier. With

55
increasing importance of financial stability the overall performance of Baosteel also
improves. Also, if the weight is increased beyond 51.91%, TISCO will become more
preferred over Hadeed but still behind Baosteel. Hence on basis of financial stability
Baosteel is clearly the best supplier.

Figure 9:: Gradient Sensitivity Analysis of Financial


Financial Stability Criterion

Table 8 shows the calculations, where F.S. stands for relative weight of Financial
Stability.

Table 8:: Calculations for Gradient Sensitivity of Financial Stability Criterion

S. Perturbed Weights Overall Supplier Performance


Criteria
No. F.S. = 0 F.S = 1 Suppliers F.S = 0 F.S = 1
1 Financial Stability 0.000 1.000 Baosteel 0.466 0.492
2 Delivery 0.292 0.000 TISCO 0.229 0.290
3 Supplier Relationship 0.269 0.000 Hadeed 0.305 0.219
4 Quality 0.261 0.000
5 Technical Capability 0.098 0.000
6 Cost 0.081 0.000

56
4.3.2. Gradient Sensitivity of Delivery Criterion:

Delivery is the second most important Primary Criteria with a global weight of 15.85%.
At this weight Baosteel is the best supplier, followed by Hadeed and TISCO. The
sensitivy analysis in Figure 10
1 shows that no matter how much the weight of Delivery
criterion is increased or decreased, Baosteel continues to be the best supplier. Also, if the
weight is reduced beyond 12.66% then TISCO will become more preferred over Hadeed
but still behind Baosteel. Hence on basis of Delivery Baosteel is clearly the best supplier.

Figure 10:: Gradient Sensitivity Analysis of Delivery


D Criterion

Table 9 shows the calculations, where D stands for relative weight of Delivery.

Table 9:: Calculations for Gradient Sensitivity of Delivery Criterion

S. Perturbed Weights Overall Supplier Performance


Criteria
No. D=0 D=1 Suppliers D=0 D=1
1 Financial Stability 0.543 0.000 Baosteel 0.464 0.550
2 Delivery 0.000 1.000 TISCO 0.286 0.101
3 Supplier Relationship 0.173 0.000 Hadeed 0.250 0.349
4 Quality 0.168 0.000
5 Technical Capability 0.063 0.000
6 Cost 0.052 0.000

57
4.3.3. Gradient Sensitivy of Supplier Relationship Criterion:

Supplier Relationship is the third most important Primary Criteria with a global weight of
14.59%.
%. At this weight Baosteel is the best supplier, followed by Hadeed and TISCO.
The sensitivy analysis in Figure
Fi 11 shows that no matter how much the weight of
Supplier Relationship criterion is increased or decreased, Baosteel continues to be the
best supplier.
lier. With increasing importance of Supplier Relationship the performance of
Baosteel decreases.. Also, if the weight is increaded beyond 19.76%
% then TISCO will
become more preferred over Hadeed but still behind Baosteel. Hence on basis of Supplier
Relationship Baosteel is clearly the best supplier.

Figure 11:: Gradient Sensitivity Analysis of Supplier Relationship Criterion

Table 10 shows the calculations, where S.R. stands for relative weight of Supplier
Relationship

Table 10:: Calculations for Gradient Sensitivity of Delivery Criterion

S. Perturbed Weights Overall Supplier Performance


Criteria
No. S.R. = 0 S.R. = 1 Suppliers S.R. = 0 S.R. = 1
1 Financial Stability 53.480 0.000 Baosteel 0.484 0.440
2 Delivery 18.552 0.000 TISCO 0.241 0.349
3 Supplier Relationship 0.000 1.000 Hadeed 0.275 0.211

58
4 Quality 16.601 0.000
5 Technical Capability 6.234 0.000
6 Cost 5.133 0.000

4.3.4. Gradient Sensitivy of Quality Criterion:

Quality has a global weight of 14.18%. At this weight Baosteel is the best supplier,
followed by Hadeed and TISCO. The sensitivy analysis in Figure 12 shows that no matter
how much the weight of Supplier Relationship criterion is increased or decreased,
Baosteel
osteel continues to be the best supplier.
supplier Also, if the weight is reduced beyond 10.40%
then TISCO will become more preferred over Hadeed but still behind Baosteel. Hence
on basis of Quality Baosteel is clearly the best supplier.

Figure 12:: Gradient Sensitivity Analysis of Quality Criterion

Table 11 shows the calculations, where Q stands for Quality.

Table 11:: Calculations for Gradient Sensitivity of Quality Criterion

S. Perturbed Weights Overall Supplier Performance


Criteria
No. Q=0 Q=1 Suppliers Q=0 Q=1
1 Financial Stability 53.222 0.000 Baosteel 0.488 0.417
2 Delivery 18.463 0.000 TISCO 0.268 0.185
3 Supplier Relationship 17.002 0.000 Hadeed 0.244 0.398

59
4 Quality 0.000 1.000
5 Technical Capability 6.204 0.000
6 Cost 5.108 0.000

4.3.5. Gradient Sensitivy of Techanical Capability Criterion:

Technical Capability has a global weight of 5.32%.


%. At this weight Baosteel is the best
supplier, followed by Hadeed and TISCO. The sensitivy analysis in Figure 13
3 shows that
no matter how much the weight of Supplier Relationship criterion is increased or
decreased, Baosteel continues to be the best supplier.
supplier. With increasing importance of
Technical Capability the performance of Baosteel and Hadded aslo improves whereas
that of TISCO decreases. Rank reversal never takes place i.e. the current ranking will
always remain the same.. Hence on basis of Technical Capability Baosteel is clearly the
best supplier.

Figure 13:: Gradient Sensitivity Analysis of Technical Capability Criterion

Table 12 shows the calculations, where T.C. stands for Technical Capability.

60
Table 12:: Calculations for Gradient Sensitivity of Technical Capability Criterion
Perturbed
S. Overall Supplier Performance
Criteria Weights
No.
T.C. = 0 T.C. = 1 Suppliers T.C. = 0 T.C. = 1
1 Financial Stability 48.245 0.000 Baosteel 0.475 0.534
2 Delivery 16.736 0.000 TISCO 0.261 0.177
3 Supplier Relationship 15.412 0.000 Hadeed 0.264 0.289
4 Quality 14.976 0.000
5 Technical Capability 0.000 1.000
6 Cost 4.630 0.000

4.3.6. Gradient Sensitivy of Cost Criterion:

Cost has a global weight of 4.38%.


4.38%. At this weight Baosteel is the best supplier, followed
by Hadeed and TISCO. The sensitivy analysis in Figure 14 shows that rank reversal takes
place twice, when the importance of cost is increased beyond 7.04% TISCO becomes
becom
more important than Hadeed but still behind Baosteel with a large margin. However
beyond 59.28% TISCO becomes even more preferred than Baosteel.
Baosteel. Thus on basis of
cost Baosteel is the best supplier unless the priority of cost is increased to about 60%,
which
hich is highly unlikely and does not show any weakness in the model.

Figure 14:: Gradient Sensitivity Analysis of Cost Criterion


61
Table 13 shows the calculations, where C stands for Cost.

Table 13: Calculations for Gradient Sensitivity of Delivery Criterion

S. Perturbed Weights Overall Supplier Performance


Criteria
No. C=0 C=1 Suppliers C=0 C=1
1 Financial Stability 0.478 0.000 Baosteel 0.485 0.329
2 Delivery 0.166 0.000 TISCO 0.246 0.493
3 Supplier Relationship 0.153 0.000 Hadeed 0.270 0.178
4 Quality 0.148 0.000
5 Technical Capability 0.056 0.000
6 Cost 0.000 1.000

4.4. RESULT OF SENSITIVITY ANALYSIS

The sensitivity analysis shows very clearly that the system is robust and small changes in
criteria weights does not affect the overall ranking of the suppliers and hence it confirms
that any inconsistency in the pair wise comparison phase resulting in slightly different
criteria weights does not affect the overall system. As a result we can say that Baosteel
(China) is the best supplier with a considerable margin and must be selected with full
confidence.

62
CHAPTER 5

DEVELOPMENT OF VISUAL BASIC APPLICATION FOR


SUPPLIER SELECTION USING ANALYTIC HIERARCHY
PROCESS

5.1 VISUAL BASIC APPLICATION FOR ‘SUPPLIER SELECTION USING


AHP’

The Visual Basic application or software is designed to provide a general purpose


solution to the Supplier Selection problem. It allows its user to structure and save
multiple Hierarchies at the same time, perform pair wise comparisons to calculate relative
weights of the criteria maintain a database of suppliers and then evaluate them to find the
supplier best suited for the order. The designing and coding is done on Visual Basic 6,
with approximately 2500 lines of coding. Different online references and books were
consulted to understand the development and coding of VB applications [25; 26].

5.2 DATA STORAGE AND RETRIEVAL

In order to store the data entered by the user and to retrieve it for future use, the
application is linked with Microsoft Excel. MS Excel not only stores the data but also
performs various mathematical and logical operations thus saving coding space and
processing time in Visual Basic. All the information entered by the user is stored in an
MS Excel file with each work sheet assigned to store some particular information related
to each Hierarchy.

5.3 STRUCTURE OF APPLICATION

The Application is structured in the form of several windows associated for different
phases of the AHP process. After starting the application user will see a main window
from where he can navigate to the other windows. The application can be divided into
three major modules or windows:

1) Supplier Database: Maintain supplier information

63
2) Manage Hierarchies: Hierarchies can be added, deleted and edited
3) Evaluate Suppliers: Evaluate suppliers on the basis of lowest level criteria

The above mentioned three windows can only be opened, one at a time and can only be
invoked from the main window (main menu). The structure of the application is shown
graphically in Figure 15.

5.4 FEATURES OF THE APPLICATION

• Up to four Hierarchies can be defined and edited at a time.


• Each Hierarchy can be structured having three levels of criteria (Level 2, Level 3, and
Level 4).
• Each Hierarchy can have up to 10 primary (Level 2) criteria, each primary criterion
can be sub divided into 7 secondary criteria and each secondary criterion can be sub
divided into 4 tertiary criteria. Altogether a hierarchy can have up to 360 criteria (10
Primary, 70 Secondary and 280 Tertiary criteria).
• Convenient data entry method for performing pair wise comparisons, with the user
having complete view of all the inputs at every time.
• Calculation of most inconsistent judgments and proposed modifications in those
judgments.
• List wise representation of Local and Global weights of the criteria.
• Each hierarchy can have up to 10 alternatives (suppliers).
• Different methods can be associated with each criterion for supplier evaluation (Pair
wise, Quantitative, Factor rating).
• Application can generate an automated MS EXCEL spread sheet containing summary
of Vendor Ranking along with supplier performance on each criterion, the mode of
evaluation. Overall performance of suppliers and the best supplier.

64
Splash Screen

Window 1: Main Menu


Window 1.1: Supplier database Window 1.4: About
Window

Window 1.2: Manage Window 1.3: Evaluate


Hierarchies Suppliers

Tab 1.2.1: Select a hierarchy to Tab 1.3.1: Associate and


edit or name a new one manage suppliers related
to a Hierarchy

Tab 1.2.2: Specify Primary,


Secondary and Tertiary Tab 1.3.2: Select criteria
criteria for the Hierarchy to evaluate and the
evaluation method

Tab 1.2.3: Perform


Pair wise Comparisons

Window 1.2.3.1:
Adjust Inconsistency Window 1.3.2.1:
Tab 1.2.4: View Results
Result

Figure 15: Structure of Application

65
5.5 SOFT WARES USED

Following softwares were used in the development of the application

• Microsoft Visual Basic 6:


VB 6 was use for designing the interface and coding for the application.
• Microsoft Excel 2007:
Serves as the database for the application and performs various mathematical and
logical operations.
• IcoFX 1.6.4:
IcoFX 1.6.4 was used to design the icon for the application.

5.6 SYSTEM REQUIREMENTS

• Windows XP or higher
• MS EXCEL 2007 or higher

5.7 INTRODUCTION TO APPLICATION INTERFACE

Following is a brief introduction of the interface along with description of each window
and tab and the functionality of the controls present on them:

1.2.1. Starting the application

After installation the Application can be invoked by selecting Start> All Programs>
Supplier Selection using AHP> Supplier Selection using AHP

1.2.2. Splash Screen

Invoked by: Start> All Programs> Supplier Selection using AHP> Supplier Selection
using AHP

66
Figure 16: Splash Screen

1.2.3. Window 1: Main Menu

Figure 17: Main Menu

The main menu shown in Figure 17, allows user to navigate through the different child
windows or modules. User can select from the following buttons:

1) Maintain Supplier Information:


Opens child window to maintain a supplier database
2) Edit/Create Hierarchies:

67
Opens child window to edit/delete/create Hierarchies and calculate relative weight
of criteria by performing pair wise comparisons
3) Evaluate Suppliers and View Results:
Opens child window to Evaluate Suppliers (Alternatives) on the basis of the
lowest level criteria
4) About:
Opens about window showing Information about the application
5) What is AHP?
Opens child window showing Information about Analytic Hierarchy Process

1.2.3.1. Window 1.1: Supplier Database

Figure 18: Supplier Database Screen

Invoked by “Maintain Supplier Information” Button (Window 1), this Window shown
in Figure 18, allows user to maintain a data base of Suppliers by entering Supplier Name,
Contact Information and Product(s)/Service(s) Supplied. The suppliers added in this
module could be subsequently associated to a Hierarchy in Window 1.3.1. A maximum
of forty suppliers can be added. Database can be managed using the following buttons:

68
1. Add: To add a new supplier to the database
2. Remove: Removes the selected entry
3. Edit: Allows user to edit the selected entry
4. Clear All: Removes all Suppliers from the data base
5. Finish: Returns to Main Menu (Window 1)

1.2.4. Window 1.2: Manage Hierarchies

Invoked by “Edit/Create Hierarchies” Button (Window 1), this module allows user to
manage Hierarchies by creating and editing new Hierarchies, adding criterion to a
Hierarchy and performing pair wise Comparisons. It consists of the following tabs:

Tab 1.2.1: Edit/Create Hierarchy


Tab 1.2.2: Define Hierarchy
Tab 1.2.3: Pair wise Comparisons
Tab 1.2.4: Result

1.2.4.1.Tab 1.2.1: Edit/Create Hierarchy

Invoked by “Edit Create Hierarchies” Button (Window 1), this Tab shown in Figure 19,
allows user to specify and edit hierarchy name, date on which it was created, names of
people who performed the comparisons and notes related to the Hierarchy. The list box
displays the names of Hierarchies created. A maximum of four Hierarchies could be
created. The user can use the following buttons on this Tab:

1. Edit: To edit Hierarchy Information.


2. Delete: This button removes the selected Hierarchy from the list of Hierarchies. The
user is prompted to confirm the action before execution of command
3. Exit: Returns to Main Window (Window 1)
4. Next: Invokes next tab (Define Hierarchy)

69
Figure 19: Edit/Create Hierarchies Tab

1.2.4.2.Tab 1.2.2: Define Hierarchy

Invoked by “Next” Button (Tab 1.2.1), this Tab shown in Figure 20, allows user to add
criteria to a Hierarchy. Criteria could be structured in three levels (Level 2, Level 3, and
Level 4). Level 2 can have maximum of ten Primary criteria. Level 3 can have maximum
of seven Secondary criteria under each Primary Criteria and Level 4 can have maximum
of 4 Tertiary criteria under each Secondary Criteria. In all maximum of 360 criteria could
be defined. If the number of criteria exceeds the allowed limit the user will be prompted
by a message box. The List Box contains the defined criteria in a Hierarchical manner.
User can use the following controls on this Tab:

70
Figure 20: Define Hierarchy Tab

1) Add: To add a criterion to the List


2) Remove Removes the selected criterion and its sub criteria from the Hierarchy
3) Clear All: Clears the contents of the Hierarchy
4) Save: Saves the Hierarchy
5) Exit: Returns to Main Window (Window 1)
6) Back: Invokes previous Tab (Edit/Create Hierarchy)
7) Next: Invokes next Tab (Pair wise Comparisons)

1.2.4.3.Tab 1.2.3: Pair wise Comparisons

Invoked by “Next” Button (Tab 1.2.2), this Tab shown in Figure 21, allows user to
perform Pair Wise Comparisons to calculate the relative weights of the criteria. The Tab
displays the Reciprocal Positive Pair Wise Comparison Matrix of only one cluster at a
time. The rows and columns of the matrix are assigned to the criteria of the cluster.
Comparisons can be performed by clicking the element on the intersection of the row and

71
column of the desired criteria in the upper diagonal of the matrix. The horizontal scroll
bar in the frame above the matrix can be used to enter the semantic comparison of the
two criteria based on the fundamental scale of AHP. The weights of criteria (in
percentage) and the consistency ratio are calculated with each change in the comparisons.
If the consistency ration exceeds the allowable limit of 0.10 its value is highlighted and
the “Fix” button is enabled. Clicking the “Next Matrix” and “Previous Matrix” button
displays the next and previous matrices respectively. The user will be asked to save or
discard the changes made to the current matrix before proceeding to another one.

Figure 21: Pair wise Comparisons Tab

The user can use the following controls on this Tab:

1) Previous Matrix: Displays the Previous Matrix


2) Next Matrix: Displays the Next Matrix
3) Fix: Enabled only if C.R. is greater than 0.10. Invokes “Adjust Inconsistency”
(Window 1.2.3.1.)

72
4) Exit: Returns to Main Window (Window 1)
5) Back: Invokes previous Tab (Define Hierarchy)
6) Next: Invokes next Tab (Results)
7) Horizontal Scroll Bar: To input comparisons in the matrix

1.2.4.4.Window 1.2.3.1: Adjust Inconsistency

Figure 22: Adjust Inconsistency Window

Invoked by “Fix” Button (Tab 1.2.3), this Window shown in Figure 22 helps user to
identify most inconsistent judgment of the current comparison matrix, identify the range
of possible input values and assist in selecting an appropriate value of the input. A series
of text boxes display the projected value of consistency ratio, in case the current value of
the comparison is replaced with the seventeen possible values. The user can use the
following buttons on this Window:

1) Previous: Display the next most inconsistent comparison


2) Next: Display the previous most inconsistent comparison

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3) Update: Recalculate the most inconsistent comparisons
4) Close: Close “Adjust Inconsistency” Window

1.2.4.5. Tab 1.2.4: Results

Figure 23: Results Tab

Invoked by “Next” Button (Tab 1.2.3), this Tab shown in Figure 23 displays the Local
and Global Weights of the criteria. The user can use the following buttons on this Tab:

1) Exit: Returns to Main Window (Window 1)


2) Back: Returns to previous Window (Pair wise Comparisons)

1.2.5. Window 1.3: Evaluate Suppliers

Invoked by: “Evaluate Suppliers and View Results” Button (Window 1)

74
This module allows user to associate suppliers with a hierarchy and evaluate them on the
basis of the criteria selected. This window consists of the following Tabs:

Tab 1.3.1: Select/Edit Suppliers


Tab 1.3.2: Select Criteria to Evaluate
Tab 1.3.3: Pair wise Comparisons
Tab 1.3.4: Direct
Tab 1.3.5: Factor Rating

1.2.5.1.Tab 1.3.1: Select/Edit Suppliers

Invoked by “Evaluate Suppliers and View Results” Button (window 1), this Tab shown
in Figure 24 allows users to add alternatives (suppliers) to a Hierarchy. In the left hand
side list box titled “Hierarchies” the existing hierarchies are displayed along with their
related notes. The list of existing suppliers in the data base is displayed in the bottom left
list box titled “List of Suppliers”. User can add suppliers by selecting the appropriate
hierarchy and then selecting the suppliers from the list of suppliers and Clicking “Add”
button. The selected suppliers are added to the list box titled “Selected Suppliers”. A
maximum of 10 suppliers can be added to a hierarchy, if more than ten suppliers are
added the user will be prompted “You cannot add more than 10 suppliers”. The selection
must be saved before proceeding. To continue with evaluating the suppliers, the user
must select the hierarchy and click “Next”. The user can use the following buttons on this
Tab:

1) Remove: Removes the selected supplier from the selected supplier list
2) Save: Saves the selection
3) Add: Adds the suppliers selected from the list of suppliers to the selected supplier list
4) Exit: Returns to main window (window 1)
5) Next: Invokes next Tab (Select Criteria to Evaluate)

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Figure 24: Select/Edit Suppliers Tab

1.2.5.2. Tab 1.3.2: Select Criteria to Evaluate:

Invoked by “Next” Button (Tab 1.3.1), this Tab shown in Figure 25 allows user to
associate an evaluation method with a criteria and to proceed towards evaluating it. The
list box displays the lowest level criteria of the hierarchy selected in the previous tab
along with their Global Weights. The “Select Evaluation Method” frame in the bottom
right position shows the evaluation methods which are Pair wise Comparisons,
Quantitative and Factor Rating.

1.2.5.2.1. Pair wise Comparisons: In pair wise comparisons the suppliers could be
evaluated by comparing them against each other using the fundamental scale of Analytic
Hierarchy Process. The interface is similar to the one described in Tab 1.2.3.

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Figure 25: Evaluation Method Selection Tab

1.2.5.2.2. Quantitative Input: In Direct Evaluation the suppliers can be evaluated by


entering numeric or quantitative values. The relation ship between the selected criterion
and the supplier performance can be specified by selected the “Direct” or “Inverse” radio
buttons.
1.2.5.2.3. Factor Rating: In Factor Rating the user will be asked to define a rating scale
(for example: poor, fair, good, excellent) along with the weight of each element of the
scale. This scale can then be used to rate the suppliers. The scale can have a maximum of
five elements.

In order to proceed with the evaluation, user must select a criterion and select the
appropriate evaluation method and click “Evaluate”. In case a different evaluation
method is associated with the criteria, the user will be prompted “Input using another
evaluation method is associated with this criteria. Are you sure you want to change
evaluation method” selecting ok will change the evaluation method to the selected

77
method. Results of the evaluation can be seen by clicking “Results” button. The user can
use the following buttons on this Tab:

1) See Results: Invokes Results Window (Window 1.3.2.1)


2) Exit: Returns to Main Window (Window 1)
3) Cancel: Returns to previous tab (Select/Edit Suppliers)
4) Evaluate: Invokes tab of selected Evaluation Method

1.2.5.3. Window 1.3.2.1: Results

Figure 26: Results Window

Invoked by “See Results” Button (Tab 1.3.2), this window shown in Figure 26 displays
the results of evaluation of suppliers in a list wise and graphical manner.. In order to
document the results, user can use the “Compile Results” button which will generate an
automated MS Excel file, a specimen of which is shown in Figure 27. User will be asked
to enter the name of the company, date, name of evaluator and the product for which the
evaluation was performed; this information will be added into the Excel file along with

78
the lowest level criteria, its global weight, mode of evaluation and the performance of
each supplier on these criteria.

Figure 27: Example of automated Excel spread sheet for Supplier Ranking

The user can use the following buttons on this tab:

1) Graphical: Switch to graphical display


2) List: Switch to list wise display
3) Compile Results: Generate MS Excel file of the Results
4) Exit: Return to Select Criteria to Evaluate Tab (Tab 1.3.2)

1.2.6. Window 1.4: About Window

Invoked by “About” Button (Window 1), shown in Figure 28 this window displays basic
information about the application.

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Figure 28: About Window

5.8 SETUP AND PACKAGING

The application was packaged using Package and Deployment Wizard available in the
Visual Basic 6.0 Tools.

80
CONCLUSION

The approach developed in this report is more formal and systematic than the current
supplier selection approach. It allows for a wide range of evaluation criteria including
both quantitative and qualitative ones which is a major advantage of this method. Unlike
other methods, which require the priorities of criterion to be provided directly by the
decision maker, the priorities or weights are determined systematically on the basis of
simple pair wise comparisons which reflect human judgment.

After selection of the appropriate criteria and their pair wise comparisons, the most
important primary criteria was found to be Financial Stability (45.67%) followed by
Delivery (15.84%), Supplier Relationship (14.59%), Quality (14.17%), Technical
Capability (5.32%) and Cost (4.38%).

Weights of secondary criteria were also calculated in a similar way. The three suppliers
namely Baosteel (China), TISCO (China) and Hadeed (KSA) were evaluated on basis of
the fifteen secondary criteria, the selection of the evaluation method depended upon the
nature of criterion. The result of evaluation identified Baosteel as a clear leader, it also
showed that cost is not the only or the most important deciding factor while selecting a
supplier. The overall performances of the three suppliers indicated Baosteel as a clear
leader with an overall performance of 47.79% followed by Hadeed and TISCO with
overall performance of 26.56% and 25.66%.

Next sensitivity analysis was performed to identify the effect of criteria weights on the
overall decision. The result of sensitivity analysis also verified the decision; only very
large variation in the weight of Cost criterion would result in a rank reversal. On basis of
the sensitivity analysis it is clear that Baosteel remains to be the best supplier. The
calculations and sensitivity analysis were also verified using Expert Choice™ Software.
Hence it can be concluded on basis of the calculations and the sensitivity analysis
performed that Shanghai Baosteel Group Corporation is the best and most efficient
supplier of Hot Rolled Steel Coils for this particular scenario of supplier selection for
Crescent Steel and Allied Products Limited.

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The major advantages which our model brings to the supplier selection procedure are:

• Both tangible and intangible factors can be included in the process.


• Using pair wise comparisons reduced dependency of the system on human judgment.
• The personal and organizational preferences and policies are reflected in the relative
weights of the criteria.
• Analysis of several “what-if” scenarios is possible using the sensitivity analysis
techniques.

Apart from developing the mathematical model of supplier selection we also developed a
Visual Basic application, designed specifically for the supplier selection problem using
the Analytic Hierarchy Process approach. The objective was to provide flexibility and
ease in model formulation for future purchasing requirements and to analyze multiple
hierarchies simultaneously for varying needs and requirements.

Analytic Hierarchy Process, although a well known and widely used multi objective and
multi criteria decision making technique around the world, is not widely implemented
and used in Pakistan. This project shows how AHP could be used in effective decision
making and to improve the overall performance of an organization. AHP can be
successfully used for other applications like employee selection, contractor selection, site
selection, to measure the performance of individual or departments etc. and a wide range
of other applications.

82
REFERENCES

[1] http://en.wikipedia.org/wiki/Baosteel

[2] http://en.wikipedia.org/wiki/Hadeed

[3] http://en.wikipedia.org/wiki/Taiyuan

[4] http://www.tisco.com.cn/en/

[5] http://www.crescent.com.pk/home.htm

[6] http://www.crescent.com.pk/spiral_welded_steel_pipes.htm

[7]M.J.S. Bello, A case study approach to the supplier selection process in, Management
Systems Engineering, University of Puerto Rico, Mayagüez, pp. 142, 2004.

[8]http://goliath.ecnext.com/coms2/gi_0199-1562209/A-model-for-strategic-
supplier.html

[9]T.K.S. Babu & S. Kamana, Analytical Hierarchy Process for Vendor Evaluation - A
Case with a Research Institute, South Asian Journal of Management, volume 12,
Issue 1, pages 101-116,2005

[10] http://www.expertchoice.com/

[11] http://www.apian.com/software/decisionpad/

[12] http://www.bestshareware.net/download/rightchoicedss-professional.htm

[13]T.L. Saaty, How to make a decision: The analytic Hierarchy Process. European
Journal of Operational Research 48 (1990) 9-26.

[14]T.L. Saaty, The Analytic Hierarchy and Analytic Network Measurement Processes:
Applications to Decisions under Risk, European Journal of Applied and Pure
Mathematics, Volume 48, Issue 1, pages 122-196, 2008.

[15]S.I. Gass, Decision Making, Models and Algorithms, First edition, John Wiley &
Sons Inc., 1985.

[16]A. Ishizaka & M. Lusti, How to derive priorities in AHP: a comparative study,
Central European Journal of Operations Research, Volume 14, Issue 4, pages 387-
400, 2006.

[17]T.L. Saaty, Decision-making with the AHP: Why is the principal eigenvector
necessary, European Journal of Operational Research, Volume 145, Issue 1, pages
85-91, 2003.

83
[18]H.A. Taha, Operations Research An Introduction, Eighth edition, 2007.

[19]Anderson, William, Sweeny, An Introduction to Management Science, Quantitative


Approaches to Decision Making, Tenth edition, Thomson Learning, 2003.

[20]T.L. Saaty, Relative Measurement and Its Generalization in Decision Making; Why
Pairwise Comparisons are Central in Mathematics for the Measurement of
Intangible Factors The Analytic Hierarchy/Network Process, Royal Academy of
Sciences of Madrid, Volume 102, Issue 2, pages 251-318, 2008.

[21]Monczka, Trent, Handfield, Purchasing and Supply Chain Management, Second


edition, Thomson Learning, 2002.

[22]P. Baily & D. Farmer, Purchasing Principles and Management, Fifth edition, Pitman
Publishing, 1986.

[23] http://en.wikipedia.org/wiki/Analytic_Hierarchy_Process

[24]Perego, A. & A. Rangone, On integrating tangible and intangible measures in AHP


Applications: a reference framework. IEEE International conference on Systems,
Man and Cybernetics, Volume 3, pages 1836-1841, 1996.

[25]Tahriri, F., et al., AHP approach for supplier evaluation and selection in a steel
manufacturing company, Journal of Industrial Engineering and Management,
Volume 1, Issue 2, 2008.

[26]P. Wright, Begining Visual Basic 6, First edition, Wrox Press Ltd., 2000.

[27]APTECH, Developing Applications with Visual Basic 6, APTECH World Wide,


2001.

84
APPENDIX

85
Pair-wise Comparisons for the Level 2 Of Hierarchy
Hierarchy
Select the Best
Level 1 Supplier

Technical Supplier
Level 2 Cost Quality Delivery Financial Stability
Capability Relationship

Fundamental Scale Of AHP


Intensity of
Definition Explanation
Importance

1 Equal Importance Both Criteria contribute equally to the objective

2 Equal to Moderate Importance


Experience and judgment slightly favor one criteria
3 Moderate importance
over another
4 Moderate to Strong Importance
Experience and judgment strongly favor one
5 Strong importance
criterion over another
6 Strong to very Strong Importance
A criterion is favored very strongly over another and
7 Very strong or demonstrated importance
its dominance demonstrated in practice
8 Very Strong to Extreme Importance
The evidence favoring one criterion over another is
9 Extreme importance
of the highest possible order of affirmation

Note
Pair wise Comparisons are performed in the work sheet "Pair wise Comparisons-Level 2"

For each pair-wise comparison, the relative importance of criterion 1 as compared to criterion 2 can be selected
from the drop down menu

The preference of criterion 1 as compared to criterion 2 can be selected from the next drop down menu

The Consistency Ratio represents the level of inconsistency in the judgments. Acceptable level is of 0.1, the closer
its value is to 0 the more consistent will be the judgments

If the value of Consistency Ratio is greater than 0.1 the three most inconsistent judgments are displayed which
could be modified to increase the consistency

The work sheet "Consistency Chart" could be used to identify the value of consisteny ratio if the input to any
judgment is modified
Pair Wise Comparison Form
Level 2 (Primary Criteria)

Performed By
Name: Fahham Hasan Qaiser
Designation: Assistant Manager Buying
Date: 7th of June, 2009
Signature:

S. No. Criterion 1 Relative Importance Criterion 2


1 Cost Moderately less preferred than Quality
2 Cost Strongly less preferred than Delivery
3 Cost Strongly to Very Strongly less preferred than Financial Stability
4 Cost Equally to Moderately less preferred than Technical Capability
5 Cost Moderately less preferred than Supplier Relationship
6 Quality Equally preferred as Delivery
7 Quality Strongly less preferred than Financial Stability
8 Quality Strongly more preferred than Technical Capability
9 Quality Equally preferred as Supplier Relationship
10 Delivery Strongly less preferred than Financial Stability
11 Delivery Strongly more preferred than Technical Capability
12 Delivery Equally preferred as Supplier Relationship
13 Financial Stability Strongly more preferred than Technical Capability
14 Financial Stability Moderately to Strongly more preferred than Supplier Relationship
15 Technical Capability Strongly less preferred than Supplier Relationship
Consistency Ratio 0.088305284
Most Inconsistent Judgments (In order of decreasing Inconsistency)
S. No. Criterion 1 Compared to Criterion 2
8 Quality Compared to Technical Capability
15 Technical Capability Compared to Supplier Relationship
3 Cost Compared to Financial Stability

Results of Pair Wise Comparisons


Level 2
Relative Priorities

Relative Weights
Cost 4.38%
Quality 14.18%
Delivery 15.85%
Financial Stability 45.68%
Technical Capability 5.32%
Supplier Relationship 14.59%
Consistency Ratio 0.088305284
Criterion 1 is less preferred over criterion 2
Most In-
S.No. Criterion 1 Criterion 2 Very Strongly Strongly to Moderately
consistent Extremely Very Srongly Strongly Moderately
to Extremely very Strongly to Strongly

1 Cost Quality 14 0.10828459 0.10391776 0.09970273 0.09573622 0.0921958 0.08944022 0.08830528


2 Cost Delivery 9 0.10710347 0.10213803 0.09728342 0.09262155 0.08830528 0.0846475 0.08238454
3 Cost Financial Stability 3 0.07218001 0.07636277 0.08162336 0.08830528 0.09696821 0.10862415 0.12539766
4 Cost Technical Capability 7 0.20478139 0.1903608 0.17522159 0.15930071 0.14254628 0.12494892 0.10664137
5 Cost Supplier Relationship 12 0.10078785 0.09738749 0.09421973 0.09139738 0.08912142 0.08778832 0.08830528
6 Quality Delivery 11 0.22361076 0.20595059 0.18805814 0.16991525 0.15152644 0.13296697 0.11454048
7 Quality Financial Stability 8 0.13170567 0.11947982 0.10798933 0.09747584 0.08830528 0.08106871 0.07682557
8 Quality Technical Capability 1 0.29031855 0.26737242 0.24302293 0.21697565 0.18886362 0.15825667 0.1248109
9 Quality Supplier Relationship 15 0.21318595 0.19655353 0.17977591 0.1628506 0.14579966 0.12871424 0.11189731
10 Delivery Financial Stability 4 0.1434731 0.12841595 0.11403326 0.10054934 0.08830528 0.07785486 0.07019723
11 Delivery Technical Capability 6 0.33915759 0.31472023 0.28907806 0.26198723 0.23313911 0.20214609 0.16854637
12 Delivery Supplier Relationship 13 0.23659049 0.21727386 0.19777987 0.17809762 0.15823733 0.13827256 0.11847778
13 Financial Stability Technical Capability 5 0.75725514 0.7015282 0.64468249 0.58628652 0.49729446 0.46162043 0.39204131
14 Financial Stability Supplier Relationship 10 0.42845118 0.38618358 0.34413085 0.30236812 0.26100841 0.22022726 0.18030193
15 Technical Capability Supplier Relationship 2 0.11132514 0.10522292 0.09927574 0.09357863 0.08830528 0.08380532 0.08089017
Consistency Ratio 0.088305284

Legend
Inconsistent
Consistent
Current Selection
Criterion 1 Criterion 1 is more preferred over criterion 2
and 2 are
Equally to Equally to Moderately Strongly to Very Strongly
equally Moderately Strongly Very Strongly Extremely
moderately moderately to Strongly very Strongly to Extremely
preferred
0.091253 0.1098972 0.15077201 0.18840743 0.22262012 0.25400476 0.28310178 0.31033977 0.33605224 0.36049962
0.08370144 0.0989735 0.1349571 0.168755 0.19979641 0.22849996 0.25529477 0.28053153 0.30448652 0.32737688
0.15291973 0.2144774 0.30350808 0.37499343 0.43858789 0.49786833 0.55451976 0.60944743 0.66318274 0.71605862
0.08830528 0.0739712 0.07828179 0.08963128 0.10216603 0.11475217 0.12705921 0.13898169 0.15049367 0.16160077
0.09330697 0.1150428 0.15876191 0.19782261 0.23280381 0.26458599 0.29385844 0.32113632 0.34680628 0.37116242
0.09743719 0.0883053 0.10299034 0.12415114 0.14614175 0.16800955 0.18954627 0.21072594 0.23157342 0.25212607
0.07791098 0.0932813 0.12842161 0.16550039 0.20393599 0.24326367 0.28318859 0.32352776 0.36416433 0.40502099
0.08968782 0.0896878 0.07663093 0.07768882 0.08232058 0.08830528 0.09489852 0.10178739 0.10882168 0.11592294
0.09645065 0.0883053 0.10122483 0.11969546 0.13881021 0.15777564 0.17643289 0.19477241 0.21282336 0.23062246
0.06755474 0.0785795 0.11090037 0.14671191 0.18433722 0.22305858 0.26248763 0.30239795 0.3426496 0.38315175
0.13194231 0.0933704 0.07831121 0.07854909 0.08268116 0.08830528 0.09461425 0.10126707 0.10809875 0.11502216
0.0998998 0.0883053 0.09911374 0.11665503 0.13518202 0.15371778 0.17203623 0.19009593 0.20790834 0.22549934
0.31245739 0.2116 0.1431022 0.1145734 0.09855054 0.08830528 0.0813176 0.07640866 0.07294232 0.07053878
0.14164186 0.1045333 0.08734473 0.08503974 0.08830528 0.09470641 0.10313578 0.11297462 0.12383943 0.13547672
0.08193773 0.0980532 0.13585813 0.17060936 0.20190808 0.23037047 0.25656552 0.28094014 0.30383758 0.3255224
Pair Wise Comparison Form
Level 3 (Secondary Criteria)

Performed By
Name: Fahham Hasan Qaiser
Designation: Assistant Manager Buying
Date: 7th of June, 2009
Signature:

COST
S. No. Criterion 1 Relative Importance Criterion 2
1 Unit Price Moderately more important than Payment Terms
Consistency Ratio 0

QUALITY
S. No. Criterion 1 Relative Importance Criterion 2
1 Quality of Deliveries Equally important as ISO 9001 Certification
2 Quality of Deliveries Equally important as Response to Quality Problems
3 ISO 9001 Certification Equally important as Response to Quality Problems
Consistency Ratio 0

DELIVERY
S. No. Criterion 1 Relative Importance Criterion 2
1 On time Delivery Moderately to Strongly more important than Deliver Lead Time
Consistency Ratio 0
FINANCIAL STABILITY
S. No. Criterion 1 Relative Importance Criterion 2
1 Total Revenues Moderately to Strongly more important than Banking History
Consistency Ratio 0

TECHNICAL CAPABILITY
S. No. Criterion 1 Relative Importance Criterion 2
1 Annual Capacity Moderately less important than Technical Support
Consistency Ratio 0

SUPPLIER RELATIONSHIP
S. No. Criterion 1 Relative Importance Criterion 2
1 Reciprocal Arrangement Moderately to Strongly more important than Primary or Secondary
2 Reciprocal Arrangement Equally important as Desire for Business
3 Reciprocal Arrangement Moderately less important than Supplier Response
4 Primary or Secondary Very Strongly less important than Desire for Business
5 Primary or Secondary Strongly to Very Strongly less important than Supplier Response
6 Desire for Business Moderately to Strongly less important than Supplier Response
Consistency Ratio 0.098546061
Results of Pair Wise Comparisons
Level 3
Relative Priorities

COST
Unit Price 75.00%
Payment Terms 25.00%
Consistency Ratio 0

QUALITY
Quality of Deliveries 33.33%
ISO 9001 Certification 33.33%
Response to Quality Problems 33.33%
Consistency Ratio 0

DELIVERY
On time Delivery 80.00%
Deliver Lead Time 20.00%
Consistency Ratio 0

FINANCIAL STABILITY
Total Revenues 80.00%
Banking History 20.00%
Consistency Ratio 0
TECHNICAL CAPABILITY
Annual Capacity 25.00%
Technical Support 75.00%
Consistency Ratio 0

SUPPLIER RELATIONSHIP
Reciprocal Arrangement 19.15%
Primary or Secondary 5.54%
Desire for Business 22.13%
Supplier Response 53.18%
Consistency Ratio 0.098546061
Supplier Evaluation Form

Performed By: Fahham Hasan Qaiser


Designation: AM Buying
Date: 6/9/2009
Product: Hot Rolled Steel Coils
Signature:

Evaluated Suppliers:
Supplier 1: Baosteel
Supplier 2: TISCO
Supplier 3: Hadeed

Price per unit:


Baosteel 765.00 $/unit
TISCO 750.00 $/unit
Hadeed 830.00 $/unit

What price difference between two suppliers will make:


Both suppliers equally preferred: 14.50 $/unit
One supplier strongly preferred: 42.00 $/unit
One supplier extremely preferred: 75.00 $/unit

On the basis of Payment Terms:


Baosteel is Equally preferred as TISCO
Baosteel is Equally to Moderately less preferred than Hadeed
TISCO is Moderately less preferred than Hadeed
Consistency Ratio 0.01683502

On the Basis of Quality of Deliveries:


Baosteel is Extremely more preferred than TISCO
Baosteel is Equally preferred as Hadeed
TISCO is Extremely less preferred than Hadeed
Consistency Ratio 0

ISO 9001 Certification:


Baosteel Yes
TISCO Yes
Hadeed Yes

How much a Supplier with ISO 9001 Certification is preferred over a Supplier without ISO 9001
Very Strongly to Extremely
On the basis of Response to Quality Problems:
Baosteel is Moderately more preferred than TISCO
Baosteel is Equally preferred as Hadeed
TISCO is Equally to Moderately less preferred than Hadeed
Consistency Ratio 0.01563252

On the basis of On Time Delivery:


Baosteel is Strongly more preferred than TISCO
Baosteel is Moderately to Strongly more preferred than Hadeed
TISCO is Moderately less preferred than Hadeed
Consistency Ratio 0.09955881

Delivery Lead Time:


Baosteel 60 days
TISCO 60 days
Hadeed 35 days

What Delivery Lead Time difference between two suppliers will make:
Both suppliers equally preferred: 5 Days
One supplier strongly preferred: 15 Days
One supplier extremely preferred: 25 Days

Total Revenues:
Baosteel 21.50 Billion USD
TISCO 14.77 Billion USD
Hadeed 6.80 Billion USD

On the basis of Banking History:


Baosteel is Strongly to Very Strongly more preferred than TISCO
Baosteel is Equally preferred as Hadeed
TISCO is Strongly to Very Strongly less preferred than Hadeed
Consistency Ratio 0

Annual Capacity:
Baosteel 20.00 Million Tons/Year
TISCO 10.00 Million Tons/Year
Hadeed 5.50 Million Tons/Year

On the basis of Technical Support:


Baosteel is Moderately preferred as TISCO
Baosteel is Equally to Moderately preferred as Hadeed
TISCO is Moderately less preferred than Hadeed
Consistency Ratio 0.04952119

On the basis of Reciprocal Consideration:


Baosteel is Equally preferred as TISCO
Baosteel is Equally preferred as Hadeed
TISCO is Equally preferred as Hadeed
Consistency Ratio 0

Primary or Secondary:
Baosteel Primary
TISCO Primary
Hadeed Primary

How much a Primary Supplier is preferred over a Secondary Supplier?


Moderately to Strongly

On the basis of Desire for Business:


Baosteel is Moderately less preferred than TISCO
Baosteel is Equally preferred as Hadeed
TISCO is Moderately more preferred than Hadeed
Consistency Ratio 0

On the basis of Supplier Response:


Baosteel is Moderately more preferred than TISCO
Baosteel is Moderately more preferred than Hadeed
TISCO is Equally to Moderately more preferred than Hadeed
Consistency Ratio 0.05331089
RESULTS OF GRADIENT SENSITIVITY ANALYSIS USING EXPERT
CHOICE™ SOFTWARE

1. Cost Criterion:

2. Quality Criterion

3. Delivery Criterion
4. Financial Stability Criterion

5. Technical Capability Criterion


6. Supplier Relationship