Purchasing and Procurement: Individual Assignment

Topic: State and discuss the importance of Supplier Selection

1.

Introduction

In order to survive in current competitive environment, it is essential to organization to provide high quality products and services at lower cost and shorter lead time. However, it is not practicable to achieve these goals without the right input products from the right suppliers. As a result, selecting appropriate suppliers becomes one of the most important aspects of purchasing and supply chain management for many industries (Punniyamoorty, Mathiyalagan, and Lakshmi 2012). Selecting the right supplier has a direct and positive impact on firms performance, as well as helping buying firms to achieve long-term competitive advantages and gain added value from the supply chain. On the other hand, wrong supplier selection decision can result in adverse impacts, hurting firms performance and image, and even causing unexpected operation disruption. This essay will first quickly define supplier selection, then discuss its importance and finally present several insights of supplier selection approach.

2.

Definition of Supplier Selection

Supplier selection is considered as one of the most important responsibilities of supply professionals. Supplier selection is a decision-making process that involves trade-offs among multiple criteria, which may also be conflicting, in order to select the most appropriate supplier for the continuation of organizations performance (Cebi and Bayraktar 2003). Supplier selection is a complicated process where supply professionals have to solve two major problems. First is how to select the right set of criteria which are appropriate with business priorities and strategies for effectively evaluating potential

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suppliers. Second is which model use to analyze data in order to achieve the most favorable result. These problems will be discussed in details in later section.

3.

Importance of supplier selection

Given the fact the almost any type of business requires some sort of inputs from different suppliers to operate, how to select the right supplier has become a common issue for every organization. In general, supplier has to be select very carefully because it can have a very positive or a very adverse impact on the overall performance of the organization.

If poor decision is made, firms performance might suffer due to defective material, long order lead-time, high cost, and probably damaging firms reputation. Actually, experience suggests that many errors have been made concerning the supplier selection decision and the total cost of incorrect supplier selection decisions can run into multi millions of USD per year (Carter et al. 2010). Typical evidence is the recent safety recall by Toyota of 2.3 million vehicles due to a problem with accelerator pedals provided by CTS Corporation. The recall has significantly damaged the reputation of Toyota in terms of an excellent and consistent quality automobile manufacturer.

On the other hand, successful supplier selection decision will result in positive impact to buying firms performance. The findings of Kannan and Tan (2006) research showed a positive and direct influence of supplier selection on the success of buyer-supplier relationship, and such relationship will positively affect buyer performance. It helps buying firms to provide better product quality at lower price and shorter lead time, as well as increasing firms competitive advantages.

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Moreover, selection of the right supplier becomes more important today than ever before, since most firms are integrating their business into the supply chain and pursuing innovative strategies. For example, in order to enter into long-term collaborative relationships with a single source of supply, firms must devote a large amount of resources to carefully select the strategic partner who is willing to make a similar commitment to the relationship and to work together to create value with a supply chain (Burt, Petcavage, and Pinkerton 2010). The supplier selection then holds a critical importance because the benefits of such collaboration are many, but the risks are great, the success of such collaboration depends largely on the quality of supplier selection decision. Likewise, supplier selection has a very similar level of important when firms involve their suppliers early in the development of new product, or decides to pursuit just-in-time manufacturing practices.

Finally, the supplier selection becomes even more important when organizations pursuits global sourcing strategy. Global sourcing is becoming a popular trend for companies to stay competitive by sourcing lower cost raw materials and goods. In the United States, about one half of all raw materials for American manufacturing are sourced overseas and the number are even higher for those businesses in apparel and footwear, consumer packaged products and high-tech electronics (Kumar, Hong, and Haggerty 2011). Consequently, how to deal with often unfamiliar and unproven foreign suppliers is more complicated and risky than traditional domestic sourcing. The techniques and practices used in selection of a domestic supplier may not be sufficient for selecting a global supplier. In fact, firms must devote a significant more amount of resources to select the most appropriate foreign suppliers in order to avoid disruption and unsatisfactory as well as to contribute to the firms competitive advantages. Min (1994) indicated several

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problems firm can encounter if the selection goes wrong such as mounting material costs, litigation, shoddy product quality, transport delays, production bottlenecks, countertrade obligations, and exchange rate fluctuations.

Among the global sourcing activities, there has been a phenomenon trend towards sourcing from emerging markets such as Asian and Central/East European countries. While low cost may stand for the most important driver and enables firms to benefit cost advantages, other factors such as quality, technology, stability, delivery, etc. may suffer. Therefore, the level of risk associated with these aspects when sourcing from emerging markets increases significantly. In such scenario, supplier selection plays a particular role not only in selecting the right supplier but also in risk management to reduce supply chain risks (Li and Barnes 2008). Li and Barnes (2008) suggest applying proactive risk management into supplier selection process when sourcing from emerging countries to reduce, control or remove risk sources coming from suppliers and suppliers markets. The risk sources are defined in the research as factors associated with supplier failure, and risk consequences as unexpected negative impacts on quality, delivery, lead time and cost of the purchasing. By analyzing sourcing experiences from five Western-based manufacturing companies, the research discovered the proactive risk management methods to be incorporated into supplier selection process include: conducting a supplier questionnaire covering a wide range of business dimensions, performing a technical review, using a mitigation plan and employing local-based procurement staff. The supplier questionnaire or a technical review needs a more thorough check list when selecting the final supplier from emerging markets than from traditional markets. The next section will discuss in more details about which approach and technique firms should adopt to better select the right supplier.

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4.

Approach to supplier selection

Since the practitioners recognize the importance of supplier selection to the overall performance of buying firms, many researches have been conducted to develop numerous selection criteria and selection methodologies for supplier selection.

The empirical studies (Table 1) identified quality, delivery and historical performance as the three most important criteria in supplier selection, followed by guarantee and compensation, equipment and capability, and price. This classification is highly different with the traditional practice focusing mainly on low cost factor when selecting supplier.

As the supplier selection is a typical unstructured decision-making process involving multiple criteria, it is very important that evaluation criteria must cover both tangible and intangible, quantitative and qualitative, operational and strategic factors. However, since each company has its own business priorities and strategies, it is difficult to have one set of evaluation criteria that suits every buying firms requirements. However, the research of Ndubisi et al. (2005) presented some interesting insights of different drivers in supplier selection of manufacturing companies. The study found that manufacturers who concentrated on product and launch flexibility placed an extremely attention to technology factor. Nevertheless, when the manufacturers focus on volume flexibility, quality becomes strategically important. Moreover, Chen (2011) suggested that at the first stage of supplier selection process, enterprise should analyze its competitive strategy using SWOT method to identify a foundation for establishing evaluation criteria and indicators. Through the process of analyzing internal organizational strengths and weaknesses, as well as external environmental threats and opportunities, enterprise will be able to clarify its priorities and strategic requirements. By this way, firms can go beyond traditional operational selection
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Purchasing and Procurement: Individual Assignment

criteria to select supplier with similar strategic orientation and commitment to meeting shared goals and objectives (Kannan and Tan 2006).

Evaluation criteria Quality Deliver on time Historical performance Guarantee and compensation Equipment and capability Price Technical capability Financial situation Procedure legality Communication system Industrial reputation Business relations Management and organization Production control ability Maintenance service Service attitude Previous image Packing ability Employment relations Geographic location Previous sales Training ability Mutual negotiation

Dickson importance ranking 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Weber importance Extremely important Very important Very important Very important Very important Very important Very important Very important Very important Very important Important Important Important Important Important Important Important Important Important Important Important Important Important

Table 1: Important criteria for supplier selection from literature (Chen 2011)

After evaluation criteria have been identified, firms must employ an analytical methodology to evaluate suppliers performance and make final decision. Chen (2011) summarized various methods might be used by decision makers as illustrated in Figure 1. He suggested that decision methods used for pre-qualifying suitable supplier included categorical methods, EDA, cluster analysis, and case-based reasoning systems. Decision models for the final choice phase comprehended the linear weighting, total cost of ownership, mathematical programming, and statistical and artificial intelligence-based models.

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Supplier Selection Methods

Single Model

Combined Model

Mathematics

Single Model

Artificial Intelligence

AHP + GP

Analytic Hierarchy Process (AHP) Linear Programming (LP) Multi-Objective Programming (MOP)

Cluster Analysis

Neural Networks (NN)

AHP + LP

Multiple Regression

Software Agent (SA)

AHP + FST

Discriminant Analysis

Case-Based Reasoning (CBR)

DEA + MOP

Total Cost Ownership (TCO)

Conjoint Analysis

Expert System (ES)

Goal Programming (GP) Data Envelopment Analysis (DEA)

Pricipal Component Analysis

Fuzzy Set Theory (FST)

Simulation

Heuristics

Figure 1: Existing analytical methods for supplier selection (Chen 12)

As illustrated in Figure 1, there is a wide range of single model that firms might employ to supplier selection process. However, given the fact that each model has its limitation, using the result of a single model as a basis for making the final decision could lead to biased decision (Ordoobadi and Wang 2011). For this reason, it is necessary that firms are able to apply multiple perspectives approach rather than a single model, which ensure the quality of the decision-making process and the reliability of the decision itself. Such approach is

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strongly supported by many researchers. For example, Cebi and Bayraktar (2003) proposed an integrated model of goal programming (GP) and analytic hierarchy process (AHP) including both quantitative and qualitative conflicting factors. In addition, Kamanathan (2007) suggested an interesting way of combining the objective and subjective information provided by the results of the total cost of ownership (TCO) and AHP approaches through the application of data envelopment analysis (DEA). The model uses the total cost of ownership to consider the quantitative factor of cost, and the AHP to consider a mix of qualitative factors. Ting and Cho (2008) presented the use of AHP to select a set of candidate suppliers and multi-objective linear programing (MOLP) to allocate the optimum order quantities to the candidate suppliers. Ho, Dey, and Lockstrom (2011), on the other hand, suggested using quality function deployment (QFD) to translate the company stakeholder requirements into multiple evaluation factors for supplier selection, then employ AHP to determine the importance of evaluating factors and preference of each supplier with respect to each selection criterion. Finally, Punniyamoorty, Mathiyalagan, and Lakshmi (2012) also supported the application of multiple perspective approach by developing an integrated model using structural equation modeling (SEM) and analytic hierarchy process (AHP) for the selection of suppliers. Obviously, an integrated approach of combining multiple analytical models is an essential methodology that supply practitioners should consider.

However, since the supplier selection is a critical process that significantly influence firms performance, the integrated approach only best worked through with a cross-functional team (Kumar, Hong, and Haggerty 2011). The team with representatives from various functional departments such as sourcing, finance, production, quality control can enable knowledge sharing and help to develop a balanced and holistic consideration of the

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requirements. In addition, Ho, Dey, and Lockstrom (2011) suggested that besides these internal stakeholders, the integrated approach can also involves external stakeholders such as customers, publics, and government so that the sourcing decision can be made more strategically and effectively.

5.

Conclusion

Supplier selection is a complicated decision-making process which identifies and evaluates the trade-offs between multiple evaluation criteria in order to select the most appropriate supplier. Since such decision can result in very positive or very adverse impact on firms performance, it needs to be taken very carefully. Once the right supplier is selected, it can help firm to stimulate its performance and achieve business strategic plans. The importance of supplier selection becomes even more significant when firm pursuits innovative supply chain management strategies such as strategic alliance, early supplier involvement, just-intime, and global sourcing. However, the process of selection requires firm to devote a significant amount of resources to identify appropriate evaluation criteria and analytical methodology. They must go beyond the traditional operational practices to employ an integrated approach of multiple analytical methods by a cross-functional team to evaluate a multiple selection factors. Combining all these efforts, firm will be able to direct all its purchasing activities toward opportunities to gain competitive advantages and added value from its supply chain.

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Reference
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