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Supplier Evaluation using

Analytic Hierarchy Process (AHP)

Under Guidance of Prof. V.N.A. Naikan

By
Subhani Shaik
M.Tech 2nd Year, 05IM6013
Dept. of Industrial Engineering and Management.
IIT Kharagpur.
 Company Information

 Problem Definition

 Project Objective

 Project Scope

 Methodology

 Literature

 As-Is Process Map

 Data Collected

 Analysis

 Work Completed

 Future Plan of Work


Company Information
 Honeywell Technology Solutions Lab (HTSL) is an integral arm of

Honeywell International.

 HTSL provides value to Honeywell businesses through Product

Solutions, New Product Introduction, Advanced Research &

Technology and IT & Business Process Solutions.

 HTSL supports and develops products in two key areas of Honeywell

businesses. 1. Aerospace 2. Automation and Control Solutions.


Company Information…
 In Aerospace HTSL develop and support ‘safety critical aerospace

systems’ like Flight Management Systems, Flight Panel Displays,

and Engine Control Systems to its aerospace clients Airbus and

Boeing.

 In Automation and Control Systems , HTSL products are Access

systems , Burglar Alarms, Switches and Sensors.

 HTSL also develops necessary IT & Business Process Solutions

for its products.


Problem Definition
 Honeywell Technology Solutions Lab (HTSL), Bangalore is a Product

Development and Research Lab. For its new product development, the

company is forecasting the demand for its customers. The designers

are developing drawings for each part of a product using computer aided

techniques like CAD. HTSL is sending its part drawings to its different

suppliers for their prototype development. The suppliers are

manufacturing prototypes as per the drawings provided.

 In Honeywell there is no proper system to evaluate the prototype

suppliers based on their performance.

 HTSL needs proper system to evaluate its prototype suppliers.


Project Objective
 Evaluation of prototype suppliers based on their performance.

Project Scope
 The dissertation work covers the evaluation of prototype

suppliers of mechanical components of Sensing & Control

department.
Methodology
 Find the current process of evaluation of suppliers

 Identify the key supplier performance factors

 Identify the methods to measure supplier performance factors

 Data collection from the existing system

 Analyze the data collected

 Measure supplier performance factors

 Identify best method to evaluate overall performance of suppliers

 Find the overall performance of the suppliers

 Ranking the suppliers based on their overall performance

 Review supplier performance continuously


Literature
 Key Supplier Performance Factors

 Supplier Evaluation Methods

 Performance Factor - Quality

 Performance Factor - Delivery

 Performance Factor - Cost

 Performance Factor - Service


Literature : Key Supplier Performance Factors
 Quality

 Delivery

 Cost

 Service

 Supplier Management Capability

 Overall Personal Capabilities

 Financial Capability and Stability

 Information System Capability

 Environmental Regulation Compliance

 Supplier Purchasing Strategies and Policies

 Long Term Relationship Potential


Literature : Supplier Evaluation Methods
Method Reference Quantitative / Advantages Disadvantages
Qualitative
Parameters

Categorical Timmerman -Quality -The evaluation -Attributes are


(1986) -Delivery process is clear Weighted equally
-Service and systematic -Subjective
-Price -Inexpensive -Imprecise
-Requires a
minimum
Performance data

Weighted Timmerman -Quality -Attributes -Subjective


Point (1986) -Delivery weighted by -Difficult to effectively
-Service Importance consider qualitative
-Price criteria

Cost Ratio Timmerman -Quality -Subjectivity is -Complexity and


(1986) -Delivery reduced requirement for a
-Service -Flexibility developed cost
-Price accounting system
-Performance
Measures (cost ratios)
are artificially
expressed in the same
Units
Literature : Supplier Evaluation Methods…
Quantitative /
Method Reference Qualitative Advantages Disadvantages
Parameters
Total cost of Ellram -Price -Substantial Cost savings -Complex
ownership (1995) -Quality Costs -Allows various
-Unreliable purchasing policies to be
Delivery Costs compared with one
-Transport Cost another
-Ordering Cost
-Reception
Cost
-Inspection
Cost
Analytic Nydick & -Quality -Simplicity -Inconsistency
Hierarchy Hill -Delivery -Captures both on the method
Process (1992) -Price qualitative and
(AHP) -Service quantitative criteria

Principal Petroni & -Quality Considers simultaneously -Knowledge of


Component Braglia -Delivery multiple inputs and advanced
Analysis (2000) -Price outputs without priori stati-stical
-Reliability assignment of weights method is
required
Neural Wei -Performance -Saves a lot of time and Lack of
Networks (1997) -Quality money of the system experts and
-Geography development Requires a
-Price software
Literature : Performance Factor - Quality
Traditional Definition : Quality means fitness for use.

Modern Definition : Quality is inversely proportional to


variability (Douglas C. Montgomery)

Quality can be measured in one of the following ways:

1. Defective Parts Per Million ( PPM)

2. Sigma Quality Level / Process Sigma

3. Process Capability

4. Rating Method
Literature : Performance Factor – Quality…

PPM for Continuous Data :

Let p= Prob. that produced items not meeting requirements

p= P(X<LSL ) + P(X>USL)

PPM =p * 1,000,000

PPM for Discrete Data :

Total no of defective items


PPM = ------------------------------ X 1,000,000
Total no of items produced
Literature : Performance Factor – Quality…
Sigma Quality Level / Process Sigma

Six Sigma Quality Level means “All parts or processes within six
standard deviations on each side of mean are acceptable. “

For the given Six Sigma Quality Level:


For Normal Distribution centered at Target (i.e. Mean = Target )
99.9999998% parts are acceptable.
i.e. Only 2 parts per billion(0.002 parts per million) are defective.

Sigma
Quality Level Percent Accepted Defective PPM
6σ 99.9999998% 0.002
5σ 99.999943 0.57
4σ 99.9937 63
3σ 99.73 2700
2σ 95.45 45500
1σ 68.27 317300

Note : 3.4 parts per million are defective if the mean is shifted by 1.5σ
from Target for the given Six Sigma Quality Level.
Literature : Performance Factor – Quality…
Process Capability :
 It is the capability of a process to produce a product relative to the
stated tolerances. Cp and Cpk are two statistics used to define process
capability.

 Cp compares the width of the data set variation to the width of the
specification.

Where as Cpk compares the width and centring of the data set to the
specification target , upper and lower values.
USL – LSL R-Bar
Process Capability Ratio Cp = --------------- Where σ = Estimated Sigma = ---------
6*σ d2

min (USL-μ, μ-LSL)


Process Capability Index Cpk = --------------------------
3*σ
Literature : Performance Factor – Quality…
Rating Method :

In Rating Method, we are allocating weights to different sub factors of


quality.

• Incoming / Manufacturing Results (60%)

 Defective Parts Per Million (PPM) (or)

 Sigma Quality Level (or)

 Process Capability

• Response to Quality Audit Observations (20%)

• Response to Corrective Actions Requests (20%)

Quality Rating = 0.6 * Incoming Result


+ 0.2 * Response to Quality Audit Observations
+ 0.2 * Response to Corrective Actions Requests
Literature : Performance Factor - Delivery
Delivery can be measured in the following methods

 Defective Parts Per Million (PPM)

 Rating System

Defective Parts Per Million (PPM)

No of times delivery is not on time


PPM = ------------------------------------------ X 1,000,000
Total No of times delivered

Rating System (Delivery before / after delivery date)

1 3 5 7 9

More than Up to 3-4 days 1-2 days On time

One week One Week


Literature : Performance Factor - Cost
Cost factor in supplier evaluation process can be measured by Rating
method as follows.

Cost : Sub-factors Max Points


i. Cost Reduction Suggestions 5

ii. Net Cost Reduction Performance 5

iii. Cost Management Initiative 5

iv. Performance during product 5


delivery process

Total Points 20
Literature : Performance Factor -Service
Service factor in supplier evaluation process can be measured by
Rating method as follows.

Service : Sub-factors Max Points

i. Proactive Communication 10

ii. Responsiveness 10

iii. Extraordinary Arrangements 5

iv. Accessible / Diligent 5

v. Flexibility 5

Total Points 35
As-Is Process Map : Current Inspection Process
As-Is Process Map : Current Supplier Evaluation Process
Data Collection
 Quality related data collected from Quality Control department .
 Prototype Samples Dimensions
 Response to Quality Audit Observations
 Response to Corrective Actions Requests.

 On time delivery information of suppliers was collected from


Stores Department.

 Cost related data collected from Purchase Department.


 Cost Reduction Suggestions
 Net Cost Reduction Performance
 Cost Management Initiative
 Performance during product delivery process

 Service related data collected from Purchase Department.


 Proactive Communication
 Responsiveness
 Extraordinary Arrangements
 Accessible / Diligent
 Flexibility
Analysis
 Quality
 Defective Parts Per Million (PPM) (60%)
 Response to Quality Audit Observations (20%)
 Response to Corrective Actions Requests (20%)

 Delivery
 PPM

 Cost
 Cost Reduction Suggestions (5 Points)
 Net Cost Reduction Performance (5 Points)
 Cost Management Initiative (5 Points)
 Performance during product delivery process (5 Points)

 Service
 Proactive Communication (10 Points)
 Responsiveness (10 Points)
 Extraordinary Arrangements (5 Points)
 Accessible / Diligent (5 Points)
 Flexibility (5 Points)

 Analytic Hierarchy Process


Analysis : Quality - How to find PPM ?
Prototype Sample Data
Analytic Hierarchy Process (AHP)
 Analytic Hierarchy Process (AHP) is a multi criteria decision technique that
can combine qualitative and quantitative factors for prioritizing, ranking and
evaluating alternatives.

 AHP reduces complex decisions to a series of one-on-one comparisons,


then synthesizes the results.

AHP Measurement Scale


 Comparing objective i and objective j
We set aii = 1. if we set aij = k, then aji =1/k

Verbal Judgment of Preference Numerical Rating

Objectives i and j are of equal importance 1

Objective i is weakly more important than j 3

Objective i is strongly more important than j 5

Objective i is very strongly more important than j 7

Objective i is absolutely more important than j 9


2,4,6,8 are Intermediate Values provided additional level of discrimination
Analytic Hierarchy Process (AHP) Steps
 1.Specify the set of criteria for evaluating the supplier’s proposals.

 2.Obtain the pair wise comparisons of the relative importance of

the criteria in achieving the goal, and compute weights of the criteria

based on this information.

 3.Obtain measures that describe the extent to which each supplier

achieves the criteria.

 4.Using the information in step 3, obtain the pair wise comparisons of

the relative importance of the suppliers with respect to the criteria,

and compute the corresponding weights.

 5.Using the results of steps 2 and 4, compute the priorities of

each supplier in achieving the goal of the hierarchy.


Work Completed
 Theoretical Framework
 Documenting Existing Process
 Data Collection
 Analysis
 AHP to Evaluate Supplier Overall Scores
 Ranking of Suppliers

Work to be done
 Consistency Checking of AHP

Future plan of work


 This dissertation work can be expanded to other sectors like
manufacturing
 Additional Criteria can be considered for supplier evaluation
 Compare supplier evaluation issues with ISO 9000 standards
 Study of other supplier evaluation methods like Principal
Component Analysis (PCA) , Neural Networks etc.
References
DOUGLAS C MONTGOMERY (2004)
Introduction to Statistical Quality Control - Fourth Edition
John Wiley & Sons, Inc

ELLRAM (1995)
“Total Cost of Ownership: An Analysis Approach for Purchasing”,
International Journal of Physical Distribution and Logistics, pp. 163-184.

EUGENE L GRANT AND RICHARD S LEAVENWORTH


Statistical Quality Control -Seventh Edition.

NYDICK AND HILL (1992)


“Using the Analytic Hierarchy Process to Structure the Supplier Selection
Procedure”, International Journal of Purchasing and Materials Management, 1992, pp.31-36.

PETRONI AND BRAGLIA (2000)


“Vendor Selection Using Principal Component Analysis”, The Journal of Supply
Chain Management: A Global Review of Purchasing and Supply, pp. 63-69.

RICHARD A JOHNSON AND DEAN W.WICHERN


Applied Multivariate Statistical Analysis - Fifth Edition
References…
SAATY (1980)
The Analytic Hierarchy Process.
NY: McGraw-Hill

SIMPSON, SIGUAW AND WHITE (2002)


“Measuring the Performance of Suppliers: An Analysis of Evaluation Processes”,
The Journal of Supply Chain Management, pp. 29-41.

TIMMERMAN(1986)
“An Approach to Vendor Performance Evaluation”,
The Journal of Supply Chain Management, pp. 2-8.

WEBER, CURRENT AND BENTON (1991)


“Vendor Selection criteria and methods”,
European Journal of Operation Research, pp. 2-18.

WEI, JINLONG AND ZHICHENG (1997)


“A Supplier Selecting System using a Neural Network”,
IEEE International Conference on Intelligent Processing Systems, pp.468-471.
Thank You