24

IJPD & LM 24,5

Appropriate selection of foreign suppliers is crucial to the success of the multinational firm.

International Supplier Selection:

A Multi-attribute Utility Approach
Hokey Min

Globalization of a firms sourcing activity means the establishment of long-term business relationships with often unfamiliar and unproven foreign suppliers. Owing to unfamiliarity and uncertainty involved in global sourcing, international supplier selection is risky and complicated. Besides, many factors influencing international supplier selection decisions are in conflict with one another. For instance, the low price of purchased materials from a certain foreign supplier can be offset by the firms loose quality standards or chronic financial instability. On the other hand, the availability of more advanced technology from a foreign source can be undermined by the sourcing firms high purchasing costs and excessive tariffs. These illustrate only a few examples of obstacles that the firm has to face when sourcing overseas. It is obvious therefore that effective international supplier selection must deal with a host of quantitative and qualitative factors that are in conflict with one another. As a useful tool for such selection, this article proposes multiple attribute utility theory (MAUT) that can effectively deal with both qualitative and quantitative factors in multiple criteria and uncertain decision environments.

International Journal of Physical Distribution & Logistics Management, Vol. 24 No. 5, 1994, pp. 24-33 MCB University Press Limited, 0960-0035

Prior Studies
In contrast with the abundant literature dealing with various domestic supplier selection problems, previous analytical studies on international supplier selection are virtually absent (see Weber et al .[1] for an excellent review of supplier selection problems). This is understandable, given that the significance of international sourcing to a firms success was not fully recognized by many practitioners and academicians until recent years, when foreign trade barriers gradually crumbled. To cope with worldwide challenges and opportunities that were created by free trade movements, an increasing number of multinational firms may require an analytical approach for international supplier selection. The development of analytical approaches for international supplier selection has been limited, although many attempts have been made to develop analytical approaches for evaluating various domestic suppliers. Examples of systematic analyses for domestic supplier selection include a categorical method, weighted-point method, matrix approach, vendor performance matrix approach, vendor profile analysis (VPA), analytic hierarchy process (AHP), and multiple objective programming (MOP) such as goal programming. To elaborate, a categorical method rates potential suppliers on a number of equally-weighted factors and then allows the decision maker to choose subjectively the supplier with the highest total score[2].

Introduction
Over the last few years, the world business community has witnessed a series of revolutionary changes overseas that are exemplified by three historical events: (1) the official formation of the European Community (EC) 1992 under the auspices of the Single European Act; (2) the demise of Communism in the Eastern bloc countries; and (3) the pending ratification of the North American Free Trade Agreement. These changes contributed to the globalization of the world economy. As the market becomes globalized, an increasing number of firms that once concentrated on domestic sourcing are now seeking their supply bases around the world.

Received March 1993 Revised September 1993

INTERNATIONAL SUPPLIER SELECTION: A MULTI-ATTRIBUTE UTILITY APPROACH

25

Although this method is simple and intuitively appealing, it often introduces subjective error into the decision and oversimplifies the selection scenario by equally weighting all factors. Timmerman[2] made some improvements by introducing a weighted-total method which quantifies the factors with relevant weights and then rates potential suppliers according to these weighted factors. Unfortunately, this method is not effective for taking qualitative factors into consideration. Similarly, Gregory[3] suggested a matrix approach which evaluates suppliers based on weighted scores obtained from a set of pre-determined benchmarks. To improve this matrix approach further, Soukup[4] presented a vendor performance matrix approach that can evaluate the suppliers performance under various unforeseen scenarios by estimating the probable deviations from the original purchase plan. In other words, this approach incorporates uncertainty in selecting the supplier. In a similar manner, Thompson[5] developed a VPA to rate suppliers in an uncertain environment on a number of weighted factors by employing a Monte Carlo simulation technique. Regardless of their strengths, none of these approaches can systematically measure both qualitative and quantitative factors and structure complex problems with a large number of criteria, attributes and alternatives. Furthermore, none of these methods can measure the degree to which a purchasing managers judgements are consistent in evaluating suppliers. To overcome these shortcomings, both Narasimhan[6] and Nydick and Hill[7] applied the AHP originally proposed by Saaty[8] to the supplier selection problem. In the meantime, Buffa and Jackson[9] developed a goalprogramming (GP) model for scheduling purchase orders and shipments under the buying firms quality, time, demand and inventory constraints. The most important merit of this GP model is its ability to handle the multiple period supplier selection problem. Similarly, Sharma et al .[10] proposed a non-linear GP model for a generic industrial purchasing plan. More recently, Weber and Ellram[11] developed a multi-objective programming (MOP) model that helped the buyer find a set of bestcompromise solutions for suppliers to be selected, and the purchasing volume to be allocated among suppliers. Consequently, the MOP model has the capability to solve both supplier selection and volume allocation problems, while aiding the buyer in assessing trade-offs among total purchasing cost, late delivery and the percentage of rejected items. Despite numerous advantages over other existing approaches, both AHP and MOP have some shortcomings. For instance, AHP cannot effectively take into account risk and uncertainty in assessing the suppliers potential performance because AHP presumes that the relative importance of attributes affecting the suppliers performance is known with certainty[12]. In other words,

AHP was designed to deal with deterministic decision environments. In contrast with scoring methods such as AHP, MOPs inherent computational complexity often prohibits consideration of many attributes essential for supplier selection, although MOP can produce an optimal result by adding explicit constraints which deal with the prospective suppliers production capacity, ordering policies, and so forth. As the literature review reveals, all the existing approaches are confined to domestic supplier selection problems and consequently neglected a host of factors relevant to international supplier selection. Furthermore, most of the prior analytical studies considered only a limited number of attributes such as price, quality, delivery and service. Past empirical studies[13-15], however, reported that more than ten different attributes existed affecting the supplier selection decision. In addition, all but AHP and MOP overlooked the multiple objective nature of supplier selection problems, thereby failing to analyse the important trade-offs among conflicting factors. The current study goes beyond the previous literature not only by considering all the qualitative and quantitative factors relevant to international supplier selection under risk and uncertainty, but also by analysing the various trade-offs among these factors in a multiple criteria environment.

Background to the Multiple Attribute Utility Theory

As indicated in the previous section, international supplier selection is a complex decision-making problem. The complexity stems from a multitude of quantitative and qualitative factors influencing supplier choices as well as the intrinsic difficulty of making numerous tradeoffs among these factors. One analytical approach often suggested for solving such complex problems is MAUT (see Green and Wind[16] for various successful applications of MAUT). MAUT enables the decision maker to structure a complex problem in the form of a simple hierarchy and to subjectively evaluate a large number of quantitative and qualitative factors in the presence of risk and uncertainty. The major strength of MAUT is its ability to deal with both deterministic and stochastic decision environments[17]. In particular, MAUT has three distinctive advantages over MOP in handling multiple and conflicting criteria. These are: (1) MAUT requires less front-end analysis than MOP as MAUT has no constraints to consider explicitly. (2) MAUT requires data than MOP as MAUT does not necessitate parameters for constraints. (3) MAUT poses less computational difficulty than does MOP as MAUT is not burdened with additional constraints.

26

IJPD & LM 24,5

The application of MAUT to the complex problem usually involves the following steps[18,19]: (1) Identify the objectives or goals of the decision and define the problem scope. (2) Define a finite set of relevant attributes affecting the decision outcome and structure them into a hierarchical form called a value tree. (3) Elicit preference information concerning the attributes from the decision maker(s) and determine the relative importance of the attributes. (4) Develop the decision makers utility function by establishing functional relationships between the attributes and the utility scores. If these relationship are uncertain, the expected utility score for each attribute will be determined by using the appropriate type of probability distributions. (5) Compute the aggregate (overall) utility score for each decision alternative and rank alternatives in terms of aggregate utility scores. (6) Perform sensitivity analyses. The systematic nature of MAUT in tackling complex problems under conflicting multiple criteria makes MAUT especially suitable for selecting the most appropriate foreign supplier.

considered important in selecting the foreign supplier. These criteria include financial terms, quality assurance, perceived risks, service performance, buyer-supplier partnerships, cultural and communication barriers and trade restrictions. At the third level, these criteria are decomposed into various attributes (factors) that may affect the supplier choice. Finally, the bottom level of the hierarchy is represented by various alternatives. The main multiple criteria and a number of attributes relevant to international supplier selection are described below. Financial Terms This criterion is one of the most important criteria in assessing the foreign supplier because it will dictate international procurement cost. The factors (attributes) affecting this criterion are as follows: G Cost . Profit maximization cannot be achieved without cost minimization. The firm must therefore find a low-cost supply base where it can minimize its purchase price, import duties, documentation cost, transport cost, communication cost and cost of investigating the potential suppliers past performances and financial background. G Payment terms . In international sourcing, it is customary for advance payments to be made prior to commencing work. Such a provision (e.g. a letter of credit) can tie up the buyers capital[21]. It is therefore important for the buyer to negotiate for favourable terms of payment such as open accounts and sight drafts, rather than a letter of credit. G Freight terms . Owing to a lengthy distribution channel, transport expenses and insurance costs are usually high in international sourcing. Consequently, the buyer should carefully look into the various freight terms, such as FOB destination, FOB origin and CIF, provided by suppliers. Quality Assurance Min and Galles recent study[14] reported that the most important factor leading to overseas sourcing is the high quality of foreign products resulting from the emphasis placed on quality-at-the-source (Jidoka). Accordingly, the buyer should investigate whether or not potential suppliers are certified for strict quality assurance and have a strong commitment for preventing quality failures. Furthermore, as Laske[22] suggested, the buyer needs to examine whether they can establish a quality/ engineering team visit for an assessment of the suppliers technical capability and quality commitment. Perceived Risks Owing to a number of exogenous factors influencing international sourcing, international supplier selection is much riskier than its domestic counterpart. Consequently, the international supplier selection

Main Attributes of International Supplier Selection

The selection of suppliers in foreign countries is not a process to be taken lightly owing to its significant and long-lasting impact on overseas sourcing. If the selection is wrong, it may result in mounting material costs, litigation, shoddy product quality, transport delays, production bottlenecks, countertrade obligations, and exchange rate fluctuations to name just a few of the problems the firm can encounter. As such, the international supplier selection decision is not trivial because it involves a large number of closely interrelated decisions regarding financing, negotiations, distribution, procurements and product quality assurance at the source. Owing to the large number of factors affecting the decision, the decision should be made based on an orderly sequence of steps. In fact, Miller[20] observed that most decision makers cannot simultaneously handle more than seven to nine factors when making a decision. As such, it is necessary to break down the complex problem into more manageable subproblems through the multi-levelled decision hierarchy. Figure 1 shows the structuring of the international supplier selection problem into a hierarchy (or value tree) of four levels. The top level of the hierarchy represents the ultimate goal of the problem. The second level of the hierarchy contains the general criteria which are usually

INTERNATIONAL SUPPLIER SELECTION: A MULTI-ATTRIBUTE UTILITY APPROACH

27

Figure 1. A Hierarchy for International Supplier Selection

Select the best foreign supplier

Level 1: Overall goal

Level 2: Criteria

Financial terms

Quality assurance

Perceived risks

Service performance

Cultural and Buyer-supplier partnerships communication barriers

Trade restrictions

Level 3: Attributes

Cost

Quality control

Political stability Foreign exchange rate Legal claims Labour disputes Local price control

On-time delivery

Financial stability

Cultural similarity

Tariffs and customs duties Countertrade

G G

Freight terms

Quality team visits

Technical assistance

Negotiability

Ethical standards

Payment terms

EDI capability

Level 4: Alternatives

Mexican supplier

Taiwanese supplier

Korean supplier

Japanese supplier

Canadian supplier

decision is most strongly affected by perceived risks. There are various types of international risks including risks of political instability, contract disputes or legal claims, currency inconvertibility, unstable foreign exchange rates, labour disputes, local price control, and so forth. Since these risks can result in high hidden costs for international sourcing, they should be factored into the international supplier selection decision. Shortages of hard currency in Russia for example can limit cash transactions, thereby prohibiting import from Russia. Government policy regarding imports can also influence a firms ability to control production and distribution planning. The Central Planning Commission and the National Ministry of Commerce in China used to classify goods into four categories according to the degree of Government control exercised: (1) exclusive distribution goods such as cotton garments, petroleum and cooking oil; (2) planned distribution goods such as bicycles, sewing-machines and watches; (3) contracted goods such as television sets, toothpastes and soaps; and (4) selectivegoods such as plastic wares, toys and carrying bags[23].

Since exclusive distribution goods are subject to tight Government control, sourcing these goods from China can create serious production and distribution problems. Service Performance G On-time delivery. Recent surveys[14,15] on global sourcing discovered that a major obstacle to global sourcing is transport delays and the subsequent increase in lead times which disrupt the successful implementation of just-in-time principles. In choosing the most appropriate supplier, the buyer should assess the length of the supply chain as well as the strength of the suppliers commitment for on-time delivery services, which include followup or expediting services. G Technical assistance . With rapid technological advances, todays purchased materials have become more sophisticated. Furthermore, suppliers are more likely to assume greater responsibility for outsourced design, engineering service, prototype development, and research and development[24]. The suppliers ability to provide the necessary technical assistance must be factored into the international supplier selection decision.

28

IJPD & LM 24,5

Buyer-Supplier Partnerships Since the mid-1980s a large number of purchasing organizations have been started to develop strategic partnerships or alliances with their suppliers based on long-term contracts, mutual support, non-adversarial negotiations, and information and risk sharing[21, 25]. To maintain long-term partnerships such as Keiretsu with the supplier, the following attributes should be taken into consideration: G Financial stability. Regardless of cost savings and other benefits, a foreign suppliers shaky financial situation will gradually weaken the long-term business relationship with the buyer. This is often the case in many less developed or developing countries where only the selected suppliers in the Government-protected industry receive preferential financial loans from the Government or banks. In this regard, financial stability of the supplier is a necessary requisite for long-term partnership programmes. G Negotiability. Without narrowing the differences between the buyer and the vendor through a series of negotiations, the buyer cannot build mutual trust with the supplier because of increasing conflicts between them. If the supplier remains stubborn during the negotiation process, the longterm collaborative relationship with the supplier will be undermined. Buyers should carefully consider the suppliers negotiation flexibility when making sourcing decisions. Cultural and Communication Barriers Since languages, business customs, ethics and communication devices vary from country to country, the buyer should consider attributes such as cultural similarity, ethical standards and Electronic Data Interchange (EDI) capability in order to ensure effective communication and negotiation with the foreign supplier. Ethnocentricism can be detrimental to successful deals and negotiations because communication breakdowns with the potential supplier may result. For example, love and respect for family and friends are prominent social values in Spanish and Hispanic cultures. Because of this great emphasis on friendships, Spanish-speaking people prefer to build a social and emotional link before establishing any business relationships[26]. The getdown-to-business-first style may therefore lead to unwanted adversarial relationships with Spanish or Latin-American suppliers. In less developed countries, there is also the problem of communicating technical and contractual information across the language barrier because of lack of communication technology[27]. Consequently, the buyer should therefore take extra precautions when sourcing from less developed countries. Trade Restrictions The prevalence of Government involvement is much greater in the international than in the home field[28].

Examples of Government involvement are tariff barriers, countertrade, free trade agreements and government pressures for trade with most-favoured nations such as China: G Tariffs and customs duties. A foreign government wants to attract buyers from other countries to boost its economy, whereas the importing country would like to impose high tariffs to protect its domestic industry. Therefore, despite the General Agreement on Tariffs and Trade (GATT), tariffs (or import duties) will be imposed on the goods and services purchased from foreign countries. Since tariffs or dumping duties can lead to a substantial increase in purchasing price, the buyer should carefully estimate these additional charges before choosing the right source. The exceptions may be sourcing from either Most Favoured Nations or Caribbean Basin Initiatives, because very little or no duties are paid on imported goods from those countries. G Countertrade . Countertrade is a growing worldwide practice as it brings numerous benefits such as avoiding currency exchange, and marketing products in less developed countries [29]. Under countertrade agreements the buyer is obligated to purchase a given percentage of goods and services from the suppliers country to satisfy offset requirements. The countertrade agreement can therefore restrict the free choice of the supplier in an international setting. With regard to the aforementioned factors that contribute to international supplier selection (see Figure 1), the international supplier selection should address the following issues: G Where to source? G How to evaluate the sensitivity of international supplier selection strategy to changing company policy? G How to analyse the trade-offs among a multitude of conflicting attributes?

Application and Results

For illustrative purposes, the base-line scenario involves selecting the most appropriate foreign supplier that manufactures and sells the components of personal computers. The base-line scenario considered five potential suppliers from five different countries: Mexico, Taiwan, Korea, Japan and Canada. Under this hypothetical scenario, relative weights of attributes were determined. These weights represent a decision makers judgements on the relative importance or preference of the attributes. Owing to the complex and time-consuming mathematical calculations, determination of relative weights calls for the assistance of a MAUT computer program such as a PC-based LOGICAL DECISION program[30]. LOGICAL DECISION is considered a

INTERNATIONAL SUPPLIER SELECTION: A MULTI-ATTRIBUTE UTILITY APPROACH

29

decision support system (DSS) that enables the decision maker to structure a multi-faceted problem in the form of a hierarchy and then allows him/her to provide his/her judgements in interactive, graphic and verbal modes. Applying LOGICAL DECISION to the international supplier selection problem, relative weights were obtained for the attributes as summarized in Table I. These weights were determined by calculating the scaling constant for each attribute and then establishing a trade-off involving each attribute under the assumption that an overall utility for each alternative can be expressed as an additive multi-attribute utility function (MUF) shown in equation (1). LOGICAL DECISION therefore determined these weights indirectly (i.e. nonarbitrarily) based on the concept that equally preferred alternatives must have equal overall utilities[30]. An example of relative weight calculations can be found in Table II. (1) U(x)= k1 U1 (x) + k2 U2 (x) + ... + kn Un (x), where U(x) = the overall utility for alternative x ki = the weight for attribute i; also called scaling constant small k for attribute i Ui (x) = the utility of alternative x for attribute i Ui (x) = ai + bie(cix) where ai , bi , ci = scaling constants for attribute i e = the constant 2.718 whose natural logarithm is 1. Prior to determining the overall utility score for each alternative, we also calculated scaling constants ai, bi and ci for the utility function equation (2) for each attribute. These scaling constants are given in Table III. Based on the weights (scaling constants) shown in Table I, the attribute of quality control is most important, followed by on-time delivery, quality team visits, tariffs and customs duties, cost, and so on. Since these weights can help establish the decision makers utility function, we can compute the overall utility score for each alternative and rank all the alternatives with respect to their overall utility scores (see Table IV). Table IV shows the most desirable supplier with reference to each criterion. For instance, the Mexican supplier is most preferable with respect to financial terms, while the Japanese supplier is considered best in terms of quality assurance, service performance, and buyer-supplier partnerships. In summary, the Canadian supplier is most preferred, with an overall utility score of 0.6581 owing to the relative importance of quality assurance and (2)

Table I. A Summary of Relative Weights for the Attributes

Attributes Quality control On-time delivery Quality team visits Tariffs and customs duties Cost Payment terms Freight terms Financial stability Foreign exchange rate Countertrade Labour disputes Technical assistance Local price control Political stability Negotiability EDI capability Legal claims Ethical standards Cultural similarity Total Weights (scaling constants) in percentages 15.0 13.9 8.6 7.7 7.3 6.2 6.1 5.5 4.9 4.1 3.5 3.5 3.2 2.4 2.4 2.1 1.8 1.0 0.9 100

Table II. Example of Relative Weight (Scaling Constant)

Calculation
Suppose the buyer has two competing suppliers, A and B, who are the same except for cost and tariff. Sourcing from supplier A costs $100 and requires $10 of import duty (tariff). In contrast, sourcing from supplier B costs $110 and requires $8 of import duty. Suppose also that suppliers A and B are preferred and that utility functions for cost and tariff are known to give the following utilities: Supplier A U cost ($100) = 0.5 U tariff ($10) = 0.3 Supplier B U cost ($110) = 0.4 U tariff ($8) = 0.7

Since these two suppliers in the trade-off are equally preferred, they must have the same overall utilities. This means U(A) = U(B) so that a change in the utility of cost of 0.5 0.4 = 0.1 is just compensated for by a change in the utility of tariff of 0.7 0.3 = 0.4.That is to say: kcostUcost($100) + ktariffUtariff ($10) = kcostUcost($110) + ktariffUtariff($8) Thus the ratio of relative weights for cost and tariff must be: k tariff [U cost ($110) U cost ($100)] = k cost [U tariff ($10) U tariff ($8)] = (0.4 -0.5) (0.3 -0.7)

= 0.25

30

IJPD & LM 24,5

Table III. Summary of the Single Utility Function (SUF) for Each Attitude
Range Minimum Maximum SUF Formulas Mid-point Level Utility a SUF parameters b

Attributes Quality control

0 Cost 100 Ontime delivery 0 Payment terms 0 Freight terms 0 Tariffs and customs duties 0 Technical assistance 0 Quality/engineering team visits 0 Political stability 0 Legal claims 0 Foreign exchange rate 0 Labour disputes 0 Financial stability 0 Negotiability 0 Local price control 0 EDI capability 0 Countertrade 0 Ethical standards 0 Cultural similarity 0

10 500 100 10 20 100 5 10 10 10 100 10 10 10 1 10 1 10 5

4.5 190 50 7 5 20 1.5 6 3 3.5 30 3.5 6.55 5.5 0.3 3.5 0.25 8 4.5

0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

3.017 0.06309 0 0.1978 0.09575 0.03905 1.198 0.7841 0.1978 0.3858 0.1978 0.3858 0.3609 0.1111 0.1978 1.386 0.09575 0.03905 0.0009872

3.017 2.154 0.01 0.1978 1.096 1.039 1.198 0.7841 1.1978 1.386 1.198 1.386 0.3609 0.1111 1.198 1.386 1.096 0.03905

0.04027 0.007061 0 0.1801 0.1219 0.03281 0.3602 0.08222 0.1801 0.1279 0.01801 0.1279 0.1327 0 1.801 0.1278 2.437 0.34281

0.0009872 1.384

Note: for SUF parameters, if c = 0, then U (x) = a+bx, otherwise, then U (x) = a+b (Exp (cx)

perceived risk. The Japanese supplier is a close second with an overall utility score of 0.6502.

LOGICAL DECISION program[30]. Owing to the excessively large number of attributes, our discussion will focus on the sensitivity of criteria that reflect the collective measures of attributes. As shown in Figure 2, the sensitivity analysis indicates that, when the importance (weight) of quality assurance was decreased by about 50 per cent or less, the Canadian supplier turned out to be the most preferred choice. Considering that the change in a ranking of the alternatives is not that dramatic, however, the supplier choice is moderately sensitive to changes in the importance of quality assurance. Figure 3 shows that when the importance of financial terms decreased 50 per cent or more, the Canadian supplier dominated the others.

Sensitivity Analyses
After obtaining the initial solution with the given weights of the attributes, sensitivity analyses were carried out to explore the response of the overall utility of alternatives to changes in the relative importance (weight) of each attribute or criterion. The sensitivity analyses are necessary because changing the importance of attributes or criteria requires different levels of cost, quality, risks and sourcing opportunities for the alternatives. A series of sensitivity analyses was conducted using the

INTERNATIONAL SUPPLIER SELECTION: A MULTI-ATTRIBUTE UTILITY APPROACH

31

The supplier choice therefore seems to be very sensitive to changes in the importance of financial terms, which in turn were often dictated by changes in the company policy. This is evident because in the weight range of 10 to 90 per cent the ranking of alternatives changes constantly.

Table IV. A Ranking of Alternatives

Criteria Overall Canadian supplier Japanese supplier Mexican supplier Korean supplier Taiwanese supplier Financial terms Mexican supplier Taiwanese supplier Japanese supplier Korean supplier Canadian supplier Quality assurance Japanese supplier Canadian supplier Mexican supplier Korean supplier Taiwanese supplier Perceived risks Canadian supplier Korean supplier Japanese supplier Mexican supplier Taiwanese supplier Service performance Japanese supplier Canadian supplier Korean supplier Taiwanese supplier Mexican supplier Buyer-supplier partnerships Japanese supplier Canadian supplier Taiwanese supplier Korean supplier Mexican supplier 0.4295 0.4289 0.4217 0.3881 0.3622 0.9200 0.8628 0.7583 0.6383 0.6325 0.8100 0.7310 0.5471 0.4993 0.2192 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 0.6581 0.6502 0.5079 0.5046 0.4615 0.5668 0.4088 0.3709 0.3646 0.3592 0.7143 0.6727 0.4187 0.4001 0.3359 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Alternatives Utility Ranks

By the same token, a series of sensitivity analyses was performed for five other criteria. Figures 4-7 show that a ranking of the alternatives is sensitive to changes in the importance of all the other criteria, except for cultural and communication barriers, because the ranking varies somewhat in the weight percentage ranging from approximately 10 to 90. On the other hand, as shown in Figure 8, we find that a ranking of alternatives virtually remains the same throughout the entire weight range. The overall utility of the alternatives is robust with changes in the importance of cultural and communication barriers.

Conclusions and Suggestions for Future Research

Over recent years, international supplier selection has been considered the most important procedure in global sourcing. To help evaluate various international sourcing strategies under dynamically changing scenarios, this article proposed an analytical approach known as MAUT. MAUT has both practical and theoretical advantages over the existing analytical approaches. The main advantages of MAUT are: (1) MAUT is capable of handling multiple conflicting attributes (e.g. lowest price, best quality, most timely delivery, lowest risk) inherent in international supplier selection; consequently, it helps the purchasing manager to make various trade-offs between competing attributes such as cost versus quality, especially when the firm should shift its priorities (e.g. from cost to quality) in supplier evaluation. (2) Through sensitivity analyses, MAUT enables the purchasing manager to evaluate what-if scenarios associated with changes in company policy. MAUT can therefore be easily adapted to frequent changes in the firms resource commitment, quality standards, logistics strategy, product design and organizational structure. (3) MAUT has the capability to not only incorporate the uncertainty involved in supplier selection, but also to convert a normative procedure to a Decision Support System (DSS) via a commercially-available PC-based program such as LOGICAL DECISION. In addition, MAUT is more capable of handling practical size problems than the existing scoring methods such as AHP because MAUT can handle more alternatives than the latter; MAUT can in fact handle up to 500 alternatives and 100 evaluation measures[30]. Despite the aforementioned various advantages of the proposed method, this study could be extended to the following areas: (1) More supplier alternatives which encompass both domestic and international suppliers can be added to the current research.

Cultural and communication barriers Canadian supplier 0.8731 Japanese supplier 0.5567 Taiwanese supplier 0.4179 Korean supplier 0.3615 Mexican supplier 0.0999 Trade restrictions Canadian supplier Mexican supplier Japanese supplier Korean supplier Taiwanese supplier 0.4940 0.3467 0.2832 0.1833 0.1034

32

IJPD & LM 24,5

Figure 2. Sensitivity of Quality Assurance

Best Japanese Canadian

Figure 6. Sensitivity of Buyer-Supplier Partnerships

Best Japanese Canadian

Utility

Utility Taiwanese
Mexican Korean Worst Taiwanese 0 Percentage of weight on quality assurance 100

Korean

Worst

Percentage of weight on buyer-supplier partnerships

100

Mexican

Figure 3. Sensitivity of Financial Terms Figure 7. Sensitivity of Trade Restrictions

Best

Best
Mexican

Utility

Canadian
Taiwanese

Utility
Japanese Worst Korean Canadian 0 Percentage of weight on financial terms 100

Mexican Japanese

Korean

Figure 4. Sensitivity of Perceived Risks

Best

Worst

Percentage of weight on trade restrictions

100

Taiwanese

Figure 8. Sensitivity of Cultural and Communication Barriers

Best
Utility Canadian Korean Japanese

Canadian

Japanese
Mexican

Utility
Worst Taiwanese 0 Percentage of weight on perceived risks 100

Taiwanese

Korean

Figure 5. Sensitivity of Service Performance

Worst
Best Japanese Canadian

Percentage of weight on cultural and communication barriers

100

Mexican

Korean

Utility

Taiwanese Mexican

Worst

Percentage of weight on service performance

100

(2) Future research into the dynamic (multiple-period) treatment of international supplier selection would contribute greatly to the knowledge base in this area. (3) Another untapped research potential includes multi-objective treatment of international supplier selection and order splitting among the chosen suppliers.

INTERNATIONAL SUPPLIER SELECTION: A MULTI-ATTRIBUTE UTILITY APPROACH

33

(4) Rather than evaluating prospective suppliers based on their past performance, an analytical approach which can systematically predict the potential suppliers ability to carry out the terms of purchase contracts over the long term should be developed in the light of strategic implications. (5) Finally, the international supplier selection decision may include environmental and ethical issues. It is increasingly important to know whether or not the chosen suppliers have complied with both environmental and ethical guidelines set by the buying firm.
References 1. Weber, C.A., Current, J.R. and Benton, W.C., Vendor Selection Criteria and Methods, European Journal of Operational Research, Vol. 50 No. 1, 1991, pp. 2-18. 2. Timmerman, E., An Approach to Vendor Performance Evaluation, Journal of Purchasing and Materials Management, Vol. 26 No. 4, 1986, pp. 2-8. 3. Gregory, R.E., Source Selection: A Matrix Approach, Journal of Purchasing and Materials Management, Vol. 22 No. 2, 1986, pp. 24-9. 4. Soukup, W.R., Supplier Selection Strategies, Journal of Purchasing and Materials Management, Vol. 23 No. 2, 1987, pp. 7-12. 5. Thompson, K.N., Supplier Profile Analysis, Journal of Purchasing and Materials Management, Vol. 26 No. 1, 1990, pp. 11-18. 6. Narasimhan, R., An Analytical Approach to Supplier Selection, Journal of Purchasing and Materials Management, Vol. 19 No. 4, 1983, pp. 27-32. 7. Nydick, R.L. and Hill, R.P., Using the Analytic Hierarchy Process to Structure the Supplier Selection Procedure, International Journal of Purchasing and Materials Management, Vol. 28 No. 2, 1992, pp. 31-6. 8. Saaty, T.L., The Analytic Hierarchy Process, McGraw-Hill, New York, NY, 1980. 9. Buffa, F.P. and Jackson, W.M., A Goal-programming Model for Purchase Planning, Journal of Purchasing and Materials Management, Vol. 19 No. 3, 1983, pp. 27-34. 10. Sharma, D., Benton, W.C. and Srivastava, R., Competitive Strategy and Purchasing Decisions, Proceedings of the Annual National Conference of the Decision Sciences Institute, 1989, pp. 1088-90. 11. Weber, C.A. and Ellram, L.M., Supplier Selection Using Multi-objective Programming: A Decision Support System Approach, International Journal of Physical Distribution & Logistics Management (forthcoming). 12. Dyer, J.S., Fishburn, P.C., Steuer, R.E., Wallenius, J. and Zionts, S., Multiple Criteria Decision Making, Multiattribute Utility Theory: The Next Ten Years, Management Science, Vol. 38 No. 5, 1992, pp. 645-54.

13. Dempsey, W.A., Vendor Selection and the Buying Process, Industrial Marketing Management, Vol. 7 No.4, 1978, pp. 257-67. 14. Min, H. and Galle, W.P., International Purchasing Strategies of Multinational US Firms, International Journal of Purchasing and Materials Management, Vol. 27 No. 3, 1991, pp. 9-18. 15. Shipley, J.P., MAPI Survey on Global Sourcing as a Corporate Strategy: An Update, MAPI Economic Report, Vol. ER-207, 1991, pp. 1-19. 16. Green, P.E. and Wind, Y., Multi-attribute Decisions in Marketing: A Measurement Approach , The Dryden Press, Hinsdale, IL, 1973. 17. Zionts, S., Some Thoughts on Research in Multiple Criteria Decision Making, Computers and Operations Research, Vol. 19 No. 7, 1992, pp. 567-70. 18. Edwards, W. and Newman, J.R., Multi-attribute Evaluation, Sage Publications, Beverly Hills, CA, 1982. 19. DeWispelare, A.R. and Sage, A.P., On Combined Multiple Objective Optimization Theory and Multiple Attribute Utility Theory for Evaluation and Choice Making, Large Scale Systems, Vol. 2, 1981, pp. 1-19. 20. Miller, G.A., The Magical Number, Seven, Plus or Minus Two: Some Limitations on Our Capacity for Processing Information, Psychological Review, Vol. 63, 1956, pp. 8197. 21. Leenders, M.R. and Fearon, H.E., Purchasing and Materials Management , 10th ed., Richard Irwin, Homewood, IL, 1993. 22. Laske, W.F., Basic to the Global Procurement Process, NAPM Insights, Vol. 3, 1992, p. 4. 23. Vernon-Wortzel, H., The Logistics of Distribution in China, International Journal of Physical Distribution & Materials Management, Vol. 15 No. 5, 1985, pp. 51-60. 24. Lyons, T.F., Krachenberg, A.R. and Henke J.W. Jr, Mixed Motive Marriages: Whats Next for Buyer-Supplier Relations?, Sloan Management Review, Vol. 31 No. 3, 1990, pp. 29-36. 25. Ellram, L.M., The Supplier Selection Decision in Strategic Partnerships, Journal of Purchasing and Materials Management, Vol. 26 No. 4, 1990, pp. 8-14. 26. Bourget, J.R., Hispanic Culture and Anglo Business, NAPM Insights, Vol. 4, 1993, p. 24. 27. Caddick, J.R., and Dale, B.G., Sourcing from Less Developed Countries: A Case Study, Journal of Purchasing and Materials Management, Vol. 23 No. 3, 1987, pp. 17-23. 28. Coyle, J.J., Bardi E.J. and Langley, C.J. Jr., The Management of Business Logistics , 4th ed., West Publishing Company, St Paul, MN, 1988. 29. Forker, L.B., Purchasings Views on Countertrade, International Journal of Purchasing and Materials Management, Vol. 28 No. 2, 1992, pp. 10-19. 30. Smith, G.R., Logical Decision: Multi-measure Decision Analysis Software, Logical Decision Co., Golden, CO, 1991.

Hokey Min is Assistant Professor of Logistics and Operations Management, Department of Marketing and Transportation, Auburn University, Auburn, Alabama, USA.