Supplier Evaluation and Selection

Laura AITER
Cengiz OKAY
Gven GL

Agenda
Importance

of Supplier Selection
Supplier Selection Process
Supplier Evaluation Criterias
Supplier Evaluation Methods

AHP
Other Methods

Importance of Supplier Selection - 1

One of the most important processes performed in

organizations today is the evaluation, selection and
continuous measurement of suppliers.

Selecting a vendor is now as important a process

as developing new products.

Importance of Supplier Selection - 2

Supplier selection process is a multi-criteria problem, which

includes both qualitative and quantitative factors.
Purchasing commands a significant position in most
organizations sincepurchased parts, components, and supplies
typically represent 40 to 60 percent of the sales of its end
products.
Thus relatively small cost reductions gained in the acquisition
of materials can have a greater impact on profits.
Suppliers have a large and direct impact on the cost,
quality,technology, and time-to-market of new products.

Importance of Supplier Selection - 3

Organizations ability to produce a quality product at a

reasonable cost and in a timely manner is heavily influenced
by its supplierscapabilities.

Supplier selection is one of the key issues of SCM because

the cost of raw materials and component parts constitutes
the main cost of a product Management.

A sound supplier selection decision today can

reduce or prevent a host of problems tomorrow

Supplier Selection Process

Steps in Supplier Selection Process

Evaluating Needs and Defining Objectives

Gathering a Limited Pool of Vendors
Interviewing with Vendors
Selecting and Applying the Method

Evaluating Needs and Defining

Objectives

What need you are looking to satisfy?

Which evaluation categories you will use?

What are your business, technical and usability requirements?
What are the must requirements?

Increase product quality

Max price, min performance, etc

How will you score the requirements?

OUTCOME: list of requirements, objective and criterias to

evaluate the vendors and the way to score different criterias

Gathering a Limited Pool of Vendors

Evaluating

all potential vendors takes much

time
Basic screening and elimination due to lack
of must requirements

OUTCOME: vendors pool

Interviewing with Vendors

One

by one interview with vendors

Gap analysis between your requirements,
objectives and vendor properties
Scoring each criteria

OUTCOME: criteria-score list for each vendor

Selecting and Applying the Method

Select

one among various methods

AHP, fuzzy logic method, etc

Calculate

overall vendor score using

selected method
Select the vendor with best score

Supplier Evaluation Criterias

The evaluation criterias are fundamental to choose

the best supplier. They are specific to each firm,
because they vary according to the needs.

The criteria exposed in the following slides are the

most common ones.*

Six categories of criteria selected

(*) We have analysed almost 30 texts in order to select the most
common criterias

Supplier Evaluation Criterias

The six classes for the suppliersevaluation
measurement:

FINANCIAL HEALTH
EXPERTISE
OPERATIONAL PERFORMANCE METRICS
BUSINESS PROCESSES & PRACTICES
ENABLING BEHAVIORS OR CULTURAL FACTORS
RISK FACTORS

Financial Health
In order to evaluate if a potential supplier is in good
financial position, a buyer can use indicators such as:
Sales
Profitability
Liquidity
ROI
Debt ratio
Transparency of finances

Expertise
The purchasing department of the firm should choose
its suppliers according to its capabilities:

Network capabilities
Quality and production capabilities (dedicated
level?)
Technical level compared to sector average
Spread of technical creation
Investment in R&D

Operational Performance
There are a large number of criteria in this category, such
as:

On-time delivery
Lead time
Responsiveness
Inventory management and control: reorder management,
forecasting capabilities
Order acceptance, processing & fulfillement
Customer service
Preventive maintenance
Hours of operators training in Total Quality Control (TQC) or
JIT

Business Processes and Practices

How does supplier provide a product or service at the
best value, on time and exactly as required from the
buyers?

Best practice and quality based information.

This evaluation business can help get at the root causes of
supplier problems.
For example: is the quality standard of the products met by the
production process (preventing defection) or by inspecting
the quality of the products after production?

Behaviors and Cultural factors

The evaluation criteria of such a category focus on the
long term sustainability of potential suppliers:

What is the improvement culture of the supplier?

Are his information capabilities always up-todate?
What is his intention of coordination?

Risk Factors
A suppliers

risks are risks for the buyer.

Indeed, if a supplier takes too much risk, it
can have a great impact on his customer.
Risk factors can be uncovered in the
previous criteria exposed, but also in criteria
such as: trade relations, currency exchange,
insurance, legislations.

Criteria Selection

In reality, these mesures of supplier performance are

difficult to obtain (financial publications,
questionnaires, surveys, site visits).
Whichever criteria chosen, the assessment system
must be optimal for good decision making.
Markov chain concept: the decision environment is
dynamic, i.e. there must be interaction between the
cooperation patterns and the supplier evaluation
criteria.

Analytic Hierarchy Process

For Complex Decisions raher than Correct Decision

Mathematics and Human Psychology
Government, Business, Industry, Healthcare, and Education.
Decomposition of a problem into a hierarchy
Evaluation of various elements comparing them to one another
in pairs
A numerical weight or priority is derived for each element of the
hierarchy
Thomas L. Saaty

Ex. Complex Decision Situations

Deciding how best to reduce the impact of global climate change

Quantifying the overall quality of software systems (Microsoft
Corporation)
Deciding where to locate offshore manufacturing
plants(University of Cambridge)
Assessing risk in operating cross-country petroleum pipelines
(American Society of Civil Engineers)
Deciding how best to manage U.S. Watersheds (U.S.
Department of Agriculture)
Etc...

AHP Process
State the Objectives
Define the Criteria
Pick the Alternatives
Establish Hierarchy
Pairwise Comparison
Synthesize Judgments
Check Consistency Index
Comparison between Criteria and Alternatives
Calculate Final Rankings

AHP Process
Objective is to open an ice cream shop for young children and families.
Establish Criteria
Neighborhood
Visibility
Competition
Price
Identify Alternatives
Suburban Shopping Center
Main Business District
Suburban Mall Location
Example based on Decision By Objectives (How to convince others that you are
right)
By: Ernest Forman, DSc., George Washington University & Mary Ann Selly, Expert
Choice Inc.

AHP Process
Hierarchical

Arrangement

AHP Process
Hierarchical

Arrangement

AHP Process
Pairwise

Comparison Matrix

1- Equally preferred
2 - Equally to moderately preferred
3 - Moderately preferred
4 - Moderately to strongly preferred
5 - Strongly preferred
6 - Strongly to very strongly preferred
7 - Very Strongly preferred
9 - Extremely preferred
8 - Very Strongly to extremely preferred

AHP Process

Synthesize Judgments
Check Consistency Index

AHP Process

Comparison between
Criteria and Alternatives

AHP Process

Recall Ranking for the Criteria

Calculate Final Rankings
First choice: Shopping Center (59%)
Second choice: The Mall (32%)
Third choice: Main Street (9%)

AHP Major Benefits

Precise assessment of values through hierarchical structuring

and pair-wise comparison.
Programmable on a computer.
Value assessment, forecasting, alternative selection and
resource allocation.
Widely accepted and applied by major business corporations
and government agencies world wide.

AHP Major Pitfalls

Human perception can distort pair-wise comparison.

Hierarchy is one directional and it is difficult to
accommodate feedback.
Values are highly aggregated and difficult to reflect
the degree of uncertainty.

Other Analytic Vendor Selection Methods

Pre-emptive Goal Programming

Wang, Huang, and Dismukes (2004) developed

an integrated AHP and pre-emptive goal
programming (PGP) methodology to take into
account both qualitative and quantitative factors
in supplier selection. While the AHP process
matched product characteristics with supplier
characteristics in order to qualitatively determine
supply chain strategy, PGP mathematically
determined the optimal order quantity from the
chosen suppliers.

Multi Objective Programming

Weber,

Current,and Desai (2000) combined

a multi-objective programming (MOP) and
DEA method to provide buyers with a tool for
negotiating with vendors that were not
selected right away, as well as to evaluate
potential suppliers.

Linear Programming

Manufacturing supply chain design and evaluation GeWang Samuel H. Huang John P. Dismukes

Ghodsypour

and OBrien (1998) proposed an

integration of an AHP and linear
programming to consider both tangible and
intangible factors in choosing the best
suppliers and giving them optimal order
quantities so that the total purchasing value
is maximized.

Fuzzy Set Theory

Morlacchi

(1999) developed a model that

combines the use of a fuzzy set with an AHP
and implemented it in order to evaluate small
suppliers in the engineering and machinery
sectors.

Questions

???

Analytic Hierarchy Process

The Analytic Hierarchy Process (AHP) is a structured technique for helping people deal with
complex decisions . Rather than prescribing a "correct" decision, the AHP helps people to determine one.
Based on mathematics and human psychology, it was developed by Thomas L. Saaty in the 1970s and has
been extensively studied and refined since then. The AHP provides a comprehensive and rational framework
for structuring a problem, for representing and quantifying its elements, for relating those elements to overall
goals, and for evaluating alternative solutions. It is used throughout the world in a wide variety of decision
situations, in fields such as government, business, industry, healthcare, and education.
Several firms supply computer software to assist in applying the process.
Users of the AHP first decompose their decision problem into a hierarchy of more easily comprehended subproblems, each of which can be analyzed independently. The elements of the hierarchy can relate to any
aspect of the decision problemtangible or intangible, carefully measured or roughly estimated, well- or
poorly-understoodanything at all that applies to the decision at hand.
Once the hierarchy is built, the decision makers systematically evaluate its various elements, comparing
them to one another in pairs. In making the comparisons, the decision makers can use concrete data about
the elements, or they can use their judgments about the elements' relative meaning and importance. It is the
essence of the AHP that human judgments, and not just the underlying information, can be used in
performing the evaluations.
The AHP converts these evaluations to numerical values that can be processed and compared over the
entire range of the problem. A numerical weight or priority is derived for each element of the hierarchy,
allowing diverse and often incommensurable elements to be compared to one another in a rational and
consistent way. This capability distinguishes the AHP from other decision making techniques.
In the final step of the process, numerical priorities are derived for each of the decision alternatives. Since
these numbers represent the alternatives' relative ability to achieve the decision goal, they allow a
straightforward consideration of the various courses of action.