Professional Documents
Culture Documents
6 May 2013
Executive summary
Direct and indirect consequences resulting from poor decision making in supplier selection are becoming
more severe with the role of the purchasing function becoming more strategic within the organization.
Factors both internal and external to the purchasing function, like faster changing customer preferences,
shorter product life cycles, integrated supply chain models, total quality management, globalization,
increased outsourcing, e-procurement and the internet, environmental and sustainability concerns and
government trade regulations increase the number of decisions made and the importance of objective
supplier selection decisions.
Supplier selection decision models should be seen as instruments that guide and correct a persons
subjective preferences and uncertainties, rather than a rigid format replacing supplier management from
a relational perspective.
This report takes into account the diversity in purchasing situations and their complexity, classifies
supplier selection decisions into purchasing portfolio matrix groups and follows the supplier selection
phases as laid out below. The two main supplier selection decision making moments are the supplier
pre-qualification (Phase 3) and the final choice-phase supplier selection (Phase 4).
Preferred supplier pre-qualification (Phase 3) methods per purchasing situation are identified as follows:
1. New supplier pre-qualification task: k-means cluster analysis (CA)
2. Modified rebuy (leverage items): Case based reasoning (CBR)
3. Straight rebuy (routine items): Jointing-tree cluster analysis (CA)
4. Straight or modified rebuy of bottleneck items: N/A. Focus on supplier relationship management.
If needed, use k-means CA with distinguishing CA factors focusing on supplier reliability and
historical delivery performance data.
5. Straight or modified rebuy of strategic items: N/A. Focus on supplier relationship management. If
needed, use k-means CA with distinguishing factors focusing on price, total cost and product value.
Page 2 of 32
Preferred final choice-phase supplier selection (Phase 4) methods per purchasing situation are:
1. New supplier selection task: Compensatory weighing model
2. Modified rebuy (leverage items): Analytical network process (ANP), or Total cost ownership
approach if TCO is already being implemented for other supplier decisions support
3. Straight rebuy (routine items): Compensatory weighing model
4. Straight or modified rebuy of bottleneck and strategic items: Total cost ownership (TCO).
The choice for the supplier (pre-)selection methods identified above is further explained in Chapter 4.
The current models used in practice and informed choices made in this report towards preferred supplier
selection methods point in most cases to methods and techniques that either follow a simple
classification method, or have a cost-focus. Most of these methods have been in use for decades and it is
surprising that newer mathematical programming (MP) or artificial intelligence (AI)-based models have
not developed faster with the growth of calculating power and software modelling capacity of standard
computer systems over the past 10 to 15 years.
Based on the amount of research on these models, and their use in financial forecasting and decision
making in the financial sector, it is clear that hybrid models with fuzzy logic or AI-elements for final
choice-phase supplier selection have the future. In 5 to 10 years the discussion on supplier selection
methods will possibly have become one between software programmers and mathematicians instead of
buyers.
Another point which can be derived from all research papers reviewed for this report is that the
multitude of research, interest and innovation in the field of supplier selection modelling takes place in
Asia, with most work being doing in China and Taiwan. In the long run this might contribute to the
decline of global competitiveness of the US and Europe vis--vis Asian economies and companies.
Page 3 of 32
Table of Contents
Executive summary .................................................................................................................................. 2
Table of Contents..................................................................................................................................... 4
List of abbreviations................................................................................................................................. 6
List of figures ........................................................................................................................................... 7
List of tables ............................................................................................................................................ 7
1.
Introduction ..................................................................................................................................... 8
1.1 Phases in the supplier selection process ......................................................................................... 8
1.2 Classification of purchasing situations ............................................................................................ 9
1.3 Purchasing portfolio matrix .......................................................................................................... 10
1.4 De Boers modified supplier selection framework......................................................................... 10
1.5 Report outline .............................................................................................................................. 12
2.
3.
4.
5.
Conclusions .................................................................................................................................... 28
References ............................................................................................................................................. 29
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List of abbreviations
AHP
AI
Artificial intelligence
ANP
BPA
CA
Cluster analysis
CBR
Case-based reasoning
CRP
DEA
EFHNN
ERP
FEAHP
FNN
FST
GA
Genetic algorithm
GP
Goal programming
JIT
Just in time
LP
Linear programming
MAUT
MCDM
MOP
Multi-objective programming
MOLP
MP
Mathematical programming
MRP
MRP II
NN
Neural networks
RST
SMART
TCA
TCO
TOPSIS
TQM
List of figures
Figure 1: Phases in the supplier selection process .................................................................................... 8
Figure 2: Purchasing portfolio matrix ..................................................................................................... 10
Figure 3: De Boers modified supplier selection framework .................................................................... 11
Figure 4: Overview of supplier pre-qualification approaches .................................................................. 13
Figure 5: Overview of final choice-phase supplier selection methods ..................................................... 17
Figure 6: Preferred pre-qualification methods vis--vis level of complexity ............................................ 23
Figure 7: Preferred final choice-phase supplier selection methods vis--vis level of complexity .............. 26
List of tables
Table 1: Classification of purchasing situations......................................................................................... 9
Table 2: Most used techniques in supplier selection literature ............................................................... 25
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1. Introduction
Over the past 40 years the purchasing function has developed from a separate function aimed merely at
the successful procurement of goods and services for the successful operation of an organization
towards a more strategic role as one of the organizations boundary-spanning functions. As purchasing
becomes a more strategic element within the organization, the direct and indirect consequences
resulting from poor decision making in supplier selection will also become more severe. Faster changing
customer preferences, shorter product life cycles, integrated supply chain models, total quality
management, globalization, increased outsourcing, e-procurement and the internet, environmental and
sustainability concerns and government trade regulations increase the number of decisions made and
the importance of objective supplier selection decisions. (Chen, Paulraj and Lado 2004; Long 2004;
Paulraj, Chen and Flynn 2006; Quayle 2006; Ting and Cho 2008; Aksoy and Oztrk 2011; Omurca 2013)
Towards the late 90s more research emerged on the role of supplier relationship management as part of
strategic procurement and supplier management (Cox 1996; Goffin, Szwejczewski and New 1997; Chen,
Paulraj and Lado 2004; Nollet and Beaulieu 2005; Ramsay 2005; Svahn and Westerlund 2009). One might
wonder whether hard and cold mathematical supplier selection decision models capture the intricacies
of supplier relationship management. Supplier selection decision models should be seen as instruments
that guide and correct a persons subjective preferences and uncertainties, rather than a rigid format
replacing supplier management from a relational perspective.
Finally, there should be a consideration for the diversity of purchasing situations. This could come down
to recognizing the differences between first time buys, straight rebuys, modified rebuys, routine items,
leverage items, strategic items and bottleneck items (Robinson, Faris and Wind 1967; Kraljic 1987;
Weber, Current and Benton 1991). The purchasing environment could also be part of the buyer situation,
where you could distinguish between the type of business or production strategy and related systems,
for example JIT, MRP, MRP II, CRP, ERP, etc. (Weber, Current and Benton 1991; Degraeve, Labro and
Roodhooft 2000; De Boer, Labro and Morlacchi 2001)
Without challenging the importance of distinguishing between specific purchasing environments, I argue
in line with De Boer, Labro and Morlacchi (2001) and Bhutta and Huq (2002) that the situation and
the choice for specific supplier selection decision making methods are best captured by:
1. the number of suppliers available,
2. the importance of the purchase and
3. the level of uncertainty related to the decision.
Page 10 of 32
Leverage items generally result in modified rebuys. With many suppliers available and a high savings
potential due to the high profit impact of the item, there might be a frequent change and selection of
suppliers. This does not necessarily need to follow all supplier selection phases every time; ie. phases 1
to 3 (Figure 1) could result in a vendor list, which would then be used for final supplier selections.
In the case of bottleneck and strategic items the supplier choice is often limited, or even non-existent,
and the focus is on supplier performance and relationship management. The high level of supply risk
either comes down to very unique specifications resulting in only a few suppliers being able to deliver, or
because of the scarcity of the resource needed also resulting in a very limited number of suppliers to
choose from. The distinction between a modified and a straight rebuy for bottleneck and strategic items
lays in the negotiation on changed requirements, which could result in a change and thus selection of a
new supplier if the current one would not be able to deliver in line with changed requirements.
Page 12 of 32
problem solving capacity, etc. on a scale (eg. positive, neutral and negative) and an overall rating
following the same scale. Categorical methods are easy to use, are inexpensive and have limited data
need, but highly rely on the evaluators judgment and all criteria are assumed equally important.
(Timmerman 1986; De Boer, Labro and Morlacchi 2001; Mendoza 2007; Ordoobadi and Wang 2011)
Page 14 of 32
k-means clustering is a CA method that starts with k random clusters and then moves suppliers
between the clusters to minimize differences within each cluster and maximize differences between
clusters. (Holt 1998; De Boer, Labro and Morlacchi 2001; Mendoza 2007)
Page 15 of 32
Page 18 of 32
Page 20 of 32
RST has been used in decision support systems in financial and market analysis, the banking industry and
business intelligence, with its main advantage being that it does not require preliminary information
about data on for example probability. A disadvantage would be that although receiving quite the
interest from researchers, it has not yet been tested as a practical tool in supplier selection decisions.
(Pawlak 2002; Chai, Liu and Ngai 2013; Omurca 2013)
3.6.4 Case-based reasoning
The Case-based reasoning (CBR) method was already mentioned as supplier pre-qualification approach.
Choy, Fan and Lo (2003) are the first to implement CBR in a supplier selection and supplier relationship
management software environment. Zhao and Yo (2011) improved supplier selection procedures by
using CBR in a case study of Chinese petroleum enterprises. (Ng and Skitmore 1995; De Boer, Labro and
Morlacchi 2001; Chai, Liu and Ngai 2013)
Page 22 of 32
1. New supplier pre-qualification task: k-means cluster analysis. New supplier pre-qualification tasks
are at the highest level of supplier selection decision making complexity, given there are no historical
records on this specific set of suppliers, nor is it unlikely a similar decision has been made in the past. The
preferred pre-qualification methods in this case is k-means cluster analysis, because depending on the
number of suppliers you can change the number of factors (clusters) that distinguish suppliers. CA does
not need historical data, though it can make use of historical data if available. It also sorts rather than
ranks the suppliers, which is preferred in this situation.
2. Modified rebuy (leverage items): Case based reasoning. A modified rebuy of leverage items is
characterized by a large set of suppliers, a high savings potential, and historical data on these suppliers is
available, perhaps because all are part of an extensive vendor list. Case based reasoning is preferred,
because of the profit impact and thus savings potential for this type of item. CBR also takes into account
historical data and combines sorting and ranking.
3. Straight rebuy (routine items): Jointing-tree cluster analysis. This type of decision does not justify the
use of CBR, given the low savings potential and low risk. Jointing-tree CA is the preferred prequalification method, because it identifies the number of factors (clusters) that distinguish suppliers
from one another. K-means CA is not preferred, because of the large set of suppliers makes it harder to
identify the number of distinguishing factors one wants to take into account with the decision.
4. Straight or modified rebuy of bottleneck items: N/A. It is questionable whether pre-selection is
needed with a very small set of suppliers to choose from and it being more about supplier relationship
management than supplier selection with bottleneck items. If a pre-qualification selection would need to
be made, k-means cluster analysis would be preferred given the very small set of suppliers and possibly
limited data on previous supplier selection decision. Distinguishing CA factors should focus on supplier
reliability and historical delivery performance data.
5. Straight or modified rebuy of strategic items: N/A. What applies to the straight or modified rebuy of
bottleneck items also applies to strategic items. The focus should be on relationship management, but if
a pre-qualification selection would need to be made, k-means CA is preferred with CA factors that should
focus on price, total cost and product value.
Page 24 of 32
Page 25 of 32
Figure 7: Preferred final choice-phase supplier selection methods vis--vis level of complexity
2. Modified rebuy (leverage items): Analytical network process (ANP). Given the high savings potential,
initial problem definition being more, fewer or other suppliers (Figure 3), multiple-supplier selection
might be giving the highest cost savings potential. ANP has been chosen as preferred method, based on
the guidance it gives towards multiple-supplier selection decisions.
If TCO is implemented by the organization for other decisions support, this would be a good second
choice as supplier election method. TCO focuses on cost and supplier selection decisions concerning
leverage items are cost-focused. Also, TCO
3. Straight rebuy (routine items): Compensatory weighing model. Compensatory weighing is the
preferred selection method for straight rebuys of routine items, given its simplicity as a method and
because we dont want to spend too much time on routine items. The ranking subjectivity element can
be circumvented by making use of archived historical supplier performance data.
Page 26 of 32
4. Straight or modified rebuy of bottleneck and strategic items: Total cost ownership (TCO).
Implementing the TCO method can take some effort, given it will possibly result in changing the way the
organization manages costs and accounts. It is nevertheless worth it, because the technique can also be
used for decisions in other purchasing situations, and as supplier performance evaluation and related
relationship management approach.
Page 27 of 32
5. Conclusions
The current models used in practice and informed choices made towards preferred supplier selection
methods point in most cases to methods and techniques that either follow a simple classification
method, or have a cost-focus. Most of these methods have been in use for decades and it is surprising
that newer mathematical programming or artificial intelligence-based models have not developed faster
with the growth of calculating power of standard computer systems over the past 10 to 15 years.
Though based on the amount of research on these models, and their use in financial forecasting and
decision making, it is clear that hybrid models with fuzzy logic or AI-elements for final choice-phase
supplier selection have the future. In 5 to 10 years the discussion on supplier selection methods will
possibly have become one between software programmers and mathematicians instead of buyers.
Another point which can be derived from all research papers reviewed for this report is that the
multitude of research, interest and innovation in the field of supplier selection modelling takes place in
Asia, with most work being doing in China and Taiwan. In the long run this might contribute to the
decline of global competitiveness of the US and Europe vis--vis Asian economies and companies.
Page 28 of 32
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