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International Journal of Physical Distribution & Logistics Management

A quality assurance-oriented methodology for handling trade-offs in supplier selection


Marcello Braglia Alberto Petroni
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To cite this document:
Marcello Braglia Alberto Petroni, (2000),"A quality assurance-oriented methodology for handling trade-offs in
supplier selection", International Journal of Physical Distribution & Logistics Management, Vol. 30 Iss 2 pp.
96 - 112
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Jian Liu, Fong-Yuen Ding, Vinod Lall, (2000),"Using data envelopment analysis to compare suppliers for
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Khurrum S. Bhutta, Faizul Huq, (2002),"Supplier selection problem: a comparison of the total cost of
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IJPDLM
30,2 A quality assurance-oriented
methodology for handling
trade-offs in supplier selection
96 Marcello Braglia
Faculty of Engineering, University of Pisa, Italy, and
Alberto Petroni
Faculty of Engineering, University of Parma, Italy
Keywords Suppliers, Supply chain, Data envelopment analysis, Quality assurance
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Abstract In an era of global sourcing, the firm's success often hinges on the most appropriate
selection of its suppliers. Supplier selection is sometimes very complicated, owing to a variety of
uncontrollable and unpredictable factors which affect the decision. Describes a multiple attribute
utility theory based on the use of data envelopment analysis (DEA), aimed at helping purchasing
managers to formulate viable sourcing strategies in the changing market place. An application of
the methodology using actual data retrieved from a firm operating in the bottling industry is
illustrated. DEA has proved to be capable of handling multiple conflicting attributes inherent in
supplier selection while simultaneously trading-off key supplier selection criteria.

Introduction
Previous research and practice indicate a trend toward a much greater
emphasis on quality in the supplier selection and retention decision among
both large and small firms (Pearson and Ellram, 1995). Purchasing and
materials managers are increasingly concerned with ISO 9000 registration,
both as a prerequisite for participation in global markets and in supplier
selection. The ISO 9000 guidelines link certification requirements to quality-
related corporate issues and can be used as a screening tool for companies
when assessing the conformity of a supplier's process. In addition, a trend is
emerging in large industrial organizations whereby a number of personnel
from various functional areas participate in the selection and evaluation of
suppliers, indicating a growing importance of team involvement in this
selection and evaluation activity.
This increased concern for supplier selection is probably due to the fact that
supplier selection may be the single most important phase of the purchasing
process. Purchasing managers need to evaluate periodically supplier
performance in order to retain those suppliers who meet their requirements in
terms of several performance criteria. As with any decision process, the
industrial supplier selection decision involves two basic, but distinct, tasks:
evaluation and choice. The evaluation element typically consists of identifying
the attributes, criteria, or factors relevant to the decision and then measuring or
International Journal of Physical
rating each supplier by considering each of the relevant factors. When a
Distribution & Logistics supplier selection decision needs to be made, the buyer generally establishes a
Management,
Vol. 30 No. 2, 2000, pp. 96-111.
# MCB University Press, 0960-0035 The authors wish to thank the two anonymous reviewers for their invaluable comments.
set of evaluation criteria that can be used to compare potential sources. Trade-offs in
Purchasing managers use all available attributes when evaluating supplier supplier
performance. Further, in making their choices the purchasing managers must
necessarily make trade-offs among different levels of these attributes.
selection
The basic criteria typically utilized for this purpose are pricing structure,
delivery, product quality, and service.
Six attributes frequently used as performance criteria are identified and used 97
in a study by Mummalaneni et al. (1996). These attributes are: on-time delivery,
quality, price/costs targets, professionalism, responsiveness to customer needs
and long-term relationships with the purchasing company.
Deng and Wortzel (1995) carried out an empirical study of the supplier
selection criteria used by US importers in three merchandise categories. In all
three categories, the most important criteria were price and product quality,
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followed closely by on-time delivery. Neither the geographical location of the


seller nor the seller's brand name proved to be of importance in the supplier
selection decision.
The insight gained into the perceived importance of different supplier
attributes are controversial. As an example, Wilson (1994) found that price
tends to be less important in the current practices of supplier selection criteria.
Quality and service considerations tend to dominate price and delivery criteria.
Verma and Pullman (1998), on the other hand, point out that although
managers say that quality is the most important attribute for a supplier, their
actual supplier choice is based largely on cost and delivery performance.
Furthermore, the importance placed on the different attributes was found to
vary largely in accordance with the differing cultural aspects of a society. In a
study conducted by Chao et al. (1993) it was shown that service and
responsiveness of a supplier is not a high priority for purchasing managers
from Chinese as opposed to Western organizations.
Summing up, supplier selection decisions vary according to the purchasing
situation. More specifically, Patton (1996) has shown that the predictive ability of
the supplier selection models and the relative importance placed on evaluative
criteria varies largely in accordance with the nature of the selection situation. In
other words, there may not be a generalized consensus on how to weight the
relative relevance of the different criteria since these are highly firm and
situation-specific. But, nevertheless, a critical part of the overall supplier selection
process consists in the determination of the relative importance of each of the
factors (Ellram, 1990). In order to support the decision-making process,
numerous models have been developed based on particular conceptual
approaches and techniques. In their classic 1991 update of Dickson's analysis of
supplier selection decisions (Dickson, 1966), Weber et al. (1991) reviewed the
literature surrounding supplier selection criteria and identified several basic
techniques or models that have appeared in studies over the previous 25 years
and found that the vast majority were linear weighting models, mathematical
models such as economical order quantity (EOQ) and a few probabilistic models.
Since 1991 other techniques have been applied to the problem: analytic hierarchy
process (Nydick and Hill, 1992; Barbarosoglu and Yazgac, 1997), multi-objective
IJPDLM programming (Weber and Ellram, 1993), total cost of ownership (Ellram, 1995),
30,2 human judgments models (Patton, 1996), statistical analysis (Mummalaneni et
al., 1996), interpretative structural modelling (Mandal and Deshmukh, 1994),
discrete choice analysis experiment (Verma and Pullman, 1998) and neural
networks (Siying et al., 1997). In this study, an alternative methodology is
proposed to aid purchasing managers in identifying and selecting suppliers.
98 Such a proposal attempts to address the need for flexible models that are highly
customised to meet an individual firm's particular needs. Then, an in-depth
study of an actual application of the methodology proposed is provided.

The case study company


In order to test its effectiveness, the methodology that is proposed in the
following was applied to the supplier selection process of a medium-sized
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manufacturer of bottling machinery and complete packaging lines.


The firm's production programme includes the design and manufacturing of
a range of equipment to handle plastic containers, another group of equipment
to handle glass containers and a third type which can be used for both plastic
and glass containers. Machines and bottling lines are specially designed and
manufactured for the mineral water, soft drinks, fruit-juice, wine, beer, liqueurs
and pharmaceutical industries. The company has annual sales totalling to
$43 million and employs 240 individuals (60 in technical departments). Its
major productions lines include:
. rinsing machines (820 units sold worldwide);
. unscrambling machines (285 units sold worldwide);
. filling machines (60 units sold worldwide);
. complete traditional bottling lines; and
. complete aseptic filling lines.
By its very nature the purchasing function is a basic part of business
management and the selection of competent suppliers has long been regarded
as one of the most important tasks to be performed.
The analysis was carried out on the selection of the suppliers of the so-called
``grip heads'', one of the most critical components used both for rinsers and
fillers. A grip head is a device for tinplate cans and tins and glass jars with
tinplate caps. The component is fairly complex from a technological point of
view, since it incorporates permanent magnets with releasing grid, plate, stem
and spring made of AISI 304 stainless steel with hard rubber pads or,
alternatively, with side polyethylene rollers. Among the main features which
are required of this component are design excellence and highly accurate
construction in order to ensure trouble free and quiet functioning, even when
running at the highest production speeds. At present more than 20 suppliers
are available in the market place for this type of component but only ten are
actually used by the company. The data used in the application of the
methodology were collected via semi-structured interviews carried out with
three purchasing managers at the host company.
The use of data envelopment analysis for supplier selection Trade-offs in
The methodology for the supplier selection problem that is proposed in this supplier
paper is based on the use of data envelopment analysis (DEA). DEA is a selection
mathematical programming method for assessing the comparative efficiencies
of decision-making units (DMUs, e.g. banks, schools, hospitals, plants, etc.)
where the presence of multiple inputs and outputs makes comparison difficult
(Dyson et al., 1990). DEA is a non-parametric method that allows efficiency to 99
be measured without having to specify either the form of the production
function or the weights for the different inputs and outputs chosen. This
methodology defines a non-parametric best practice frontier that can be used as
a reference for efficiency measures.
The efficiency of a many input-many output DMU (in this case a supplier)
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may be defined as a weighted sum of its m outputs divided by a weighted sum


of its n inputs:
weighted sum of outputs
Efficiency of DMU j ˆ Ej ˆ
weighted sum of inputs

1 y1j ‡ ::: ‡ m ymj


ˆ
1 x1j ‡ ::: ‡ n xnj

where:
k is the weight of output k,
k is the weight of input k,
ykj is the amount of output k from DMU j,
xkj is the amount of input k in DMU j,
and where Ej is conventionally constrained by DEA to be defined in the range
[0,1] (Charnes et al., 1978).
This approach has been adapted to the supplier selection problem and the
resulting procedure is illustrated in successive steps.

Step 1. Identification of the factors


Each supplier may be described by a supplier rating (SR) which is a measure
for its effectiveness and is built as follows:
SERVICE PROVIDED BY SUPPLIER i
SUPPLIER i RATING ˆ SRi ˆ
CUSTOMER'S COMMITMENT TO SUPPLIER i

As for the service provided by the supplier to the buyer, the traditional indicators of
shipment quality, delivery compliance and profitability are used.
Shipment quality is measured using a conformity index which is built as
follows:
A ‡ B ‡ yC
CONFORMITY INDEX ˆ
D
where:
IJPDLM is the estimated cost of a component rejection in incoming quality
30,2 control. It is thus a function of the percentage of defective incoming
components detected by the incoming quality control.
is the estimated cost of a component rejection in the assembly line. It is
thus a function of the percentage of incoming components accepted by
the incoming quality control but then noticed during production.
100
y is the estimated cost of a component rejection by the end-user. It is thus a
function of the percentage of incoming components accepted by the
incoming quality control and the production line, but returned by the
end-user.
D is the monetary value of the purchased components in the time period.
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Compliance with the agreed date can be computed as the changing average of
delayed deliveries over the last n supplies.
With regard to profitability, we considered the price of the item to be
purchased, that is the average unit purchase lot price of the item considered. In
this way, price can be considered as one of the outputs for the customer, as for
quality and delivery compliance.
The performance criteria can be customised to meet particular corporate
objectives or to suit the specific circumstances related to the product/order
being evaluated. For instance some indicators of post-sale assistance might be
included. In the specific case study, though, placing emphasis on these aspects
would have been meaningless since post-sale assistance is rigorously
contractualised and thus no actual differences exist among suppliers.
Customer's commitment to the supplier is a complex construct that requires
that the buying firm determines the consequent costs of using such a supplier.
Customer's commitment should include all the potential penalties associated
to the selection of a particular supplier. These penalties are a function of the
supplier-specific attributes. It should consider those suppliers' attributes that
are likely to have an impact on their performances (quality, profitability and
delivery). The vast majority of the studies on the supplier selection process
confirm that purchasing managers do not limit their selection criteria to
profitability, quality and delivery consistency, but tend to include the analysis
of the overall supplier's profile (in terms of managerial and technological
competence and firm-specific characteristics). For instance, Weber et al. (1991),
in their review and classification of 74 articles related to the criteria and
analytic methods used in the supplier selection process, found that suppliers'
production facilities and capacity, geographical location, technological
capability, management and organization, financial position and performance
history were discussed in 31, 21, 20, 13, 10 and 9 per cent of the articles
respectively. More recently, a survey conducted on 154 firms by Choi and
Hartley (1996) confirmed the importance of these factors and emphasized the
growing weight of buyer-seller relationship.
One could object that, from the customer point of view, the effectiveness of
the procurement rather than the intrinsic supplier efficiency is relevant in the
supplier selection process. For instance, compliance to delivery dates could be Trade-offs in
important per se regardless of the fact that suppliers are geographically close or supplier
distant. This position is partly agreeable, since two suppliers with identical selection
performances in terms of delivery dates will have a distinct profile of risk that
is a function of their relative geographical proximity to the customer (especially
as far as socio-political or other country-specific risks are concerned). This
approach is fairly common in literature, as in Willis et al. (1993) who, dealing 101
with suppliers' evaluation in just-in-time environments, consider jointly
compliance to delivery dates and geographical location.
The same can be stated with regard to management capabilities and
technological competencies, in particular for customers that largely tend to
delegate product design and prototyping activities to the supplier. For instance
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in the literature about the ``lean supply'' paradigm, Kamath and Liker (1994)
and Lamming (1993) have demonstrated that first-tier suppliers (the so-called
partner roles) in the supply hierarchy (keiretsu) of large Japanese automobile
firms are selected based on the level of product development capabilities.
Moreover, adequate production facilities and capacity may translate into
higher response flexibility. Other benefits may be easily associated to the
remaining attributes that were considered in the analysis. In other words,
considering the intrinsic supplier's attributes in the evaluation allows the
decision-maker to take into account the intangible benefits that overcome the
effectiveness of a single procurement. Thus, based on the literature analysis
and the specific characteristics of the case study under examination, our choice
has been to include such attributes as supplier's management capabilities,
production facilities and capacity, technological capability, financial position,
experience and geographical location.
Management capabilities relate to the quality of management and its
operational competencies. These dimensions may be measured on a seven point
Likert scale. In the specific application that follows, three purchasing managers
at the host organization were asked to rate each supplier. It is worth noting that
the applicability of DEA to factors that can only be measured on an ordinal
scale has been demonstrated by Cook et al. (1993).
The experience of the supplier may be operationalized by using the amount
of past business with the target customer and its approximate number of
clients. The amount of past business may be measured by the overall sales of
the supplier to the company during a unit of time.
Production facilities and capacity may be measured as the ratio between the
average manufacturing capacity of the supplier and the customer's average
consumption per unit of time.
The supplier's technological capability has many different dimensions and
is difficult to measure. In the application presented, a questionnaire was
developed and submitted to the chief technical officer of each of the target
firms. The measurement indicators used were the percentage of the total staff
who were technical staff and the percentage of the R&D budget in relation to
IJPDLM sales. Respondents were also asked to report which of the technologies shown
30,2 in Table I were adopted and implemented within their organization. An overall
score was obtained by calculating the sum of the relative percentages.
The suppliers' financial position may be indicated by the mean of two
financial indicators, one for solidity (the debt ratio, that is the ratio between
equity and borrowed capital) and one for liquidity (the current ratio, that is the
102 ratio between current assets and current liabilities).
Lastly, geographical location may be measured by the supplier's distance
from the customer in kilometers.
Table II shows the suppliers' attributes. These measures are the normalized
values of the three performance factors and the six input attributes previously
illustrated.
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It is of use to note that the greater management capabilities, production


capacity, technological capabilities, financial position and experience are, the
better it is. Because these attributes are at the denominator of the supplier

Technology

Automated handling
Barcode system
Computer-aided design (CAD)
Computerized numerical control (CNC)
Direct numerical control
Electronic data interchange (EDI)
Computer-aided manufacturing (CAM)
Computer-aided engineering (CAE)
Rapid prototyping techniques (RPT)
Table I. Communication technologies
List of technologies Computer integrated manufacturing (CIM)
considered Automated storage and retrieval systems (AS/RS)

Sup MCa PFCa TCa FPa Expa GL Prof. Qual. DelC

1 0.622 0.261 0.667 0.480 0.190 0.040 0.958 0.100 0.122


2 0.500 0.333 0.571 0.414 0.127 0.090 1.000 0.200 0.200
3 0.737 0.429 0.400 0.293 0.317 0.068 0.935 0.133 0.167
4 0.683 0.286 0.444 1.000 0.500 0.240 0.983 0.182 1.000
5 0.452 0.353 0.400 0.800 0.158 0.640 0.958 0.400 0.040
6 0.509 1.000 0.800 0.400 0.244 0.110 0.975 0.167 0.032
7 1.000 0.500 0.571 0.267 0.176 0.030 0.943 0.333 0.179
8 0.778 0.667 0.571 0.343 1.000 0.160 0.983 1.000 0.093
9 0.596 0.176 0.444 0.375 0.297 0.148 0.920 0.167 0.060
10 0.528 0.545 1.000 0.414 0.380 1.000 1.000 0.222 0.049
Notes: Sup = Supplier; MC = management capabilities; PFC = production facilities and
Table II. capacity; TC = technological capabilities; FP = financial position; Exp = experience;
Suppliers' attributes GL = geographical location; Prof. = profitability; Qual. = quality; DelC = delivery
(normalized values) compliance; a = reciprocal value
rating equation, we took their inverse ratio. On the other hand, the lower the Trade-offs in
geographical distance, the better. We considered, thus, the absolute values for supplier
this attribute. The same was done with the performance attributes: price was
taken at its inverse ratio to express the profitability concept, quality is the
selection
reciprocal of the conformity index and compliance is the reciprocal of the
changing average of delayed deliveries over the last n supplies.
Once the attributes have been defined, DEA makes it possible to obtain a 103
ranking of all suppliers based on the concept of supplier effectiveness. With
respect to s competing suppliers, the relative rating, SRj , for each generic
supplier j(j = 1, ..., s) can be evaluated by using the model:
max SRj
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subject to

P
m
k ykj
kˆ1
 1 for each supplier j ˆ 1; :::; s …i†
P
n
i xij
iˆ1

k  "k ˆ 1; :::; m…ii†

i  "i ˆ 1; :::; n…iii† …Model 1)

Restrictions are placed on these assessments to reflect a priori judgements on


inputs and/or outputs. The weights of inputs and outputs (variables of the
model) are bounded (constraints (ii) and (iii)) to be greater than or equal to some
small positive arbitrary quantity  in order to avoid a performance criterion
being totally ignored ( is set at zero in most DEA applications). The relative
rating of each supplier is bounded (constraints (i)) to be lower than or equal to 1
(maximum value).
Then model (1) indicates the combination of weights most favourable to
supplier j, as compared to the other suppliers. SRj represents the maximum
relative efficiency for the target supplier. The performances of all suppliers will
emerge when each supplier is considered in turn. As the cost function varies
from problem to problem, weights may differ accordingly.
Model (1) is fractional linear programming, but it can be easily transformed
into the following linear program (LP) (Charnes et al., 1978):
Xm
max Hj ˆ k ykj
kˆ1

Subject to
IJPDLM X
n
i xij ˆ 1 …i†
30,2 iˆ1

X
m X
n
k ykj ÿ i xij  0 for each supplier j ˆ 1; :::; s …ii†
kˆ1 iˆ1
104
k  "k ˆ 1; :::; m …iii†
i  "i ˆ 1; :::; n …iv† …Model 2)

Model 2 is used to obtained the simple efficiency scores of all the suppliers
considered.
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The linear programs of model 2 were solved using LINDO software. The
results are shown in Table III.
DEA identified suppliers 1, 2, 3, 4, 5, 7, 8 and 9 to be efficient with a relative
efficiency score of 1. The remaining two suppliers (6 and 10) obtained an
efficiency score of less than 1. It is evident that traditional DEA showed a poor
discriminatory power in this application. Another major limitation is that the
simple efficiency scores are misleading. In fact, model 2 makes complete weight
flexibility possible. This may result in identifying a supplier with an unrealistic
(extreme) weighting scheme as being efficient. These suppliers could become
``false positive'' candidates. A ``false positive supplier'' achieves a relative
efficiency score of 1 by weighing heavily on few favourable inputs and outputs
and completely ignoring the others. This type of supplier is performing well
with respect to few input/output measures and is not indulging in good overall
practices. Therefore a measure of more than just the simple efficiency is
required for the analysis. It was thus decided to revise the methodology based
on new developments in DEA by computing, for each supplier, the
corresponding cross-efficiency in place of the conventional ``simple'' efficiency.

Step 2. Cross-efficiency
In cross-efficiency DEA, the best set of weights chosen for a particular supplier
can be used to weight the inputs and outputs for each of the other suppliers. If

Supplier Simple efficiency

1 1.0000
2 1.0000
3 1.0000
4 1.0000
5 1.0000
6 0.9814
7 1.0000
Table III. 8 1.0000
Simple efficiency 9 1.0000
values 10 0.9847
this procedure is repeated for all suppliers, a matrix of cross-efficiencies (Table Trade-offs in
IV) is filled out row-by-row. A cross-efficiency matrix is thus a square matrix supplier
whose i-th row reports the efficiency of each supplier, as seen by the i-th selection
supplier, while the k-th column reports the efficiency of the k-th supplier using
the weights that each supplier has chosen.
Eik is, then, the cross-efficiency of supplier k using the weights accorded by
supplier j. The leading diagonal of this matrix corresponds to the special case 105
where supplier k rates itself. Ejj are the traditional simple efficiency
measurements for each supplier (Eik(Ekk  8 i). The outcomes of the matrix of
cross-efficiency are Ai and ek. Ai is the average of cross efficiency measures
(CEM) along row i, without the leading diagonal. Ai might be thought of as
supplier i's averaged appraisal of peers, against which supplier i compares
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itself. Ek is the average of cross efficiencies along column k, without self-


appraisal. It may be conceived as the averaged efficiency rated by supplier k
using the set of weights chosen by the other suppliers to maximise their own
efficiency. It is, in other words, the cross-efficiency of supplier k.
A limitation with the CEM evaluated from model 2 weights is that input/
output weights obtained from this model may not be unique (multiple optimum
solutions). Thus the usefulness of CEM in identifying overall good performers
is undermined because there may be several CEM that can be constructed with
different sets of optimal weights. One remedy suggested by Sexton et al. (1986)
is to introduce a secondary objective function.
For a particular supplier, some choice of weights may lead to a lower cross-
efficiency, while other choices may lead to higher cross-efficiency.
This ambiguity can be solved by using the formulations proposed by Doyle
and Green (1994). These formulations may be categorized as benevolent and
aggressive in which not only is the efficiency of the target supplier is
maximized but also a second goal is taken into account. In the aggressive
formulation, a particular choice of weights is made that not only obtains the
maximum simple efficiency for a supplier as a primary goal but also as a
secondary target, minimizes the other suppliers' cross-efficiencies.
Conversely the choice of weights that not only obtains the maximum simple
efficiency for a supplier as a primary goal but also as a secondary aim maximizes
the other suppliers' cross-efficiencies is known as the benevolent formulation.

Rated supplier
Rating supplier 1 2 3 4 5

1 E11 E12 E13 E14 E15 A1


2 E21 E22 E23 E24 E25 A2 Table IV.
3 E31 E32 E33 E34 E35 A3 Matrix of cross-
4 E41 E42 E43 E44 E45 A4 efficiencies for a data
5 E51 E52 E53 E54 E55 A5 envelopment analysis
e1 e12 e3 e4 e5 involving five suppliers
IJPDLM The simultaneous accomplishment of two objectives (maximising self-
30,2 efficiency and maximising/minimising the efficiency of the other suppliers) is
achieved via a two-stage procedure. In the first step, traditional DEA is used to
obtain simple efficiencies (primary objective). The second phase involves
solving a specific objective function which, opportunely linearized through a
proxy, gives the averaged cross-efficiency measurements for the other
106 suppliers when rating them by applying weights chosen by supplier i. The
primary goal is maintained by adding the condition that the efficiency of
supplier j be equal to its simple efficiency (as obtained from step 1). For a more
extensive description of the problem, see Sexton et al. (1986) and Doyle and
Green (1994).
The benevolent and aggressive formulations may lead to results that are
partly divergent. Also, in supplier selection, since no clear indication is put
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forward as to the secondary objective, opting for a particular formulation


(possibly different from the two extremes of benevolent and aggressive) would
be subjective and, as such, disputable. To overcome such a drawback, Doyle
and Green (1994) propose to get to an overall result for each decision unit that
considers the two approaches jointly. But the possible synthesizing measures
(the average rating, the median, the minimum, the variance, etc.) have been
proposed in the literature with no apparent justification.
In the case study here presented, it is proposed that a clustering analysis
carried out considering the results of the two cross-efficiency approaches might
be helpful.
Summing up, the procedure used to get a final ranking of the ten suppliers
considered in the case study is as follows:
(1) determining the cross-efficiency measurements for benevolent and
aggressive formulations;
(2) determining the values of an index that measures the relative percent
difference between simple efficiency and averaged cross-efficiency
obtained for each supplier; and
(3) analysing jointly the two rankings obtained via the benevolent and the
aggressive approaches by using clustering analysis. This allows the
decision-maker to identify the outranking suppliers.
These steps are briefly described below.

Step 3. Benevolent and aggressive formulations of cross-efficiency


The cross-efficiency measurements for benevolent and aggressive formulations
are shown in Table V. The aggressive formulation proposed by Doyle and Green
(1994) is generally used when relative dominance among DMUs is to be identified.
It is evident from this table that suppliers 1, 2, and 7 have several high cross-
efficiency values. Some of the simple efficient suppliers such as suppliers 4, 5
and 9 have several low cross-efficiency values. The column means may be used
to effectively differentiate between the overall efficient suppliers and possible
``false positive'' suppliers.
SUP1 SUP2 SUP3 SUP4 SUP5 SUP6 SUP7 SUP8 SUP9 SUP10 Trade-offs in
supplier
SUP1 1.00 0.51 0.58 0.20 0.08 0.34 1.00 0.28 0.31 0.05 selection
SUP2 0.73 1.00 0.51 1.00 0.13 0.31 1.00 0.13 0.27 0.08
SUP3 0.85 0.77 1.00 0.49 0.22 0.57 1.00 0.58 0.63 0.14
SUP4 0.13 0.17 0.11 1.00 0.03 0.01 0.10 0.04 0.10 0.03
SUP5 0.72 1.00 0.60 0.43 1.00 0.59 0.80 0.23 0.61 0.43
SUP6 0.83 1.00 1.00 0.46 0.51 0.98 0.92 0.90 0.90 0.67
107
SUP7 0.23 0.20 0.18 0.07 0.06 0.14 1.00 0.56 0.10 0.02
SUP8 0.19 0.28 0.25 0.10 0.11 0.21 1.00 1.00 0.17 0.04
SUP9 0.70 0.57 0.42 0.66 0.52 0.19 0.36 0.28 1.00 0.35
SUP10 0.81 1.00 1.00 0.47 0.59 0.99 0.91 0.97 0.93 0.98
Note: a For example, 0.58 (the value in the first row and third column) represents the cross- Table V.
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efficiency score of supplier 3 with the optimal weights of supplier 1 Cross-efficiency matrixa

Step 4. Maverick index


Another effective way of measuring the false positiveness of suppliers is by
constructing a ``Maverick index'' (Doyle and Green, 1994), which can be defined
as the percentage relative difference between cross-efficiency and simple
efficiency. That is:
Ejj ÿ ej
Mj ˆ :100
ej

Where Mj is the maverick index for supplier j, Ejj and ej are, respectively, its
simple efficiency and its cross-efficiency. An efficient supplier with a
considerable maverick index is likely to be exploiting the low selectiveness of
traditional DEA.
Table VI depicts the cross-efficiency mean scores and the maverick indexes
for the ten suppliers used in the analysis.
As for the aggressive formulation, suppliers 4, 5, 8 and 9, which were simple
efficient, exhibited low mean scores of 0.4315, 0.2507, 0.4422 and 0.4464. These
suppliers are far from being good overall candidates. Supplier 6 which was
inefficient with a relative efficiency score of 0.9814 and mean score of 0.3710 is
rated to be a better overall performer than efficient supplier 5. Thus it is
possible to have an inefficient supplier outperforming the efficient ones in
terms of overall performance. Table VI also shows that some of the efficient
suppliers are in fact ``false positive''. Efficient suppliers 4, 5, 8 and 9 exhibited
high maverick indexes of 1.320, 2.984, 1.261 and 1.234, respectively. Supplier 7
has the lowest maverick index of 0,271 and the highest mean score of 0,7873.
As far as the benevolent formulation is concerned, supplier 1, which was
simple efficient, exhibited a low mean score of 0,6828. Generally the values of
the maverick index are significantly lower in the benevolent formulation, even
reaching zero for supplier 8.
IJPDLM Cross- Cross-
30,2 efficiency Maverick efficiency Maverick
Simple mean index mean index
Supplier efficiency (aggressive) (aggressive) (benevolent) (benevolent)

1 1.0000 0.5770 0.73373 0.6828 0.46510719


2 1.0000 0.6117 0.63709 0.9832 0.016713
108 3 1.0000 0.5166 0.93578 0.8205 0.219277
4 1.0000 0.4315 1.32004 0.8070 0.23893
5 1.0000 0.2507 2.98483 0.8830 0.131985
6 0.9814 0.3710 1.64386 0.6384 0.536511
Table VI. 7 1.0000 0.7873 0.27137 0.8767 0.14008
Simple-efficiency, 8 1.0000 0.4422 1.26145 0.9999 0.0000
cross-efficiency and 9 1.0000 0.4464 1.23434 0.8254 0.211028
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maverick index 10 0.9847 0.2013 3.89284 0.5633 0.748375

Step 5. Clustering analysis


In order to come to a final optimal choice, instead of averaging the values for
the aggressive and benevolent formulations (which has no actual theoretical
justification), it was decided to perform a clustering analysis. This procedure
attempts to identify relatively homogeneous groups of cases based on selected
characteristics, using an algorithm that starts with each case in a separate
cluster and combines clusters until only one is left. The clustering was
restricted to the values of cross-efficiency and the maverick indexes both in the
aggressive and the benevolent formulations. Four clusters were derived using
the average linkage (between groups) method with squared Euclidean distance.
These four clusters represent relatively homogeneous groups of suppliers
identified according to their cross-efficiency and maverick index values. The
results are shown in Table VII and are based on the underlying dendrogram
that is not reported here for the sake of brevity. Dendrograms can be used to
assess the cohesiveness of the clusters formed and can provide information
about the appropriate number of clusters to keep. The individual clusters are
highly homogeneous since no F value is greater than 1 (this is, in fact the rule-
of-thumb that is used by the statisticians).
The clusters have been plotted in Figure 1. Plotting the clusters permits to
immediately evaluate the ``outranking'' suppliers.
It can be helpful to reflect on the meaning of these clusters of suppliers: as an
example, consider cluster 1 that includes suppliers number 1, 3, 6, 8 and 9. This
basically means that these suppliers are very similar and homogeneous in
terms of the values of cross-efficiency (both in the aggressive and in the
benevolent formulation) and of the relative maverick indexes.
Based on these results, one can affirm that suppliers 2 and 7 (belonging to
cluster number 2) outrank over all other suppliers. The difference between the
two is that supplier 2 is given a priority especially when the benevolent
formulation is considered (see Figure 1), whereas the performances of supplier
7 are well-balanced irrespective of the formulation chosen.
Case 4 Clusters Trade-offs in
supplier
Supplier 1 1 selection
Supplier 2 2
Supplier 3 1
Supplier 4 1
Supplier 5 3
Supplier 6 1
109
Supplier 7 2
Supplier 8 1
Supplier 9 1 Table VII.
Supplier 10 4 Cluster membership
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We may then conclude that the optimal choice is supplier 7 which is a good
overall candidate performing well in many dimensions. This result is not
surprising, for supplier 7 is outranking as for financial position and
geographical position, is excellent as for experience level while is in an
intermediate position as for production capacity and technological capabilities
and is a very poor performer as for management capabilities. As for the
performances, supplier 7 is not so good in terms of customer's profitability
ranking (but it is important to note that the absolute values are extremely
close), third for quality and third for procurement compliance. In other words
the optimal supplier does not excel in respect to any specific attribute (except
for geographical position and financial position) but, on the other hands it is
characterized by good overall values (well balanced). This fact confirms that
DEA is able to identify those suppliers that have a balanced behaviour with
respect to all the attributes considered in the selection process.
The implications for purchasing managers are evident: DEA has distinct
advantages over the traditional methods for evaluating competing suppliers.

Average Linkage
(Between Groups)
cluster 1
0,80000 7 cluster 2
cluster 3
aggressive formulation

cluster 4
0,60000 2
1
3

49 8
0,40000
6

5
0,20000 10

Figure 1.
Mapping of suppliers
0,00000 based on their cross-
0,200000 0,400000 0,600000 0,800000 1,000000
efficiencies
benevolent formulation
IJPDLM The major benefit of DEA is its total objectivity in the establishment of the
30,2 weights for the attributes. It is worth mentioning that weights are usually
considered the most critical point of the multi-attribute techniques.
Furthermore, it is not necessary to state the performance measures and the
suppliers' attributes in the same units. These can be measured in any unit such
as money, percentages and various scales. This implies that retrieving the data
110 that are necessary to conduct the analysis is relatively easy and can be done
from multiple sources (invoices, perceptual judgments of managers, etc.).

Conclusions
Supplier selection is a multicriteria problem which includes both qualitative
and quantitative factors. In order to select the best suppliers it is necessary to
make a trade-off between these tangible and intangible factors, some of which
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may conflict. Some authors have applied mixed integer, goal and multi-
objective programming to solve this problem. As these techniques are
mathematical, they have significant problems in considering qualitative factors
which are very important in supplier selection, especially when supplier
partnership is desired. In this paper a methodology based on the use of cross-
efficiency in data envelopment analysis has been developed for the supplier
selection problem in order to consider both tangible and intangible factors.
This methodology allows purchasing managers to rank the suppliers based on
their overall performance. An application of the same methodology has been
carried out using the data concerning a medium-sized manufacturer of bottling
machines and packaging lines. This methodology has made it possible to
identify a single outranking supplier among ten eligible suppliers. Other uses
of the methodology relate to the possibility of benchmarking different suppliers
and identifying their possible failures. One of the major benefits of using such a
methodology is that it is completely objective for it does not require to establish
the weights in advance. The advantages of this alternative methodology are
that there is no possibility of selecting a sub-optimal supplier. Furthermore, the
optimal choice is a good overall candidate performing well with respect to
many different attributes, some of which involve trade-offs. In fact, the
importance of cross-efficiency is in cautioning the purchasing manager from
selecting a ``false positive'' supplier. This paper reinforces the use of DEA as a
tactical decision-making tool in purchasing.
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