Available online at www.sciencedirect.com JOURNAL OF OPERATIONAL RESEARCH ELSEVIER European Journal of Operational Research 154 2004) 236-250, ‘wor elsviercomiocateldsw O.R. Applications A methodology for strategic sourcing Srinivas Talluri *, Ram Narasimhan Department of Marketing and Supply Chain Management, FE Broad College of Business. Michigan State Universi. 1N370 North Busines Comples, Bast Lansing, MI 48824, USA ‘Received 16 May 2001; accepted 29 July 2002 Abstract Strategic sourcing is critical for firms practicing the principles of supply chain management. It specifically deals with ‘managing the supply base in an effective manner by identifying and selecting suppliers for strategic long-term part nerships, involving in supplier development initiatives by effectively allocating resources to enhance supplier perfor ‘mance, providing benchmarks and continuous feedback to suppliers, and in some cases involving in supplier pruning activities, Currently, the methodologies in practice for strategic soureing have mostly been subjective in nature with few “objective decision models focused at supplier evaluation, which are also not devoid of limitations, This paper proposes an objective framework for effective supplier sourcing, which considers multiple strategic and operational factors in the evaluation process, Suppliers are categorized into groups based on performance, which assists managers in identifying candidates for strategic long-term partnerships, supplier development programs, and pruning. In addition, this research investigates the differences among supplier groups in proposing possible improvement strategies for ineffectively per- forming suppliers. Also, we demonstrate the methodological richness of our ramework when compared to some of the traditional methods proposed and utilized for supplier evaluation purposes. The supplier data utilized in the study is jobiained from a large multinational corporation in the telecommunications industry. © 2002 Elsevier B.V. All rights reserved Keyword Nonparametric effieney analysis; Purchasing; Stategc sourcing 1. Introduction term relationship with suppliers has become even mote important and vital for enhancing organi- Strategie sourcing is a critical challenge faced by zational performance. Also, in today’s dynamic many firms involved in the latest innovations environment strategic relationship with suppliers is cof supply chain management. With the recent a key ingredient to the success of a supply chain, éemphasis on just-in-time (JIT) manufacturing phi- Strategic sourcing decisions must not be solely losophy, strategie sourcing that establishes a long- based on operational metries such as cost, quality, and delivery, but also incorporate strategic di- mensions and capabilities of suppliers such as emphasis on quality management practices, pro- Casino recesses seer seeeea! cess capabilities, management practices, design Tonal adévesse:talluri@piotmes eu (S. Talus), nare- and development capabilities, and cost reduction simh@pilot muedu (R, Nari). capabilities into the decision-making process. 0377-22178 - se font matter © 2002 Elsevier BLY. All rights reserved loi10.1016490377-2217(02)0649.55. Tall, & These supplier attributes provide information to a firm’s managers on the infrastructure and practices employed by the suppliers, which are key elements for long-term strategic relationships (SR). It is well established in the strategic supplier evaluation lit- erature that sourcing decisions significantly impact various aspects of a product such as cost, design, manufacturability, and quality (Burt, 1984: Bur- ton, 1988). Other research that emphasizes the importance of supplier evaluation includes works by Banker and Khosta (1995) and Dobler et al (1990). Banker and Khosla (1995) have identified the supplier evaluation and justification problem as an important one in operations management While several methods have been proposed and utilized for evaluation and selection of suppliers, they have limitations including: evaluation solely based on operational metrics without the consid- cration of strategie capabilities, simple weighted scoring methods based on subjective assessments, inappropriate or arbitrary methods utilized to ‘ ee : from this analysis that suppliers 15, 22, 7, 23, 4, 6, and 12 are the best (in the sense of the highest ranked group of) performers. These are the sup- pliers that management must consider as poten- tial candidates for SR. These suppliers are the stars that are excelling with respect to several input and output dimensions, ie., capabilities and per- formance metries. From a resource allocation standpoint, management must primarily invest in improving integration with these suppliers in terms ‘of implementing systems such as electronic data interchange (EDI) and web-based procurement for effective and rapid transactional ability with the suppliers. Also, as we discuss late. these suppliers ‘can serve as potential benchmarks for ineffectively performing suppliers. In essence, management ust find possible ways of transferring their best practices to other suppliers. Suppliers 5, 20, 19, 10, 3, 8 13, 11, 14, 16, 1,2, 17, and 21 are in the second category. These are the suppliers that management should consider as potential candidates for supplier development programs and initiatives. While these supplicrs have demonstrated potential, they have scope for further improvement. The exact supplier develop- ment programs to implement will depend on the areas in which they are weak, which we address later in this seetion by identifying the differences among the thtee groups of suppliers in terms of capabilities and performance metrics. Finally, sup- pliers 9 and 18 are possible candidates for pruning. 6.3. Identifying differences in performance across supplier groups From process improvement and supplier de- velopment perspectives, we further investigated the reasons for differences in performance across the three supplier groups. We analyzed the differences in their capabilities (inputs) and performance metrics (outputs). The ANOVA results on inputs and outputs for the three groups are shown in Table 6. It is interesting to note that there is no significant difference in terms of inputs or capa- bilities of the supplier groups, ie, QMP, SA, PMC, MGT, DD, and CR levels are not statist cally different. However, the performance metrics Quality, Price, Delivery, CRP, and Other are all significantly different at an a ~ 0.05. In order to investigate which groups difler we performed the Duncan's multiple range tests on output measures, ‘These results are summarized in Table 7. Based on results in Table 7, we can conclude that lower supplier efficiency groups 2 and 3 are ranked well below group 1 with respect to several output variables. It also shows that group 3 is the lowest ranked with respect to all performance metries or ‘outputs, It can be seen that group 1 suppliers’ per- formance is vastly superior on “price” and “CRP” ‘compared to groups 2and 3, Group 2suppliers who will be the primary targets of SDI programs could Table 6 ANOVA results on inputs and outputs for supplier groups Factor Type Fale Signifeance ‘MP Taper Tos 0368 SA Input rt) PMC Input os oats MoT Input 100388 D> Inpat os ose cR Inpat os 0389, Quality Oviput 5390 Oma Price Output 120 om Deivery Output 5850 0.010 cP Ourput 17.020 0.000, Other Ourput 7050 0.0082a Talli R Norasinhon | European Joural of Operational Research 154 (2004) 236-250, ‘Tab 7 ‘Duncan's muliple comparison results on supplier group di ferenes “Paciod 1 3 Tae of subeete signe 0525 (G2) Quality 0.764 (G1) 0.55063) o1 Price 0.730(G1) 0.499¢G2) 0.313 (03) 905 Delivery 0490 (G2) 0.100(G3) 00s oes (Gl) CRP OSTRIGI) 0.000663), 0s 0.167 (G2) Other 0706 (G)_0A72(G2)_0250(G3)_0.1 Jearn from group 1 suppliers on how to reduce their costs by effectively implementing cost reduction programs. Its conceivable that group 1 supplicrs might refuse to divulge their best practices to group 2 firms for fear of intensified competition from them in the ture. This can be mitigated by entering into strategic partnering agreements with group 1 fms that essentially make them the principal beneficia- ries of the buying fiem’s competitive performance. In summary, the managerial implications are that ‘group 2 suppliers must improve with respect to Quality, Price, CRP, and Other. However, they are categorized as being in the same subset with group | suppliers with respect to Delivery. Thisis the type of feedback that management should provide to group suppliers, Since there are no significant differences inthe inputs across the three groups, it implies that groups 2and 3 have all capabilitis in place, but are poor in executing these capabilities and trans- forming them into high level of performance. Thus, these groups must benchmark themselves against group I suppliers and identify ways to execute their capabilities better. The buying firm's SDI programs can be targeted at group 2 suppliers and specitic areas of performance improvement. The knowledge transfer from group I suppliers to group 2 suppliers can be filtered through the buying firm and can be kept ata level acceptable to the group ! suppliers 7. Conclusions In this paper, we have proposed a framework and methodology for strategic sourcing. We uti- lized a combination of DEA models for effectively discriminating supplier performance. We wtlized both strategic capabilities and performance met- ties in evaluating supplicrs. Our analysis yielded a ‘number of managerial insights that could not have been possible with traditional supplier evaluation methods. These include the identification of sup- pliers for strategic partnerships, deployment of resources for SDI, identifying the factors on which ineffective suppliers need to improve on, and se- lecting targets for improvement. ‘The principal advantages of our methodology are that: it simultaneously considers supplier ca pabilities and performance metrics in evaluat- ing the efficiency of alternative suppliers; it does not require the decision-maker to select @ priori ‘weights or preferences for the supplier factors; it ‘overcomes some of the problems associated with the traditional DEA models, which include unre- stricted weight flexibility in selection of input and output weights in supplier evaluation decisions: it effectively incorporates efficiency variability mea- sures into the analysis in determining homogenous groups of suppliers; and identifies the key difer- ences across the supplier groups in terms of pet- formance While we have considered the input side of the DEA model somewhat comprehensively, the out- put measures might need further examination, In addition, it should be pointed that although the input and output dimensions considered in this paper are gonerally useful, they are context spe- cific. Also, in a specific application of this meth- odology, if in fact the set of ineffective suppliers is deemed an unacceptable result by management, the output dimensions of DEA model must be te examined for relevant but missing dimensions, which might cause them to be inellective, A re- evaluation of the proposed methodology along these lines would yiold additional insights and lead to a better approach for strategic sourcing, References Ansati, A. Modarress, B., 1986, Justinstime purchasing: Problems and solutions, Journal of Purchasing andl Mate fialy Manaesment 22 2), 19-26,S Tull, R. Naas! Europe Journal of Operastonl Research 154 (2004) 2 Banker, R.D., Khosla, 1S, 1998. Esonomies of operations management A research perspective, Journal of Operations Management 12 423-428, Banker. RD, Charnes, A, Cooper, W.W., 1984, Some models for estimation of tecbrial and scale efciencies in data cmvelopment azalysi, Management Seizes 30 (9), 1078 1092, Barbarosogla, G., Yargae, T. 1997. An application of the analytic hierarchy proces to the supplier selection problem. Production and Inventory Management Journal 3 (1), 18 2. Benton, W.C., Kraeski, L. 1990, Vendor performance and alternative manctacturing envtonments. Dession Selences 21, 403-415, ematd, P., 1989, Managing vendor performance. Production and Inventory Management Jouraal 3, 1-7. Roussofane, A, Dyson, R.G, Thanasouke, E, 1991, Applied da envelopment analysis, European Journal of Opera ‘onal Research $2), 1-18 Browning, 1M. Zabriskie, NB, Huelimentle, A.B., 1983 Stcuegic purchasing planning. Journal of Purchasing and Materials Management 19 (1), 19-24 Burt, D.N,, 1984, Prosetive Procurement, Prentice-Hall, En- plewood Cis, NI Burton, T-T.. 1988. JTT/Repeiive sourcing strategies: Tying the knot with your supplies. Production and Inventory Management Joural (th Quarter), 38-41 Chapman, SN, 1989, JusLincime supplier inventory: An ‘empirical implementation model. Intemational Joutral of Production Research 27 (12), 1993-2007, Chapman, SN., Carter, PL, 1990. Suppliefcustomer inven ‘ory relationships under justie-time. Decision Sciences 2), 35-51 CChames,A., Cooper, WW, Rhodes, E, 1978, Measuring the eflceney of decision making vnits European Journal of Operational Research 2 (6), 429-488 Cononver, WJ, 1980. Practical Nonparametric. Statist. Wily, New York Coughlan, P.D,, Wood, A.R.. 1992. Getting product designs right Business Quarterly 56 4), 63-47. De Ron, AJ. 1998. Sustainable production; The ultimate result ‘of a continuous improvement. Interstional Journal of Production Economics 6-47 (I-3), 99-110, Dickson, G., 1966. An analysis of vendor selection systems and ‘ecisions. Journal of Purchasing 2,284 Dobler, DW., Burt, DN. Lee, I. 1990. Purchasing and Materials Management. McGraw-Hil, New York Doyle, J, Green, Re, 1994. Eficieney and erosselfkiency in DEA: Derivations, meanings and ves. Journal of Opera. sional Research Society 45 (5), 567-578, Tram. LIM.. 1990. The supplier selection decision i strateyic pariveships. Journal of Purchasing ad) Materials Man- agement 26 (4), 8-14 Elam, LM., 1995. Total cost of ownership: An analysis approach for purchasing. Intemational Jouzaal of Phys- real Distribution and Logistes Management 25 (8), 4 2. 6-250 249 Friedman, M., 1937 The use of ranks to avoid the assumption ‘of normality implicit in the analysis of variance. Journal of ‘American Statistical Association 32, 675-701 Gregory. RE. 1986, Source selection: A matri approach Journal of Purchasing ané Materials Management (Sum mer), 24-28, Hahn CK. Pinto, PA. Drage, D., 1983, Justintime production and planning. Journal of Purchasing nud Ma- {erals Management 19 (3), 2-10 Hill, RP, Nyciek, RL. 1992, Using the analytic hierarchy proceso structure the supple sletion rooedure. Inter ‘ational Journal of Purchasing and Mateals Menagement 28 0), 3-36 inkl, CL, Robinson, PJ, Green, PE., 1969. Vendor evalu stion using cluster alysis, Journal of Purchasing, 49-58, Jackson, G.C., 1983. Justin-time production: Implications for logistics managers. Joural of Business Lainie 4, 1-19, Kieinsorme, LK, Schary, PB, Tanner, RD, 1992, Data ‘nvelopiment analysis for monitoring customer supplir relationships Journal of Accounting and Public Poisy 11, 357-372 Kovlamas. C., 1992. Quality improvemeat through product redesign and the learning curve. OMEGA: The lnterna- tional Journal of Management Science 20 (2), 161-68, Kral, P. 1989. Purchasing must become supply manage. ‘ment. Harvard Busines Review 61, 109-117 Lamberson, LR., Diederich, D, oor, J, 1976, Quantitative vendor evaluation. Journal of Purchasing and: Materials Management (Spring), 19-28. Lederer, PL, Rhos, S.K., 1985, Economics of total gualty ‘management, Fourral Of Operations Mangement 12 (34) 355-367, Mandal, A. Deshmukh, 8.G., 1994, Vendor selection using imierpetative siructiral modeling (ISM). International Journal of Operations and. Prosuction Management. 14 (6), 2-9, ‘Mummalaneni, V., Dubas, K.M., Chao, C., 1996, Chinese purchasing mangers’ preferences and trade-off in supplier selection and performance evaluation. Industrial Marketing Management 25 2), 115-124, Monczka, R'M., Giunipero, I-C., Reek, RI. 1981, Perceived importance of supplier information. Journal of Purchasing and Materials Management 17, 21-29 Moriarty, RT, 1983. Industrial Buying Behavior. Lexington Books, Lexington, Massachusets Narasimhan, R., 1983, An analytical approach to supplier seletion Journal of Purchasing and Matsrials Management 19(1), 27-32, "Narasimhan, R., Talluri, S., Mendez, D. 2001, Supple ‘valuation snd rationaization via data enveloprment anak sis An empirical examination, working paper, Michigan State University Pan, A.C. 1989, Allocation of order quantity among supplier. Journal of Purchasing and Materials Manapement, 36-39, Patton, W.W., 1986, Use of human judgment: models in industrial buyers vendor selection ecsions. Industria Marketing Management 25, 135-149,280 |S Tallvi R. Narain | European Jura of Operational Research 184 (2004) 236-230 Peteoni, A Braga, M., 2900. Vendor selection using principal ‘Compodent analysis. Jourmal of Supply Chain Management pring), 20. Sexton, TR. Silman, R.HL. Hogan, A., 1986, Data envelop: ‘ment analysis: Critique and extensions, In: Richard Hu Silman (Eds), Measuring Effcioney: An Assessment of ‘Data Emelopment Analyss, Publication no. 32 inthe series New Diresiens of Program Evaluation, Jossey Bass, San Francisco. Simar, L, Wilson, P, 1998, Sensitivity analysis of efficiency ‘ove: How ta booistrap 8 non-paranetsic Foner models Manegement Science 44, 49-61 Siying, W.-filong, Z, Zhicheng. L., 1997 A supplieseleting fier using # neural network 1997 IEEE International ‘Conerence'on Ineligent Procasing Systems, IEEE, New York NY, pp. 468-471 “Tutkens,H., 1993. On FDH efficiency analysis: Some method: ‘lopsalsues anc applications to etait banking, cours, Sand urban transit Journal of Productivity Analysis 8, 183 210, “Tallur, S, Narasimhan, R. in pees. Vendor evaluation with ‘performance variability: A max-min approach, European Journal of Operational Research Tallun, S» Whiteside, MIM. Seipel, SI. 2000. A nonpara- ‘metric stochastic procedure for FMS evaluation. Earopean Journal of Operations! Research 124 @), 529-538 “Tham, WS. 1988, Transactions of the American Assocation fof Cost Engineers RU ‘Thanassulis Allen, R. 1998, Simulating weight restietions Th data eavslopment analysis, Management Science 4,586 595, ‘Timmerman, E., 1986. An approach to vendor performance ‘evaluation. Journal of Purchasing and Materials Manage- ‘ment (Winter, 2-8, “Televen, M., 1987, Sng sourcing: A management rool For the ‘waliy supplier, Jouraal of Purchasing and Materils Management 23 (1), 19-24 “Tallous, R, Munson, JM, 1991 Tradeoffs under uncertainty Timpiceions for industrial purchasers. Tnernational Journal of Purchasing nd Materials Management 27, 4-31 Tummale, KVM, Chin, KS., Ho, SH, 1997, Assessing Svees aciors for implementing CE: A case study in Hong Kong electronics inst. Taternational Journal of Produc- toe Eeonomics 49 (3), 265-283, ‘Turner, 1. 1988. An independent system for the evaluation of Toniract tenders, Journal of Operational Research Society 39 (6), 951-56. ‘Verma, R. Pullman, ME. 1998. An analysis ofthe supplier selection process. Ome 26 (6), 739-750. Webor, CA, Curren. 193, A multnbjctive approach veridor selection, European Journal of Operational Re sear 68, 173-184 Weber, GA. Current, LR, Benton, W.C. 1991. Vendor selection criteria and methods European Journal of Oper- Stional Research 50, Weber, CA, Current IR, Dest, A. 1998, Non-cooperative negotiation statis for vendor selction. European Tour fal of Operational Research 108, 208-223, Weber, CAs Dest, A, 1996, Determination of paths 0 vendor market effsisney using pavalel coordinates repre entation: A negotiation tool for buyers. European Fourat (of Operational Research 90, 142-155, Weber, CA Elam, L.M., 1993. Supplier scion using mul objective programming: A desision support systems ap- proach, International Journal of Physia! Distribution and ogisties Management 28 (2), 14 Woowside, A.C, Vyas, N. 198). Industrat purchasing strat ‘es. Lexington Books, Lexington, Massachusetts