Supplier selection is one of the most challenging decisions for purchasing managers and it is one of the main steps in the purchasing management process. The selection decision has an extensive impact for the company success; the right supplier selection will be the vital component to the company’s competitiveness and success in future. (Weele, 2010; Bedley, et al., 2008 pp. 105-114) However the supplier selection process is a complex multi criteria decision, where different selection criterions are hard to combine because of both quantitative and qualitative nature of the criterions (Saaty, 2008).
In this chapter a broad vision of different problems and used selection criterions will be presented and studied. One part of the supplier selection is a specification determination, the purchaser has to determine the specification that have to be fulfilled by suppliers and also fulfil the company’s actual needs. After that the selection methods and specification determination are presented, different methods for selection are presented with closer look to the advanced hierarchy process (AHP), as it turns out that it is widely used among researchers and industrial managers.
5.1 Selection criterions
One of the first steps in the supplier selection process is to choose the right selection criterions. Correct selection criterions are a key to the successful supplier selection as it assures that suppliers are compared equally and with relevant success factors. Selection criterions have to be defined before the supplier selection and defined criterions have to be implemented correctly to the selection process by using predetermined selection method. (Bedley, et al., 2008) Importance of the criterions is emphasised in the public procurement process, as unclear selection criterions might increase possibilities for complaints.
5.1.1 Dickson’s criterions
Selection criterions have been studied and focused by researchers and purchasing managers actively since 1960’s, when one of the first comprehensive researches was presented in 1966 by Dickson. (Benyoucef, et al., 2003) Dickson’s study was based on an enquiry sent for professionals of the National Association of Purchasing Managers, were top level purchasing managers ranked 23 of predetermined supplier selection criteria in order of their importance. Results from the study are relevant even today, as
30
can be seen from table 7, where the Dickson’s score are compared to a more recent research presented by Thiruchelvam, et al (2011).
Research from Thiruchelvam, et al., (2011) different criterions was studied based on their appearances in publications from 1966 to 2001 and 2001 to 2010. Result from the study can be seen in the below (Table 7), where the findings from the both research, Thiruchelvam, et al (2011) and Dickson (1966) are combined. The table is in order of overall appearances of publications, based on Thiruchelvam research. The Dickson’s scores and rank are presented in the two last columns.
Table 7 Top ten criterions in order of overall appearance compared with score and rank from Dickson study. Based on Dickson (1966) and Thiruchelvam, et al., (2011).
The research made by Thiruchelvam, et al. (2011), shows that Dicson’s criterions are still presented in the literature today and the Dickson’s study is the base for most of the resent studies (Benyoucef, et al., 2003). More recent comprehensive researches have been made in last decades including authors such as Roa, Ellram and Stamm. The research of Ellram is studied in more detail below, as it is widely referred research in the branch of business. (Bedley, et al., 2008)
5.1.2 Ellram criterions
Research presented by Ellram (1990), the selection criterions where studied in a broader scope and criterions where divided to a hierarchy structure. Structure was based on criterions reported by case studies. In the uppermost level the four main supplier selection criterions were: financial issues, organizational culture and strategy issues, technology issues and other issues. (Ellram, 1990) The hierarchy structure is presented in the table 8:
Table 8 Supplier partnership selection criteria (Ellram, 1990)
32
Supplier selection criteria
Financial issues
Economical performance
Financial stability
Organizational culture and strategy issues
Feeling of trust
Management attitude for the future
Strategic fit
Top management compatibility
Compatibility across levels and functions of buyer and supplier
Supplier's organizational structure and personnel
Technology issues
Assessment of current manufacturing facilities/capabilities
Assessment of future manufacturing capabilities
Supplier's design capabilities
Supplier's speed in development
Other factors
Safety record of the supplier
Business references
Supplier's customer base
Financial issues include factors such as performance and stability of the company based on an historical data available on public sources or a review of suppliers records if available. It is stated that the poor financial stability of the supplier will reduce possibilities for the development of strategic partnerships, as the supplier has to concentrate to its own survival. Organizational culture is mostly based on intangible factors such as feeling of trust, management attitude, outlook and functions between supplier and purchaser. These criterions are mostly based on a judgmental raking by purchasing managers. It can be summarised that organisational culture describes how the two firms are able to work together. (Ellram, 1990)
Technology factors include the supplier capability to design new innovations, development and speed for product changes. As a result of the research is it stated that the most usable method for ensure the technical development capabilities is a reviewing of suppliers production and development facilities. A good estimate can also be obtained by using availability and amount of technical staff into consideration when evaluating technical development capabilities. Other factors include related factors that can be used in selection criterions, such as safety record and references. (Ellram, 1990)
5.1.3 Katsikeas criterions
After the studies of Roa, Ellram, Stamm and others, a professor from Leeds University, Constanttine Katsikeas grouped criterions to more general conclusion on 2004, based on reviews of the literature in the field. (Figure 10) Criterions were: competitive pricing, reliability, service and technological capability. Although Katsikeas study was focused for the IT supplier selection, are these fundamental criterions fully relevant for all supplier selection. These criterions are presented in the figure below and all also selected for approach point of this thesis. (Katsikeas, et al., 2004)
Figure 10 The conceptual framework for purchasing decision criterions. (Katsikeas, et al., 2004)
Competitive pricing
Competitive pricing is the most common and the most citied element for traditional approaches to purchasing. “Lowest prices” has been usually the most important determinant of the purchasing decision process, especially when purchasing routine products. However resent studies have shown that more and more weight is given for other cost factors, such as quality and services. Therefore the competitive pricing is nowadays representing more overall cost than just the purchasing price. (Piercy, 1997; Katsikeas, et al., 2004)
Reliability
Reliability has been devoted by particular attention in the field. In the research different aspects of the reliability is clarified according to the supplier situation. When selecting multi-sourcing suppliers the most critical aspect is right time deliveries and production reliability, meanwhile when selecting a single-source supplier the most important aspects is the product reliability. (Katsikeas, et al., 2004)
33
Scope for reliability is also broadened by authors such as Swift (1995) for including deliveries, fulfilment of agreements and distribution. Even supplier honestly and regular communication are often counted as part of the reliability.
Service
Reliability and price have been reported as the most important decision criterion but it is stated by Katsiekas, et al. (2004) that many studies have also raised service attributes as a principal determinant in decision making process. Service offerings are emphasised especially in studies where the main focus is in performance and quality management, from where it is implemented also to the purchasing management. (Katsikeas, et al., 2004)
Service can include factors such as maintenance, installation or training etc. Also advanced delivery systems or customer service are counted as the service, where the company can archive cost reductions from other cost factors. (Katsikeas, et al., 2004)
Technological capability
The technological capability includes assessment of supplier design abilities and the speed for taking the new design into production. Supplier’s ability to move fast in the market or long term development will add value to the purchaser as technical innovations and long-term development projects can be successfully performed. On the other hand supplier without the technological capabilities may become to a burden, if the development speed is slower than market average. (Ellram, 1990)
5.2 Determining specifications
One of the most critical point of the supplier selection process is determining specifications for the request for tenders (RFQ). Although this might sounds as an obvious detail, determining a good specification will be the base for the successful supplier selection process. Poorly made specification could cause a quality decrease or limit different suppliers’ ability to tender the most suitable or lowest overall cost solution. (Morledge, et al., 2013)
Quality decreasing is based on aggressive price competition which will lead suppliers to fulfil exactly the minimum requirements which are defined in the specification. In aggressive price competition specification will become the minimum requirement and all additions will affect negatively to the tenders comparison. By going to aggressive price competition the customer will increases its own risk and also the importance of the specification. (Morledge, et al., 2013)
34
On the other hand if the customer uses strict specifications it might decrease the possibility for the supplier to offer different solution and it might limit new innovations in the field of business. Strict specification is also typically made in close cooperation with current supplier, the situation where the supplier could use its position to make the specification most suitable for its own business model. To prevent the most typical problems in the procurement process, called as pitfall, ten basic steps of are listed by Iloranta et. al. (2012) and four of those steps are preventable in the specification determining process. These four steps are studied more closely in the below. (Iloranta, et al., 2012 pp. 245-255)
Determining of the acquisition is a process of determining needs and targets of the future procurement. In this phase customer should get to know of different possibilities in the field and possible suppliers. Also in phase the scope of the procurement should be determined and how many of different pieces the acquisition should be divided.
Finding of the potentially suppliers can be made after the needs is determined and one of this phases main goals is also to find potential new suppliers and to got wide perspective of different possibilities for the specific market area.
Request for suppliers to make open proposals is a phase where the chosen suppliers can make a proposal for their solutions to fulfil the requested needs. Usually in this phase the specification can also be clarified and chanced according to the proposals.
Supplier’s methods for minimizing the risks should be made in the same phase or after the requesting of proposals. Suppliers are asked to estimate major risks concerning of the supply chain and life time of the offered product. Suppliers should also make a proposal how risks can be avoided or minimized.
To summarise it is important to have good relations with manufacturers and suppliers to have a view for changes in the field and the possibility of new innovations. To do that a constant dialogue between the purchaser and suppliers should happen. (Iloranta, et al., 2012 pp. 245-255)
5.3 Methods for supplier selection
As earlier discussed, the supplier selection is a complex multi-criteria decision and a successfully supplier selection have major impact in the company’s future success. After the selection criterions are determined one question remains: how to compare each criterion between each other and against others suppliers? To do that a systematic method for criterion comparing is a much needed tool for archiving the desirable result. (Benyoucef, et al., 2003)
35
Different supplier selection methods and tools have been into great interest of researchers and practitioners in the field of purchasing management. Broad investigations of those methods is performed, for example, by De Boer (2001), Bedley et al.(2008) and Sonmez (2006). The research performed by Bedley et al.(2008) is very board and comprehensive, and therefore the result of the study is presented below (Table 9). In the research four different category of selection methods are presented, based on the used methods.
Table 9 Different methods for supplier selection (Bedley, et al., 2008)
36
Multi criteria decision making
Mathematical programing
Multivariate statistical analysis
Artificial intelligence
AHP, outranking, judgemental modelling, multiple attribute theory
Total cost based approaches, non- linear programing, mixed integer programing, linear programing, goal programing
Structural equation modelling, principle concept analysis, confidential interval approach
Neutral network, case based reasoning, Bayesian belief network
In a research performed by Huang (2007) a different methods from business universities and engineering universities were analysed and compared. The main focus in the research was to compare different approaches from different universities. Publications from engineering schools were criticized for overemphasising the need of quantitative optimisation and overlooking the importance of qualitative factors such as business strategy integration, meanwhile business researchers were emphasising philosophical issues and supplier selection was only based on qualitative methods. It was stated that the best result could be achieved by integrating both qualitative and mathematical optimisation. (Huang, 2007)
As a result in Huang’s study it was concluded that multi-criteria methods are good for integrating qualitative and mathematical optimization methods together and such methods are already widely used in practice. Different variations of widely used multi- criteria methods such as AHP, multiple-criteria decision-making (MAUT) or multivariate outranging methods are based on structured decisions problems and both qualitative and quantitative criterions could be used similarly. It was stated by Huang that any one of these methods could be effective when used criterions are correct. (Huang, 2007)
One of the most popular methods among researchers is the AHP, which is developed by Saaty in the 1970s (Benyoucef, et al., 2003). It is a robust multi criteria decision making tool and it is also widely used among supplier selection in an industrial business.
(Bedley, et al., 2008) For these reasons, and keeping in mind the fact that the most important factor in successful decision method implementation is to have the correct decision criterions, the AHP model is selected for further studying and will be used as the selection decision tool in this thesis. (Huang, 2007)