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Supplier selection and evaluation are critical functions that favor the success of an organization. Professional literature contains several approaches including four methods of supplier contractors to objectively evaluate suppliers. The current research proposal will focus on the following areas: description of the process of supplier selection, analysis of the methods of the choice of supplier and examination of advantages and disadvantages of existing approaches to this subject.
State University – Higher School of Economics
Faculty of Management
Department of Logistics and Supply Chain Management
Supplier selection problem: approaches and methods
Project proposal
by E. Samoylova
Group № 420
Research advisors
A.P. Kashperskaya
I.Y. Bukina
Moscow 2009
Abstract.
Supplier selection and evaluation are critical functions that favor the success of an organization. Professional literature contains several approaches including four methods of supplier contractors to objectively evaluate suppliers. The current research proposal will focus on the following areas: description of the process of supplier selection, analysis of the methods of the choice of supplier and examination of advantages and disadvantages of existing approaches to this subject.
Supplier selection is one of the most important decision making problems, since selecting the right supplier significantly reduces purchasing costs and improves corporate competitiveness. In this regard, buyer-supplier relationships are based on the price factor that hadn’t been appropriate in supply chain management recently. Therefore, the major focus of the paper will be on the efficiency and relationship.
The project proposal includes four sections: introduction to the study, review of the literature, methodology, report on the results anticipated and conclusion.
The first part of the proposal gives a general background to the process of supplier selection, identifies the main problem, describes professional significance of the study, determines the scope of the research and presents key terms used in this study.
Background of the study.
Supplier selection is a popular topic today. Firms are using effective models to support their multiple manufacturing goals such as flexibility, cost, quality and delivery. In today’s competitive and uncertain environment, the flexibility of supplier selection is crucial in satisfying customers’ changing needs.
Purchasing process represents a chain of interconnected activities. It begins with drawing up demand and finishes with practice the al supply of the demanded goods. The goods should be delivered in the necessary quantity, and of satisfactory quality, and with the observance of the set terms. And the most important thing which can also appear to be a limiting factor is stipulated conditions. Thus, the purchasing process comes to an end with accomplishing of the order made on the basis of available demands to a concrete supply contractor. Therefore, it is necessary for the purchase requests to be formulated correctly and to be done in due time. Supply contractors should be correctly chosen and the contracts with supply contractors should be correctly done and accomplished in due time.
Planning purchasing activities and delivery begins with the choice of supply contractors corresponding to a given demand. Identification and close examination of purchase and delivery sources are not the actions that could be done just in the very beginning of all processes. It should be rechecked regularly based on various sources of information. A detailed classification of suppliers can be seen in Table 1 in the Appendix. Therefore, a variety and a great number of potential supply contractors for required production make a problem of choice quite important. The choice lies within those suppliers who can efficiently and successfully plan and implement their customer’s production and marketing activities.
In general, the problem of supplier selection can be divided into three stages:
Table 2 describes schematically the process of decision making with regard to the supplier selection. For more detailed information refer to the Appendix.
As shown on the table, the closing stage for decision-making regarding the choice of the supply contractor is determined by their rating and ranging. However this process is ambiguous, subjective and informal in character. Michael Lindere and Harold E. Phiron (2005) pay a special attention to the informal character of rating suppliers. They say that personal contacts, professional meetings and conferences, as well as mass media relations play a pivotal role in rating suppliers.
It is agreed that any organization depends on the customer satisfaction, therefore, any changes in the contract should be:
The second issue of great importance is how to choose the appropriate supplier. In general, tenders are used to identify the best supplier among the number of competitors. The tenders are used to optimize cost, quality and deadlines. However, practitioners and researchers say (Krepkii (2005), Lankin (2006)) that Russian companies lack the culture of tenders in choosing the supplier. Generally, the tender documentation is complex and it allows the participants to reflect the characteristics of business processes, cost, price, deadlines, quality and quantity guarantees, and other details.
It should be mentioned that despite the fact that the topic of supplier selection is quite popular, there is a considerable shortage in literature devoted to practical implications of supplier selection models and deep analysis of various approaches to supplier contractor.
Problem statement.
The primary aim of the proposed research is to investigate current available supplier selection methods and evaluation models and determine their potential for supply chain management. The second objective is to determine the required variables in evaluating supplier performance for supply chain operations and to develop a supplier selection and evaluation model based on this selected variables.
There will be four questions to address in this study based on the main objectives:
Professional significance of the study.
The problems raised in this study will be of great significance for all those who are engaged in the process of identifying and selecting suppliers for their companies. In particular, this research will be useful for the companies entering new and thus, ambiguous markets, for supply chain managers of entry and middle level who consider advantages and disadvantages of approaches to supplier contractors. Finally, this research may be interesting to those who study the topic of procurement in general and its correlation to the choice of supplier.
Moreover, the research will contribute a lot to the understanding of general processes which lie behind the choice of effective and thus, profitable suppliers and to the deeper analysis of the approaches to supplier selection.
Delimitations of the study.
The study findings will be limited by the number of professional literature and researchers available. As the literature review has shown, there are very few research materials which examine closely the problems of the procurement process in relation to the choice of supplier. The literature body available focuses mainly on concrete existing industries, such as engineering, textile industry and others. However, the assessment of comparative models lacks considerably. This is another limitation of the proposed research. Different approaches to this issue vary considerably from one author to another depending on his or her country of origin and previous professional experience. A variety of approaches and multiplicity of criteria on this topic makes it difficult to draw a general or universal method to identify the appropriate supplier.
Another limitation of this study concerns the means of data collection. This research widely uses secondary data collection tools which are of non-quantitative character. A quantitative, investment and economic evaluation of potential suppliers, as needed by the practitioners to make decisions is not considered in this study.
Finally, great difference between European approach to the efficiency of supply chain management and traditional Russian buyer/supplier relationship will constrict the bounds of this research.
Definitions of key terms.
Supplier – is a term used to refer to:
Supply chain - A supply chain or logistics network is the system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to the end customer.
Purchasing refers to a business or organization attempting to acquire goods or services to accomplish the goals of the enterprise. Though there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations. Typically the word “purchasing” is not used interchangeably with the word “procurement”, since procurement typically includes Expediting, Supplier Quality, and Traffic and Logistics (T&L) in addition to Purchasing.
Procurement is the acquisition of goods and services at the best possible total cost of ownership, in the right quantity and quality, at the right time, in the right place and from the right source for the direct benefit or use of corporations, or individuals, generally via a contract.
II. Literature review
A considerable amount of valuable work on supplier selection gives a solid grounding for the theoretical basis to the research. This part of the review will consist of two parts. The first part will describe major methods of supplier selection widely used by practitioners. The second part of the review will analyze other existing methods, which are possible to use in practice. However, they are limited to a particular segment of business.
Within the context of procurement marketing the supplier management process is responsible for the arrangement of the supplier/buyer connection. According to Arnolds (1998) the most widespread method of supplier selection is the method of rating estimations. He identifies the basic criteria for the choice of the supply contractor, and establishes the importance b y the means of expertise. For example, let us assume that it is necessary for an enterprise to purchase goods, and its stock shortage is not allowed. Therefore, the major criteria will be reliability of delivery. Relative density of this criterion will be the greatest.
The model is shown in Figure 1.
Criteria for choice |
Relative density of criteria |
Estimation value of criteria on 10-grade scale |
value of criteria on 10-grade scale multiplied |
1. Reliability of delivery |
0,30 |
7 |
2,1 |
2. Price |
0,25 |
6 |
1,5 |
3. Quality of goods |
0,15 |
8 |
1,2 |
4. Terms of payment |
0,15 |
4 |
0,6 |
5. Possibility of off-schedule deliveries |
0,10 |
7 |
0,7 |
6. Financial condition status of the supply contractor |
0,05 |
4 |
0,2 |
Total: |
1 |
6,3 |
The value of rating is calculated by each criteria multiplied by product of relative density criterion and its expert grade estimation (for example, on 10-grade system) for the given supply contractor. Further, we summarize the received rating value based on all criteria and receive a common rating for the concrete supply contractor. Next, we compare the received value of a rating for different supply contractors and determine the best partner. If the rating estimation yields identical results for two and more supply contractors by the basic criteria, the procedure should be repeated using additional criteria. It is also necessary to note here, that sometimes it is almost impossible to obtain objective data necessary for the work of experts.
Another important method for the supplier choice was developed by Kotler (2002). This method can be called “a method of missions” or the method of expenses estimation. The research process of supply is divided into several possible variants or “missions”. And for everyone all expenses and incomes are carefully calculated. As a result the data obtained is used for comparison and to choose variants of possible decisions or “missions”. For each supply contractor all possible costs and incomes (logistics risks) are carefully calculated. Then the most efficient supplier of all variants (missions) is chosen by criteria of general profit.
In the essence, this method is a version of ranging methods based on cost criteria. The method is interesting from the point of c
Finally, Khurrum S. Bhutta and Faizul Huq (2002) identify another method, which is cost efficiency and allows determining the cost of the choice of the supply contractor. It should be noted, that this method requires a great volume of data and the analysis of incoming information flows on each supply contractor.
The third approach on the supplier choice is the method of dominating characteristics. This method was first described by Fahrmeir (1996). It focuses on one chosen criteria: lowest price, best quality, schedule of delivery, greatest trust, etc. The advantage of this method called the method of category of preference lies in simplicity. However, the method ignores other important factors and criteria of selection. In this case an estimation of the supply contractor including the choice of a way of its estimation depends on the information which flows down from many divisions of a firm. Engineering services shape the estimation of capability of the supply contractor to manufacture highly technological goods and can competently evaluate their quality. The dispatching office reports on a time of delivery of purchased material resources. The industrial departments report on simplicity and convenience of using material resources in production. Such method means presence of the extensive and various information from the variety of sources which allows to consider each factor on one level with the other factors. For the firm, any factor can be a key factor, for example, simplicity in the use of goods in production.
Michael R.Lindere and Harold E.Firon (2005) give particular attention to an informal estimation of the supply contractor workers of the buyer company which include an estimation of personal contacts between the supply contractor and workers of departments, the information received from conversations at professional meetings, conferences and in mass media. The informed worker has similar information on supply contractors and always notices how the new information affects the general estimation of the supply contractor. Currently, almost all estimation of available sources of supply is performed at the informal level. They continue to argue whether or not "informal" approach when customers and departments of purchases are in personal contact on daily basis, and there is a fast feedback on the efficiency of the supply contractor, is quite proved and useful.
Different sets of criteria for supplier selection have been worked out by Dickson (1966), who presented 23 supplier selection criteria that were taken into consideration during the decision making process. Later, Wind and Robinson (1968) reported that most vendor selection decisions involved multiple criteria and since then several articles have been published for supplier selection. Verma and Pullman (1998) stated that supplier selection literature is rich in terms of conceptual and empirical works and decision support methods for purchasing manager as well. Weber and Ellram (1993) used multi-objective programming for supplier selection. Ghodsypour and O’Brien (1998) proposed an integrated AHP approach and linear programming (LP) approach as supplier selection decision support system. In their recent work, they proposed mixed integer non-linear programming model to solve the multiple sourcing problem, with multiple criteria and with suppliers’ capacity. Akbari Jokar (2001) identifies several significant elements for a multiple criteria approach for strategic supplier selection and proposed a mathematical model maximizing the total utility of the supplier with respect to supplier and buyer constraints. In addition to these articles, data envelopment analysis (DEA) was used as a mathematical programming tool for supplier selection.
As we have seen, the extension to which the theoretical background is analyzed is great and the opinions vary considerably. However, most of the companies can improve their competitive advantage by means of good supplier management. Hence, supplier selection should be performed by a systematic and scientific approach. During the supplier selection process, the purchasing manager should take into consideration strategic and operational factors as well as tangible and intangible factors.
This part of the proposal explains the methods used in carrying out current study.
Desk research or secondary data collection is the main research tool of this project. The study will be focused on examining the literature on the subject. Some complex data will be presented in tables and some nonlinear relationships will be shown in figures.
The data will be analyzed using comparative approach to data analysis. This approach is a powerful way to explain differences and show similarities. In regard to this research this approach is useful because it allows to identify strong and weak points of each existing decision making model and find the core elements and combine them into the best model for supplier contractor.
It should be noted here that several case studies and company overviews will be used to generalize on the topic. It will serve to exemplify our analysis and make it more tangible. In addition, expert commentaries and interviews will be used to support the analysis of existing approaches to methods of supplier selection.
This part of the research proposal identifies the results which are likely to be obtained with the methods mentioned. As it was mentioned above the main objective of the research is to examine current available supplier selection methods and evaluation models and determine their potential for supply chain management. Therefore, it is anticipated that this paper will identify and describe the advantages of the widely used methodological tools that help to categorize the efficiency of suppliers. It is expected that this research will be able to find the main determinants which will allow a logistics manager to sort out qualified suppliers. Secondly, the findings of this study will describe the key methods of supplier selection. Finally, it is anticipated that this research will suggest new models and approaches to supplier selection in purchasing.
The data will be presented in charts, tables and non-linear equations. The appendix will include existing classification of suppliers and criteria for supplier selection. More data is needed for a graphical representation of the suppliers.
The theoretical background of this study will have a great impact on the discussion of the supplier selection process in general, and will be widely used by practitioners in particular. However, additional research is needed to provide a basis for the empirical data and a more systematic approach to supplier rating method is needed.
References
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