Purchasing and Procurement: Individual Assignment

Topic: State and discuss the importance of “Supplier Selection”

1. Introduction

In order to survive in current competitive environment, it is essential to organization to

provide high quality products and services at lower cost and shorter lead time. However, it

is not practicable to achieve these goals without the right input products from the right

suppliers. As a result, selecting appropriate suppliers becomes one of the most important

aspects of purchasing and supply chain management for many industries (Punniyamoorty,

Mathiyalagan, and Lakshmi 2012). Selecting the right supplier has a direct and positive

impact on firm’s performance, as well as helping buying firms to achieve long-term

competitive advantages and gain added value from the supply chain. On the other hand,

wrong supplier selection decision can result in adverse impacts, hurting firm’s performance

and image, and even causing unexpected operation disruption. This essay will first quickly

define supplier selection, then discuss its importance and finally present several insights of

supplier selection approach.

2. Definition of Supplier Selection

Supplier selection is considered as one of the most important responsibilities of supply

professionals. Supplier selection is a decision-making process that involves trade-offs

among multiple criteria, which may also be conflicting, in order to select the most

appropriate supplier for the continuation of organization’s performance(Cebi and

Bayraktar 2003). Supplier selection is a complicated process where supply professionals

have to solve two major problems. First is how to select the right set of criteria which are

appropriate with business priorities and strategies for effectively evaluating potential

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suppliers. Second is which model use to analyze data in order to achieve the most

favorable result. These problems will be discussed in details in later section.

3. Importance of supplier selection

Given the fact the almost any type of business requires some sort of inputs from different

suppliers to operate, how to select the right supplier has become a common issue for every

organization. In general, supplier has to be select very carefully because it can have a very

positive or a very adverse impact on the overall performance of the organization.

If poor decision is made, firm’s performance might suffer due to defective material, long

order lead-time, high cost, and probably damaging firm’s reputation. Actually, experience

suggests that many errors have been made concerning the supplier selection decision and

the total cost of incorrect supplier selection decisions can run into multi millions of USD

per year (Carter et al. 2010). Typical evidence is the recent safety recall by Toyota of 2.3

million vehicles due to a problem with accelerator pedals provided by CTS Corporation.

The recall has significantly damaged the reputation of Toyota in terms of an excellent and

consistent quality automobile manufacturer.

On the other hand, successful supplier selection decision will result in positive impact to

buying firm’s performance. The findings of Kannan and Tan (2006)research showed a

positive and direct influence of supplier selection on the success of buyer-supplier

relationship, and such relationship will positively affect buyer performance. It helps buying

firms to provide better product quality at lower price and shorter lead time, as well as

increasing firms’ competitive advantages.

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 Purchasing and Procurement: Individual Assignment

Moreover, selection of the right supplier becomes more important today than ever before,

since most firms are integrating their business into the supply chain and pursuing

innovative strategies. For example, in order to enter into long-term collaborative

relationships with a single source of supply, firms must devote a large amount of resources

to carefully select the strategic partner who is willing to make a similar commitment to the

relationship and to work together to create value with a supply chain (Burt, Petcavage, and

Pinkerton 2010). The supplier selection then holds a critical importance because the

benefits of such collaboration are many, but the risks are great, the success of such

collaboration depends largely on the quality of supplier selection decision. Likewise,

supplier selection has a very similar level of important when firms involve their suppliers

early in the development of new product, or decides to pursuit just-in-time manufacturing

practices.

Finally, the supplier selection becomes even more important when organizations pursuits

global sourcing strategy. Global sourcing is becoming a popular trend for companies to

stay competitive by sourcing lower cost raw materials and goods. In the United States,

about one half of all raw materials for American manufacturing are sourced overseas and

the number are even higher for those businesses in apparel and footwear, consumer

packaged products and high-tech electronics(Kumar, Hong, and Haggerty 2011).

Consequently, how to deal with often unfamiliar and unproven foreign suppliers is more

complicated and risky than traditional domestic sourcing. The techniques and practices

used in selection of a domestic supplier may not be sufficient for selecting a global

supplier. In fact, firms must devote a significant more amount of resources to select the

most appropriate foreign suppliers in order to avoid disruption and unsatisfactory as well

as to contribute to the firms’ competitive advantages. Min (1994) indicated several

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 Purchasing and Procurement: Individual Assignment

problems firm can encounter if the selection goes wrong such as mounting material costs,

litigation, shoddy product quality, transport delays, production bottlenecks, countertrade

obligations, and exchange rate fluctuations.

Among the global sourcing activities, there has been a phenomenon trend towards sourcing

from emerging markets such as Asian and Central/East European countries. While low cost

may stand for the most important driver and enables firms to benefit cost advantages, other

factors such as quality, technology, stability, delivery, etc. may suffer. Therefore, the level

of risk associated with these aspects when sourcing from emerging markets increases

significantly. In such scenario, supplier selection plays a particular role not only in

selecting the right supplier but also in risk management to reduce supply chain risks (Li

and Barnes 2008). Li and Barnes (2008) suggest applying proactive risk management into

supplier selection process when sourcing from emerging countries to reduce, control or

remove risk sources coming from suppliers and suppliers markets. The risk sources are

defined in the research as factors associated with supplier failure, and risk consequences as

unexpected negative impacts on quality, delivery, lead time and cost of the purchasing. By

analyzing sourcing experiences from five Western-based manufacturing companies, the

research discovered the proactive risk management methods to be incorporated into

supplier selection process include: conducting a supplier questionnaire covering a wide

range of business dimensions, performing a technical review, using a mitigation plan and

employing local-based procurement staff. The supplier questionnaire or a technical review

needs a more thorough check list when selecting the final supplier from emerging markets

than from traditional markets. The next section will discuss in more details about which

approach and technique firms should adopt to better select the right supplier.

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 Purchasing and Procurement: Individual Assignment

4. Approach to supplier selection

Since the practitioners recognize the importance of supplier selection to the overall

performance of buying firms, many researches have been conducted to develop numerous

selection criteria and selection methodologies for supplier selection.

The empirical studies (Table 1) identified quality, delivery and historical performance as

the three most important criteria in supplier selection, followed by guarantee and

compensation, equipment and capability, and price. This classification is highly different

with the traditional practice focusing mainly on low cost factor when selecting supplier.

As the supplier selection is a typical unstructured decision-making process involving

multiple criteria, it is very important that evaluation criteria must cover both tangible and

intangible, quantitative and qualitative, operational and strategic factors. However, since

each company has its own business priorities and strategies, it is difficult to have one set of

evaluation criteria that suits every buying firm’s requirements. However, the research

ofNdubisi et al. (2005) presented some interesting insights of different drivers in supplier

selection of manufacturing companies. The study found that manufacturers who

concentrated on product and launch flexibility placed an extremely attention to technology

factor. Nevertheless, when the manufacturers focus on volume flexibility, quality becomes

strategically important. Moreover, Chen (2011)suggested that at the first stage of supplier

selection process, enterprise should analyze its competitive strategy using SWOT method

to identify a foundation for establishing evaluation criteria and indicators. Through the

process of analyzing internal organizational strengths and weaknesses, as well as external

environmental threats and opportunities, enterprise will be able to clarify its priorities and

strategic requirements. By this way, firms can go beyond traditional operational selection

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criteria to select supplier with similar strategic orientation and commitment to meeting

shared goals and objectives (Kannan and Tan 2006).

Evaluation criteria Dickson importance ranking Weber importance

Quality 1 Extremely important
Deliver on time 2 Very important
Historical performance 3 Very important
Guarantee and compensation 4 Very important
Equipment and capability 5 Very important
Price 6 Very important
Technical capability 7 Very important
Financial situation 8 Very important
Procedure legality 9 Very important
Communication system 10 Very important
Industrial reputation 11 Important
Business relations 12 Important
Management and organization 13 Important
Production control ability 14 Important
Maintenance service 15 Important
Service attitude 16 Important
Previous image 17 Important
Packing ability 18 Important
Employment relations 19 Important
Geographic location 20 Important
Previous sales 21 Important
Training ability 22 Important
Mutual negotiation 23 Important
Table 1: Important criteria for supplier selection from literature (Chen 2011)

After evaluation criteria have been identified, firms must employ an analytical

methodology to evaluate supplier’s performance and make final decision. Chen (2011)

summarized various methods might be used by decision makers as illustrated in Figure 1.

He suggested that decision methods used for pre-qualifying suitable supplier included

categorical methods, EDA, cluster analysis, and case-based reasoning systems. Decision

models for the final choice phase comprehended the linear weighting, total cost of

ownership, mathematical programming, and statistical and artificial intelligence-based

models.

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 Purchasing and Procurement: Individual Assignment

Supplier
Selection
Methods

Single Model Combined Model

Artificial
Mathematics Single Model AHP + GP
Intelligence

Analytic
Neural Networks
Hierarchy Process Cluster Analysis AHP + LP
(NN)
(AHP)

Linear
Multiple Software Agent
Programming AHP + FST
Regression (SA)
(LP)

Multi-Objective
Discriminant Case-Based
Programming DEA + MOP
Analysis Reasoning (CBR)
(MOP)

Total Cost Expert System

Conjoint Analysis
Ownership (TCO) (ES)

Goal Pricipal
Fuzzy Set Theory
Programming Component
(FST)
(GP) Analysis

Data
Envelopment
Analysis (DEA)

Simulation

Heuristics

Figure 1: Existing analytical methods for supplier selection (Chen 12)

As illustrated in Figure 1, there is a wide range of single model that firms might employ to

supplier selection process. However, given the fact that each model has its limitation, using

the result of a single model as a basis for making the final decision could lead to biased

decision (Ordoobadi and Wang 2011). For this reason, it is necessary that firms are able to

apply multiple perspectives approach rather than a single model, which ensure the quality

of the decision-making process and the reliability of the decision itself. Such approach is

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strongly supported by many researchers. For example, Cebi and Bayraktar (2003) proposed

an integrated model of goal programming (GP) and analytic hierarchy process (AHP)

including both quantitative and qualitative conflicting factors. In addition, Kamanathan

(2007) suggested an interesting way of combining the objective and subjective information

provided by the results of the total cost of ownership (TCO) and AHP approaches through

the application of data envelopment analysis (DEA). The model uses the total cost of

ownership to consider the quantitative factor of cost, and the AHP to consider a mix of

qualitative factors. Ting and Cho (2008)presented the use of AHP to select a set of

candidate suppliers and multi-objective linear programing (MOLP) to allocate the optimum

order quantities to the candidate suppliers. Ho, Dey, and Lockstrom (2011), on the other

hand, suggested usingquality function deployment (QFD) to translate the company

stakeholder requirements into multiple evaluation factors for supplier selection, then

employ AHP to determine the importance of evaluating factors and preference of each

supplier with respect to each selection criterion. Finally, Punniyamoorty, Mathiyalagan,

and Lakshmi (2012)also supported the application of multiple perspective approach by

developing an integrated model using structural equation modeling (SEM) and analytic

hierarchy process (AHP) for the selection of suppliers.Obviously, an integrated approach

of combining multiple analytical models is an essential methodology that supply

practitioners should consider.

However, since the supplier selection is a critical process that significantly influence firm’s

performance, the integrated approach only best worked through with a cross-functional

team (Kumar, Hong, and Haggerty 2011). The team with representatives from various

functional departments such as sourcing, finance, production, quality control can enable

knowledge sharing and help to develop a balanced and holistic consideration of the

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requirements. In addition,Ho, Dey, and Lockstrom (2011)suggested that besides these

internal stakeholders, the integrated approach can also involves external stakeholders such

as customers, publics, and government so that the sourcing decision can be made more

strategically and effectively.

5. Conclusion

Supplier selection is a complicated decision-making process which identifies and evaluates

the trade-offs between multiple evaluation criteria in order to select the most appropriate

supplier. Since such decision can result in very positive or very adverse impact on firm’s

performance, it needs to be taken very carefully. Once the right supplier is selected, it can

help firm to stimulate its performance and achieve business strategic plans. The importance

of supplier selection becomes even more significant when firm pursuits innovative supply

chain management strategies such as strategic alliance, early supplier involvement, just-in-

time, and global sourcing. However, the process of selection requires firm to devote a

significant amount of resources to identify appropriate evaluation criteria and analytical

methodology. They must go beyond the traditional operational practices to employ an

integrated approach of multiple analytical methods by a cross-functional team to evaluate a

multiple selection factors. Combining all these efforts, firm will be able to direct all its

purchasing activities toward opportunities to gain competitive advantages and added value

from its supply chain.

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Reference

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