Vendor Selection Using Principal
Component Analysis
AUTHORS
Alberto Petroni
is a researcher in the Department of Industrial Engineering at the
University of Parma in Parma, Italy. He earned his Ph.D. degree at
the University of Padua in Italy. Dr. Petroni’s research interests
include operations management, supply chain management, and
technology management.
Marcello Braglia
is an assistant professor at the University of Brescia in Italy. He earned
his M.Sc. degree from the Politecnico di Milano. Mr. Braglia’s research
interests include combinatorial problems in manufacturing systems,
maintenance, and logistics.
Purchasing managers need to periodically evaluate
supplier performance in order to retain those sup-
pliers which meet their requirements in terms of
several performance criteria. The evaluation element
typically consists of identifying the attributes, criteria,
or factors relevant to the decision and then measuring
or rating each vendor by considering each of the rele-
vant factors. A critical part of the
SUMMARY overall supplier selection process
is the determination of the relative
importance of each of the factors. This article pre-
sents an alternative decision model to evaluate the
relative performance of suppliers that have multiple
outputs and inputs. This approach is based on a
multivariate statistical method, principal compo-
nent analysis, that uses information obtained from
eigenvalues to combine different ratio measures
defined by every input and every output. The
method has been employed to aggregate multiple
performance measures for a real-world data set of
suppliers of a medium-sized firm operating in the
The Journal of Supply Chain
bottling machinery industry.
Management: A Global
Review of Purchasing
and Supply Copyright
© May 2000, by the National
Association of Purchasing
Management, Inc.
The Journal of Supply Chain Management | Spring 2000
INTRODUCTION
During recent years, supply chain management and
the supplier (vendor) selection process have received
considerable attention in the business management
literature. In one of the widely cited articles on opera-
tions strategy, Miller (1981) classifies supply strategies
as one of the strategic operating choices.
Additionally, with the increase in use of total quality
management (TQM) and Just-In-Time (JIT) concepts by
a wide range of firms, the supplier selection question
has become extremely important. In a recent study,
Flynn et al. (1994) found supplier involvement to be
an important dimension of quality management. Banker
and Khosla (1995) classify the supplier selection process
as an important operations management (OM) decision
area. They suggest that OM research should attempt to
identify the supply chain management practices that
provide competitive advantage. Karmarker (1996) also
identifies supply chains as multidisciplinary in nature
and recommends an integrated OM-marketing
approach.
Dickson (1966), in one of the early works on supplier
selection, identified over 20 supplier attributes which
managers trade off when choosing a supplier. Since
then, a number of conceptual and empirical articles
on supplier selection have appeared (for an exhaustive
review, see Weber et al. 1991). The conceptual articles
by Ansari and Modarress (1980; 1986), Benton and
Krajeski (1990), Bernard (1989), Browning et al. (1983),
Burton (1988), Hahn et al. (1983), Jackson (1983),
Kraljic (1983), Sheth (1973), and Treleven (1987) are
examples of publications emphasizing the strategic
importance of the supplier selection process. The above
articles (and several others) highlight the trade-off among
quality, cost, and delivery performance measures in the
supplier selection process.
A number of empirical articles on supplier selection
have also appeared. Based on empirical data collected
from 170 purchasing managers, members of the National
Association of Purchasing Management, Dickson (1966)
identified quality, cost, and delivery performance history
as the three most important criteria in vendor selection.
Cardozo and Cagley (1971), Chapman (1993), Chapman
63
Vendor Selection Using Principal Component Analysis
and Carter (1990), Dempsey (1978), Hakansson and
Wootz (1975), Monczka et al. (1981), Wagner et al. (1989),
and several other authors have evaluated the relative
importance of quality, cost, delivery performance, and
other supplier attributes. According to a review of 74
articles discussing supplier selection criteria, quality was
perceived to be most important, followed by delivery
performance and cost (Weber et al. 1991). In summary,
most of the articles referenced above suggest that man-
agers perceive quality to be the most important supplier
attribute. The conceptual articles emphasize that man-
agers should not select suppliers based on low cost only
but should consider quality, delivery performance, and
other attributes.
While the supplier selection literature is rich in terms
of (a) conceptual and empirical work and (b) decision
support methods for purchasing managers, none of the
articles cited above has studied how managers actually
choose suppliers. The past empirical articles are based
on the managers’ rating of the perceived importance of
various supplier attributes. An actual choice of supplier
involves evaluating the characteristics of the suppliers
based on their attributes and selecting one or more sup-
plier(s) that best suit the needs of the firm. It can be
argued that it is extremely difficult for any one supplier
to excel in all dimensions of performance. For example,
a high-quality supplier might not be the one with the
lowest-cost components. It is also possible that the com-
ponents delivered by a particular supplier excel in a few
quality dimensions (reliability, features) while another
supplier might be superior in other quality dimensions
(durability, aesthetics). Therefore, an actual choice gen-
erally involves trade-off among the attribute levels of
different suppliers (Mummalaneni et al. 1996).
DECISIONMAKING METHODOLOGIES
In real-world situations, there exist peer groups of
vendors, which use various resources (inputs) to generate
various results (outputs). The overall performance of sup-
pliers may be measured by their inputs consumed and
outputs generated. It is desirable to combine various
inputs and outputs into one measure, such as the ratio
of aggregated outputs to aggregated inputs. This ratio
can be used to evaluate and rank the performance of
vendors.
Obviously, weights that reflect the relations of various
inputs and outputs are usually needed in order to obtain
such a single measure. In general, there are two possible
ways to determine the weights. One way is to use expert
opinions or other managerial information obtained
through the delphi, analytical hierarchical process (AHP),
or other methods, to specify the weights. Regression or
optimization techniques could also be used to find the
weights.
Willis, Huston, and Pohlkamp (1993) have proposed
an effective classification of the traditional methods for
64 The Journal of Supply Chain Management | Spring 2000
supplier performance evaluation: categorical, weighted
point, and cost ratio. According to the categorical
method, the buyer assigns either a preferred, unsatisfac-
tory, or neutral rating for each of the selected attributes
for every contending supplier. The main drawback of
this family of methods is that the identified attributes
are weighted equally. The weighted point method con-
siders attributes that are weighted by the buyer. The
weight for each attribute is then multiplied by the per-
formance score that is assigned. Finally, these products
are totaled to determine a final rating for each supplier.
The method, although less subjective than the former
method, requires that the performance measures be in
standard (uniform) units. The cost ratio method is based
on cost analysis that considers cost ratios for product
quality, delivery, and customer service. The cost ratio
measures the cost of each factor as a percentage of total
purchases for the supplier. The drawback of this method
is its complexity and requirement for a developed cost
accounting system. Also, the performance measures
(cost ratios) are artificially expressed in the same units.
Prior research has proposed various methodologies to
overcome some of the drawbacks related to these tradi-
tional methods. More specifically, numerous models have
been developed based on particular conceptual approaches
and techniques. In their classic 1991 update of Dickson’s
analysis of vendor selection decisions (Dickson 1966),
Weber et al. reviewed the literature surrounding vendor
selection criteria and identified several basic techniques
or models that appeared in studies over the previous
25 years. They found that the vast majority were linear
weighting models, mathematical models such as eco-
nomical 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
programming (Weber and Ellram 1993), total cost of
ownership (Ellram 1995), human judgments models
(Patton 1996), statistical analysis (Mummalaneni et al.
1996), interpretative structural modeling (Mandal and
Deshmukh 1994), discrete choice analysis experiment
(Verma and Pullman 1998), and neural networks (Siying
et al. 1997).
Although each of these methodologies offers advan-
tages under particular conditions, they do not provide a
generally workable methodology for combining multiple
criteria into a single measure of supplier performance.
In the present study, an alternative methodology is
proposed to aid purchasing managers in identifying and
selecting suppliers. This approach attempts to address
the need for flexible models that are highly customized
to meet an individual firm’s particular needs. This is
a multi-objective approach to vendor selection that
attempts to provide a useful decision support system for
a purchasing manager faced with multiple vendors and
trade-offs such as price, delivery reliability, and product

quality. An in-depth study of an actual application of
this methodology is provided.
PRINCIPAL COMPONENT ANALYSIS
The multivariate statistical method — principal compo-
nent analysis (PCA) — is a data reduction technique used
to identify a small set of variables that account for a large
portion of the total variance in the original variables. This
technique is also used to identify “latent” dimensions in
the data. In fact, PCA computes linear combinations of
variables. The first linear combination of variables accounts
for the largest amount of variation in the sample; the
second for the next largest amount of variance in a dimen-
sion independent of the first; and so on (Bolch and Huang
1974). PCA is also a popular ranking method in multidi-
mensional analysis, but no practical application to the
supplier selection problem has been reported in the litera-
ture. The PCA methodology has the advantage to be
fairly simple to exploit, since it has been available in “off-
the-shelf” computer packages for decades.
An alternative to PCA is confirmatory factor analysis
(CFA). Although based on a different mathematical
model, CFA can be used on the same data and produces
similar results.
In order to conduct the PCA process, new measures
must be defined for each input and each output. That
is, individual output-to-input ratios for each vendor
must be defined. The principal components for the
newly defined measures are then determined. Next, a
single measure is obtained by weighting the principal
components in terms of the information from the
eigenvalues. It can be seen that PCA gives the weights
among various output/input ratios defined by the
multiple outputs and multiple inputs of vendors. Finally,
a performance ranking of the vendors according to the
PCA scores can be constructed.
The analysis that is illustrated in the following has
been carried out by using the SPSS computer package.
ATTRIBUTES FOR SUPPLIER SELECTION
Three outputs (performance indicators) and three
inputs (supplier attributes) are used for analysis in the
following application. The traditional indicators of
product price, shipment quality, and delivery compli-
ance are used for supplier performance. Product price is
the average unit purchase lot price of a component.
Shipment quality is measured using a conformity index,
which is built as follows:
αA + βB + yC
Conformity Index =
D gram includes the design and manufacture of a range
where:
α is the estimated cost of a component rejection in
incoming quality control. It is a function of the per-
centage of defective incoming components detected
by incoming quality control.
Vendor Selection Using Principal Component Analysis
β is the estimated cost of a component rejection in
the assembly line. It is a function of the percentage of
incoming components accepted by incoming quality
control and then detected during production.
y is the estimated cost of a component rejection by
the end user. It is a function of the percentage of
incoming components accepted by incoming quality
control and the production line and then returned
by the end user.
D is the dollar value of the purchased components
in the time period.
Compliance with the agreed date can be computed as
the moving average of delayed deliveries over the last n
procurements.
The operationalization of the supplier input attributes
can be carried out based on some of the selection criteria
that are put forward in the literature. The supplier’s man-
agement capabilities, production facilities and capacity,
and technological capability have been chosen for this
application.
“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 pur-
chasing managers at the host organization were asked
to rate each supplier. The “production facilities and
capacity” attribute 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 mea-
sure. In this application, a questionnaire was developed
and submitted to the chief technical officer of each of
the target suppliers based on the suggestions provided
by the buying organizations. The measurement indica-
tors used were the ratio of the technical staff to total
staff and the ratio of the research and development
budget to sales. An overall score was obtained by calcu-
lating the sum of the relative ratios. Respondents were
also asked to report which of the technologies shown in
Table I were adopted and implemented within their
organization.
AN APPLICATION TO VENDOR RATING IN
THE PACKAGING MACHINERY INDUSTRY
In order to test its effectiveness, the methodology pro-
posed was applied to the supplier selection process of a
medium-sized manufacturer of bottling machinery and
complete packaging lines. The firm’s production pro-
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
drink, fruit juice, wine, beer, liqueur, and pharmaceutical
The Journal of Supply Chain Management | Spring 2000 65
Vendor Selection Using Principal Component Analysis

Table I components used both for rinsers and for fillers. A grip
head is a device for tinplate cans and tins and glass jars
LIST OF TECHNOLOGIES ACTUALLY IN
with tinplate caps. The component is fairly complex
USE IN THE SUPPLIER COMPANIES
from a technological point of view, since it incorporates
Technologies permanent magnets with releasing grid, plate, stem, and
spring made of AISI 304 stainless steel with hard rubber
Automated Handling
pads or, alternatively, with side polyethylene rollers.
Bar Code System Among the main features that are required of this com-
Computer-Aided Design (CAD) ponent are design excellence and highly accurate con-
Computerized Numerical Control (CNC) struction in order to ensure trouble-free and quiet
Direct Numerical Control functioning, even when running at the highest produc-
Electronic Data Interchange (EDI) tion speeds.

Computer-Aided Manufacturing (CAM)
Computer-Aided Engineering (CAE)
Rapid Prototyping Technologies (RPT)
Communication Technologies
Computer Integrated Manufacturing (CIM)
Automated Storage and Retrieval Systems (AS/RS)
industries. The company has an annual sales volume of
$43 million and employs 240 individuals (60 in technical
departments). Its major production lines include:
• Rinsing machines (820 units sold worldwide)
• Unscrambling machines (285 units sold
worldwide)
• Filling machines (60 units sold worldwide)
• Complete traditional bottling lines
• Complete aseptic filling lines
By its very nature, the purchasing function is a basic
part of business management, and the selection of com-
petent suppliers has long been regarded as one of the
most important tasks to be performed. PCA was applied
to the evaluation of the performances of the suppliers
of the so-called “grip heads,” one of the most critical
More than 20 suppliers were available in the market-
place for this type of component. The analysis was car-
ried out on 23 suppliers. Table II shows the suppliers’
attributes. These measures are the normalized values of
the three performance factors and the three input attrib-
utes previously illustrated.
Six output/input ratios for the suppliers’ attributes
were defined:
d1 = product price/technological capability
d2 = product price/management capabilities
d3 = shipment quality/management capabilities
d4 = shipment quality/technological capability
d5 = delivery compliance/production capacity
d6 = delivery compliance/management capabilities
The decision maker would like to select the supplier
that provides the best combination of the performance
parameters. In statistical terms, these suppliers are
extreme observations that lie away from the rest of the
data. Thus, a procedure that would identify outliers is
needed. Principal component analysis is a procedure
that identifies outlying suppliers regardless of the
importance the purchasing manager attaches to each
performance parameter of the vendor. Most of the vari-
ability in the data set is contained in the first few linear

Table II
SUPPLIERS’ ATTRIBUTES (NORMALIZED VALUES)

Production
Management Facilities Technological Delivery
Supplier Capabilities and Capacity Capabilities Price Quality Compliance
1 0.622 0.261 0.667 0.958 0.100 0.122
2 0.500 0.333 0.571 1.000 0.200 0.200
3 0.737 0.429 0.400 0.935 0.133 0.167
4 0.683 0.286 0.444 0.983 0.182 1.000
5 0.452 0.353 0.400 0.958 0.400 0.040
6 0.509 1.000 0.800 0.975 0.167 0.032
7 1.000 0.500 0.571 0.943 0.333 0.179
8 0.778 0.667 0.571 0.983 1.000 0.093
9 0.596 0.176 0.444 0.920 0.167 0.060
10 0.528 0.545 1.000 1.000 0.222 0.049

66 The Journal of Supply Chain Management | Spring 2000

 Vendor Selection Using Principal Component Analysis

combinations of variables, i.e., the principal components. Table III

In other words, PCA is employed to identify the principal
CORRELATION MATRIX
components that are respectively different linear combi-
nations of the performance variables so that the principal d1 d2 d3 d4 d5 d6
components can be multiplied by their eigenvalues to
d1 1.000 -0.192 0.253 -0.203 -0.278 -0.104
obtain a weighted measure of the variables.
d2 -0.192 1.000 -0.096 0.198 0.222 -0.071
The first step in PCA consists of testing whether the
d3 0.253 -0.096 1.000 0.704** -0.236 -0.121
variables show a sufficient level of correlation. To this
extent, both the correlation matrix (Table III) and the d4 -0.203 0.198 0.704** 1.000 -0.018 -0.032
Bartlett’s test of sphericity have been analyzed. The coef- d5 -0.278 0.222 -0.236 -0.018 1.000 0.900**
ficients are the usual Pearson correlations (one-tailed) d6 -0.104 -0.071 -0.121 -0.032 0.900** 1.000
and confirm that significant correlations can be found.
** Significant at the 0.001 level (one-tailed)
Bartlett’s test of sphericity is a useful instrument to
test the null hypothesis that the correlation matrix is an
identity matrix. If the null hypothesis cannot be rejected,
and the sample size is reasonably large, the decision
maker should reconsider the use of multivariate analysis,
since the dependent variables are not correlated. In this
case, the null hypothesis is rejected at the 0.001 level. Figure 1

A rule-of-thumb for determining the number of com- EIGENVALUE SCREE PLOT

ponents to extract is to consider the “eigenvalue greater
than one” criterion. The so-called “eigenvalue scree plot” 2.5
is often useful in graphically determining the number of
factors extracted (Figure 1). In the present analysis, three
components are a workable solution (since the residual
2.0
components have all eigenvalues less than 1).
Components 1, 2, and 3 account for approximately 83
percent of the total variance of the variables (Table IV).
1.5
Eigenvalue

The percentage of variance explained by each compo-

nent represents its relative importance.
The term “rotated component” in the heading in
Table IV is due to the fact that an orthogonal rotation is 1.0
usually carried out on the components that are initially
extracted. Usually, the initial component extraction
does not give interpretable results. One of the purposes 0.5
of rotation is to obtain components that can be named
and interpreted more clearly. In other words, rotation
makes the larger loadings of the different variables on
each component larger than before and the smaller 0.0 1
1 2 3 4 5 6
loadings smaller than before. There are a number of
Number of Component
different methods of extraction — here, the varimax
method has been chosen. The “rotated” loadings of each
variable on each component are reported in Table V.
The interpretation of Table V leads the decision maker
to conclude that component 1 loads on matters con-
cerning delivery compliance, component 2 loads on
matters concerning product quality, and component 3
loads on matters concerning price. Table IV
For each variable considered (d1, d2, d3, d4, d5, and TOTAL VARIANCE EXPLAINED BY THE COMPONENTS
d6), a coefficient wi (i =1 to 6) is obtained by multiplying
the loadings on each component by the percentage of Weights of the rotated component
variance explained by the component. For instance, w1 Component Total % of Variance % Cumulative
is obtained as follows: 1 1.913 31.885 31.885
w1 = 0.171 * 0.31885 + 0 * 0.28508 + 0.749 * 0.22949 = 0.2264 2 1.710 28.508 60.393
The coefficients w2 to w6 are obtained in the same way. 3 1.377 22.949 83.342
Each coefficient is then multiplied by the value of the

The Journal of Supply Chain Management | Spring 2000 67

Vendor Selection Using Principal Component Analysis

corresponding variable (d1 to d6) for each supplier to DISCUSSION ON THE MANAGERIAL
get a final supplier score (Table VI). Based on these IMPLICATIONS OF THE METHODOLOGY
scores, the final ranking is obtained. PROPOSED
Summing up, supplier number 4 ends up as the supplier In an era of global sourcing, a firm’s success often
that provides the best performances with respect to the hinges on the most appropriate selection of its suppliers.
three components identified. Supplier selection is sometimes very complicated, owing
to a variety of uncontrollable and unpredictable factors
that affect the decision. As with any decision process,
the industrial vendor selection decision involves two
basic but distinct tasks: evaluation and choice. The
Table V evaluation element typically consists of identifying the
MATRIX OF ROTATED COMPONENTS attributes, criteria, or factors relevant to the decision
(LOADINGS SMALLER THAN 0.1 ARE OMITTED) and then measuring or rating each vendor by considering
each of the relevant factors. When a supplier selection
Variable Component decision needs to be made, the buyer generally establishes
1 2 3 a set of evaluation criteria that can be used to compare
potential sources. Purchasing managers use all available
d6 0.987
attributes when evaluating supplier performance.
d5 0.946 0.247 Vendor selection decisions vary according to the pur-
d3 0.115 0.923 0.256 chasing situation. More specifically, Patton (1996) has
d4 0.918 0.282 shown that the predictive ability of the vendor selection
d2 0.778 models and the relative importance placed on evalua-
d1 0.171 0.749 tive criteria vary 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 rela-
Table VI tive relevance of the different criteria since they are
FINAL RANKING OF SUPPLIERS highly firm- and situation-specific. Nevertheless, a crit-
ical part of the overall supplier selection process is the
SCORE SUPPLIER determination of the relative importance of each of the
NUMBER factors (Ellram 1990). Further, in making their choices,
2.292 4 the purchasing managers must necessarily make trade-
1.798 14 offs among different levels of these attributes.

1.658 5 The methodology presented in this article may help to

find a solution to these problems since:
1.639 8
• The relative importance of each vendor
1.622 17
attribute and performance is determined in an
1.482 11
objective manner.
1.396 18 • Unlike most mathematical methods, individual
1.391 22 judgments and measures (i.e., Likert-type ques-
1.356 2 tionnaires) may be effectively used to collect the
1.271 12 relevant data.
1.241 20 CONCLUSIONS
1.224 13 This article describes a multiple-attribute approach
1.209 9 based on the use of principal component analysis,
1.180 19 aimed at helping purchasing managers to formulate
1.168 23 viable sourcing strategies in the changing marketplace.
An application of the methodology using actual data
1.151 16
retrieved from a firm operating in the bottling industry
1.091 3 is illustrated. PCA has proved to be capable of handling
1.066 21 multiple conflicting attributes inherent in supplier selec-
1.013 7 tion while simultaneously trading-off key supplier selec-
0.974 15 tion criteria.
0.937 10 PCA’s strength is in simultaneously considering multiple
0.915 1 inputs and multiple outputs without any need for a priori
assignment of weights. PCA also has a distinct advantage
0.857 6

68 The Journal of Supply Chain Management | Spring 2000


over the traditional methods of evaluating suppliers’
performances in that it is not necessary to state the
performance measures in the same units. The relevant
attributes of suppliers can, in fact, be measured in any
unit such as money, percentages, and qualitative subjec-
tive judgments. Furthermore, since PCA does not force
the decision maker into a standardized rating for the
attributes, this technique is less subjective than the
traditional methods.
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