Methods of Supplier Selection Process

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Supplier selection is the process in which firms select one or a group of supplier to acquire the necessary raw material to meet the organization’s output. Selecting the best and/or the most suitable suppliers is based on accurately identify, evaluate, and contract with suppliers to assess their capabilities. The supplier selection process contributes a tremendous amount in a firm’s financial resources. In return, they expect considerable benefits from contracting with the selected suppliers offering high value.

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Selecting the appropriate supplier involves much more than scanning a series of price lists. The decision will depend on a wide range of factors such as value for money, quality, reliability and service. How the importance of different factors are weighted will be based on the firm’ priorities and policy. A strategic approach to choosing suppliers can also help the organization to understand how their own potential customers weigh up their purchasing decisions.

This study presents the typical steps of supplier selection processes: identifying suppliers, addressing their information, evaluating the cost and value and finally selecting the potential ones. Selecting an appropriate supplier affects various functional aspects from purchase of raw materials to production and delivery of the end products. The importance of supplier selection on organizational performance is undeniable. Most supplier selection frameworks in the literature include multiple phases. As mention in Aissaoui’s study, several decision-making steps make up the supplier selection process: Firstly, a preparation step is achieved by formulating the problem and the different decision criteria. Secondly, prequalification of potential suppliers and final choices are successively elaborated. In Chou and Chang’s study four distinct phases in the purchasing and supply literature have been identified, namely, defining the problem, formulation of criteria, qualification, and final selection. Sarkar and Mohapatra developed a systematic framework for carrying out the supply base reduction process. They considered two dimensions of performance and capability. Performance of a supplier represents short-term effects and supplier capability indicates long-term effects on the supply chain. They proposed a multiphase fuzzy set approach to rank a potential list of suppliers against their performance and capability. There are four major decisions that are related to the supplier selection problem: What product or services to order, from which suppliers, in what quantities, and in which time periods? In an attempt to provide reasonable answers to the first question, some authors have studied supplier evaluation in multiproduct environments. For example, Rajan et al. developed a multiphase decision-making model to evaluate a set of suppliers for a set of products with respect to product prioritization and customer expectations. In the first phase, they use profit ratio analysis to obtain the profitability rank order for the set of products. Then, they prioritize customers using the analytic hierarchy process (AHP) in the second phase. In the third phase, they employ critical value analysis to prioritize the products based on profitability rank order and customer expectations. Next, they evaluate the set of suppliers for the set of products using AHP in the fourth phase. Finally, they use an assignment model to allocate the specified supplier for each product based on priority. Even though Rajan et al. considered a single product problem, their model could be extended to solve multiproduct problems.

The next decision concerns with which suppliers and in what quantities? The answers to these questions require identification and evaluation of the relevant supplier evaluation criteria. Dickson distributed a questionnaire among 273 purchasing agent and managers from the USA and Canada and identified 23 different criteria relative to the supplier evaluation and selection decisions. Among these criteria, price, delivery, and quality objectives of the buyer, as well as the ability of the vendors to meet those objectives, are particularly important factors in deciding how much to order from the available suppliers. Although the evolution of the industrial environment has modified the relative importance of the supplier selection criteria since the 1960s, the 23 ones presented by Dickson still cover the majority of those presented in the literature. The supplier evaluation and selection literature has traditionally held that quality, delivery, service, and cost comprise the choice criteria utilized by business customers to evaluate their suppliers. Therefore, these four criteria are assumed to provide an appropriate set of major performance measures for supplier evaluation.

Another complicating factor in supplier evaluation is the decision to buy from a single source or multiple sources. In single sourcing, all the suppliers can fully meet the buyer’s price, quantity, quality, and delivery requirements. Consequently, the only decision concerns the selection of the “best” supplier. In contrast, multiple sourcing is adopted when either none of the suppliers can satisfy the buyer’s total demands or when purchasing strategies aim at avoiding dependency on a single source. A useful approach to ensure the reliability of a manufacturer’s supply stream is to follow a multiple sourcing policy. Hong and Hayya have argued that the use of multiple sourcing, in a majority of cases especially in a just-in-time environment, reduces the overall inventory and purchasing costs. In those situations, a buyer purchases the same item from more than one supplier by splitting total demand among them. Sometimes, for reasons such as price discount offers or possible limitations on capacity, quality, delivery, or price, a supplier may not be able to satisfy the assigned demand. Therefore, in multiple sourcing, we could have a shipment or order allocation phase where the buyer may want to split the order quantity among multiple suppliers for a variety of reasons including creating a constant environment of competitiveness. In other words, we have to determine the optimal order quantity from the chosen suppliers considering vendor capacity constraints and demand requirements.

Liu and Hai attempted to provide a simple method for computing the total ranking of the suppliers and presented a novel weighting procedure in place of AHP’s paired comparison for selecting suppliers. They proposed a method called voting AHP that does not lose the systematic approach of deriving the weights to be used for scoring the performance of suppliers. The technique for order performance by similarity to ideal solution is a well-known multi-criteria method; recently, Chen et al. extended its concept to develop a methodology for solving supplier selection problems in fuzzy environments. To assess the criteria weights and the alternative ratings, linguistic variables are used for group decision making processes with fuzzy decision data. Finally, a closeness coefficient is defined to determine the ranking order of the alternatives. In another study, Chou and Chang presented a strategy-aligned fuzzy simple multi-attribute rating technique for solving the supplier selection problem in fuzzy environments. The proposed system utilizes operations management/supply chain strategy to identify and utilize quantitative and qualitative supplier selection criteria in a judgmental decision-making procedure. The final decision concerns the time period in which the product should be ordered. There are a few studies in the literature that address this question. In reality, while multiple planning period considerations contribute to the problem complexity, inventory management considerations yield a more robust procurement plan. This balances the ordering costs and the holding costs and allows for the selection of the supplier with a low ordering cost when frequent ordering is necessary due to inventory management reasons (e.g., perishable inventory). In addition, the flexibility in the purchasing schedule may significantly reduce ordering and purchasing costs especially when the buyer can take advantage of discounted prices. Our method addresses these four decisions using a systematic and structured framework. Several authors have proposed similar frameworks in the literature.

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