Tuesday, March 13, 2012

Supplier selection using a multi-criteria decision aid method

This article applies MCDA to the selection of vendors and suppliers for business and manufacturing firms by replacing the "Courses of Action" with suppliers available to the company. The idea came out of the growing push for "lean" supply and production as a way to speed up the selection of suppliers while still choosing the right one. The article specifically addresses issues of weighting variables through the use of simultaneous change of weights, developing a sensitivity analysis. This sensitivity analysis checks the how sensitive the weighted variables are and how they could change analytic results. The method developed was then applied to an Italian public road and rail transportation firm.
The authors of the article note that decision makers now have a wide set of criteria for selecting suppliers and a single-objective model is impractical for businesses as they weigh various necessary criteria. These multiple criteria make a multiple criteria decision aid necessary for choosing suppliers. The authors identify key criteria such as product quality, cost, delivery times, and reliability, but also leave room for more options depending on the business. The article identifies clear trade-offs between variables like quality and cost, and prioritizes proper weighting based on the need of the firm.
Since the subject of supplier selection made simple out-ranking methods suitable, the authors chose to use the PROMETHEE method. This method allows for the use of "psuedo-criteria" as well as real criterion in comparing both quantitative and qualitative measures for criteria. The PROMETHEE method also provided more flexibility and a higher stability of results.
In the development of a weighting method for criteria in selecting a supplier, the authors found that most methods were either too arbitrary or limiting and required additional sensitivity analysis to test the influence of the weights. In addition, multiple decision makers in a company may weight criteria differently, resulting in conflicts. The authors' solution was to use a rank-order weighting, where the group ranks the criterion by priority and then these are weighted by giving them values. The authors chose the values by using an algorithim where the sum of the set of numbers will be equal to one, where the highest ranked criteria received the highest value and so on.
The authors then applied this technique to a simplified supplier selection problem faced by an Italian public road and rail firm. The firm was looking to choose one of three possible suppliers and their criteria were:
-Mark up, overhead, and cost of doing business
-Prototyping time
-Processing time needed to develop designs
-Design revision time
-Co-design and the supplier's effort within the project
-Technological levels
Based on rankings, these criterion were maximized or minimized in value. The results showed that the third supplier proved to be the best compromise choice. While they excelled in only one criterion (Co-Design), this value was highly weighting and they also ranked fairly well in other factors. On the other hand, the other two suppliers ranked well in other criteria, but these had lower weights. In the ensuing sensitivity analysis, the weight values were shifted (but priority rankings for criteria were still maintained). The authors found that several criteria consistently grouped together while conflicting with other groups of criteria, meaning that these groups stayed clustered in their results. In the end, the third supplier came out as the best choice 50 % of the time while other suppliers consistently ranked lower, validating the results of the study.
The article provides an example of how to use MCDA as a means of choosing suppliers and vendors for a company. It does this by providing an outranking weighting system through the use of the PROMETHEE method and a sensitivity analysis to confirm results. The approach is intended to help decision makers deal with supplier selection where performance criteria can actually be in direct conflict (quality and cost), and where there are multiple decision makers involved. The authors' running of multiple assessments created weights generated at random (and then reordered according to rank) allowing for the performance of sensitivity analysis as well as a verification of initial results. The advantages of this method is its relative simplicity and that the only needed consensus within a group of decision makers is the relative priority of criteria.
While this method and application of MCDA is a little complex (compared to other methods, especially in intelligence analysis), it removes some of the flaws of arbitrary weighting and allows for easier group consensus. In addition, the running of multiple tests using different weights can strengthen and confirm findings while testing the validity of rankings. The method this article suggests seems well-suited to the issue of supplier selection.
Dulmin, R., Mininno, V. (2002). Supplier selection using a multi-criteria decision aid method. Journal of Purchasing and Supply Management, 9 (4), pp. 177-187.

1 comment:

  1. Did the article discuss the PROMETHEE method and how to use it, or just that it was used. I'd be interested in knowing more about the methodology.