Supplier Evaluation Using AHP

Supplier Evaluation using Analytic Hierarchy Process (AHP)

BySubhani ShaikM.Tech 2nd Year, 05IM6013Dept. of Industrial Engineering and Management.IIT Kharagpur.

Under Guidance of Prof. V.N.A. Naikan

Company Information

Problem Definition

Project Objective

Project Scope

Methodology

Literature

As-Is Process Map

Data Collected

Analysis

Work Completed

Future Plan of Work

Company Information

Honeywell Technology Solutions Lab (HTSL) is an integral arm of

Honeywell International.

HTSL provides value to Honeywell businesses through Product

Solutions, New Product Introduction, Advanced Research &

Technology and IT & Business Process Solutions.

HTSL supports and develops products in two key areas of Honeywell

businesses. 1. Aerospace 2. Automation and Control Solutions.

Company Information…

In Aerospace HTSL develop and support ‘safety critical aerospace

systems’ like Flight Management Systems, Flight Panel Displays,

and Engine Control Systems to its aerospace clients Airbus and

Boeing.

In Automation and Control Systems , HTSL products are Access

systems , Burglar Alarms, Switches and Sensors.

HTSL also develops necessary IT & Business Process Solutions

for its products.

Problem Definition Honeywell Technology Solutions Lab (HTSL), Bangalore is a Product

Development and Research Lab. For its new product development, the

company is forecasting the demand for its customers. The designers

are developing drawings for each part of a product using computer aided

techniques like CAD. HTSL is sending its part drawings to its different

suppliers for their prototype development. The suppliers are

manufacturing prototypes as per the drawings provided.

In Honeywell there is no proper system to evaluate the prototype

suppliers based on their performance.

HTSL needs proper system to evaluate its prototype suppliers.

Project Objective

Evaluation of prototype suppliers based on their performance.

The dissertation work covers the evaluation of prototype

suppliers of mechanical components of Sensing & Control

department.

Project Scope

Methodology

Find the current process of evaluation of suppliers

Identify the key supplier performance factors

Identify the methods to measure supplier performance factors

Data collection from the existing system

Analyze the data collected

Measure supplier performance factors

Identify best method to evaluate overall performance of suppliers

Find the overall performance of the suppliers

Ranking the suppliers based on their overall performance

Review supplier performance continuously

Literature

Key Supplier Performance Factors

Supplier Evaluation Methods

Performance Factor - Quality

Performance Factor - Delivery

Performance Factor - Cost

Performance Factor - Service

Literature : Key Supplier Performance Factors Quality

Delivery

Cost

Service

Supplier Management Capability

Overall Personal Capabilities

Financial Capability and Stability

Information System Capability

Environmental Regulation Compliance

Supplier Purchasing Strategies and Policies

Long Term Relationship Potential

Literature : Supplier Evaluation MethodsMethod Reference Quantitative /

Qualitative Parameters

Advantages Disadvantages

Categorical Timmerman(1986)

-Quality-Delivery-Service-Price

-The evaluationprocess is clear and systematic-Inexpensive-Requires a minimumPerformance data

-Attributes areWeighted equally-Subjective-Imprecise

WeightedPoint

Timmerman(1986)


-Attributes weighted by Importance

-Subjective-Difficult to effectively consider qualitative criteria

Cost Ratio Timmerman(1986)


-Subjectivity is reduced-Flexibility

-Complexity and requirement for a developed cost accounting system-Performance Measures (cost ratios) are artificiallyexpressed in the sameUnits

Literature : Supplier Evaluation Methods…

Method ReferenceQuantitative /Qualitative Parameters

Advantages Disadvantages

Total cost of ownership

Ellram(1995)

-Price-Quality Costs-Unreliable Delivery Costs-Transport Cost-Ordering Cost-Reception Cost-Inspection Cost

-Substantial Cost savings-Allows various purchasing policies to be compared with one another

-Complex

AnalyticHierarchy Process(AHP)

Nydick & Hill (1992)

-Quality-Delivery-Price-Service

-Simplicity-Captures both qualitative and quantitative criteria

-Inconsistency on the method

Principal Component Analysis

Petroni &Braglia (2000)

-Quality-Delivery-Price-Reliability

Considers simultaneously multiple inputs and outputs without priori assignment of weights

-Knowledge of advanced stati-stical method is required

Neural Networks

Wei(1997)

-Performance-Quality-Geography-Price

-Saves a lot of time and money of the system development

Lack of experts and Requires a software

Literature : Performance Factor - Quality

Traditional Definition : Quality means fitness for use.

Modern Definition : Quality is inversely proportional to variability (Douglas C. Montgomery)

Quality can be measured in one of the following ways:

1. Defective Parts Per Million ( PPM)

2. Sigma Quality Level / Process Sigma

3. Process Capability

4. Rating Method

PPM for Continuous Data :

Let p= Prob. that produced items not meeting requirements

p= P(X<LSL ) + P(X>USL)

PPM =p * 1,000,000

PPM for Discrete Data :

Total no of defective itemsPPM = ------------------------------ X 1,000,000 Total no of items produced

Literature : Performance Factor – Quality…

Sigma Quality Level / Process Sigma

Six Sigma Quality Level means “All parts or processes within six standard deviations on each side of mean are acceptable. “

For the given Six Sigma Quality Level:For Normal Distribution centered at Target (i.e. Mean = Target ) 99.9999998% parts are acceptable. i.e. Only 2 parts per billion(0.002 parts per million) are defective.

SigmaQuality Level Percent Accepted Defective PPM

6σ 99.9999998% 0.002 5σ 99.999943 0.57 4σ 99.9937 63 3σ 99.73 2700 2σ 95.45 45500 1σ 68.27 317300

Note : 3.4 parts per million are defective if the mean is shifted by 1.5σ from Target for the given Six Sigma Quality Level.


Process Capability : It is the capability of a process to produce a product relative to the stated tolerances. Cp and Cpk are two statistics used to define process capability.

Cp compares the width of the data set variation to the width of the specification.

Where as Cpk compares the width and centring of the data set to the specification target , upper and lower values.


USL – LSL R-Bar

Process Capability Ratio Cp = --------------- Where σ = Estimated Sigma = ---------

6 * σ d2

min (USL-μ, μ-LSL)

Process Capability Index Cpk = --------------------------

3 * σ

Rating Method :

In Rating Method, we are allocating weights to different sub factors of quality.

• Incoming / Manufacturing Results (60%)

Defective Parts Per Million (PPM) (or)

Sigma Quality Level (or)

Process Capability

• Response to Quality Audit Observations (20%)

• Response to Corrective Actions Requests (20%)


Quality Rating = 0.6 * Incoming Result + 0.2 * Response to Quality Audit Observations + 0.2 * Response to Corrective Actions Requests

Delivery can be measured in the following methods

Defective Parts Per Million (PPM)

Rating System

Defective Parts Per Million (PPM)

No of times delivery is not on timePPM = ------------------------------------------ X 1,000,000

Total No of times delivered

Rating System (Delivery before / after delivery date)

1 3 5 7 9

More than Up to 3-4 days 1-2 days On time

One week One Week

Literature : Performance Factor - Delivery

Literature : Performance Factor - Cost

Cost : Sub-factors Max Points

i. Cost Reduction Suggestions 5

ii. Net Cost Reduction Performance 5

iii. Cost Management Initiative 5

iv. Performance during product delivery process

5

Total Points 20

Cost factor in supplier evaluation process can be measured by Rating method as follows.

Literature : Performance Factor -Service

Service factor in supplier evaluation process can be measured by Rating method as follows.

Service : Sub-factors Max Points

i. Proactive Communication 10

ii. Responsiveness 10

iii. Extraordinary Arrangements 5

iv. Accessible / Diligent 5

v. Flexibility 5

Total Points 35

As-Is Process Map : Current Inspection Process

As-Is Process Map : Current Supplier Evaluation Process

Data Collection Quality related data collected from Quality Control department .

Prototype Samples Dimensions Response to Quality Audit Observations Response to Corrective Actions Requests.

On time delivery information of suppliers was collected from Stores Department.

Cost related data collected from Purchase Department. Cost Reduction Suggestions Net Cost Reduction Performance Cost Management Initiative Performance during product delivery process

Service related data collected from Purchase Department. Proactive Communication Responsiveness Extraordinary Arrangements Accessible / Diligent Flexibility

Analysis Quality

Defective Parts Per Million (PPM) (60%) Response to Quality Audit Observations (20%) Response to Corrective Actions Requests (20%)

Delivery PPM

Cost Cost Reduction Suggestions (5 Points) Net Cost Reduction Performance (5

Points) Cost Management Initiative (5 Points) Performance during product delivery process (5 Points)

Service Proactive Communication (10 Points) Responsiveness (10 Points) Extraordinary Arrangements (5 Points) Accessible / Diligent (5 Points) Flexibility (5 Points)

Analytic Hierarchy Process

Analysis : Quality - How to find PPM ?

Prototype Sample Data

Analytic Hierarchy Process (AHP) Analytic Hierarchy Process (AHP) is a multi criteria decision technique that

can combine qualitative and quantitative factors for prioritizing, ranking and evaluating alternatives.

AHP reduces complex decisions to a series of one-on-one comparisons, then synthesizes the results.

AHP Measurement Scale Comparing objective i and objective j We set aii = 1. if we set aij = k, then aji =1/k

Verbal Judgment of Preference Numerical Rating

Objectives i and j are of equal importance 1

Objective i is weakly more important than j

3

Objective i is strongly more important than j

5

Objective i is very strongly more important than j 7

Objective i is absolutely more important than j 9

2,4,6,8 are Intermediate Values provided additional level of discrimination

Analytic Hierarchy Process (AHP) Steps

1.Specify the set of criteria for evaluating the supplier’s proposals.

2.Obtain the pair wise comparisons of the relative importance of

the criteria in achieving the goal, and compute weights of the criteria

based on this information.

3.Obtain measures that describe the extent to which each supplier

achieves the criteria.

4.Using the information in step 3, obtain the pair wise comparisons of

the relative importance of the suppliers with respect to the criteria,

and compute the corresponding weights.

5.Using the results of steps 2 and 4, compute the priorities of

each supplier in achieving the goal of the hierarchy.

Work Completed Theoretical Framework Documenting Existing Process Data Collection Analysis AHP to Evaluate Supplier Overall Scores Ranking of Suppliers

Work to be done Consistency Checking of AHP

Future plan of work

This dissertation work can be expanded to other sectors like manufacturing

Additional Criteria can be considered for supplier evaluation

Compare supplier evaluation issues with ISO 9000 standards

Study of other supplier evaluation methods like Principal Component Analysis (PCA) , Neural Networks etc.

References

DOUGLAS C MONTGOMERY (2004)Introduction to Statistical Quality Control - Fourth Edition John Wiley & Sons, Inc

ELLRAM (1995)“Total Cost of Ownership: An Analysis Approach for Purchasing”, International Journal of Physical Distribution and Logistics, pp. 163-184.

EUGENE L GRANT AND RICHARD S LEAVENWORTHStatistical Quality Control -Seventh Edition.

NYDICK AND HILL (1992)“Using the Analytic Hierarchy Process to Structure the Supplier Selection Procedure”, International Journal of Purchasing and Materials Management, 1992, pp.31-36. PETRONI AND BRAGLIA (2000)“Vendor Selection Using Principal Component Analysis”, The Journal of Supply Chain Management: A Global Review of Purchasing and Supply, pp. 63-69.

RICHARD A JOHNSON AND DEAN W.WICHERN Applied Multivariate Statistical Analysis - Fifth Edition

SAATY (1980)The Analytic Hierarchy Process. NY: McGraw-Hill

SIMPSON, SIGUAW AND WHITE (2002)“Measuring the Performance of Suppliers: An Analysis of Evaluation Processes”, The Journal of Supply Chain Management, pp. 29-41.

TIMMERMAN(1986)“An Approach to Vendor Performance Evaluation”, The Journal of Supply Chain Management, pp. 2-8.

WEBER, CURRENT AND BENTON (1991)“Vendor Selection criteria and methods”, European Journal of Operation Research, pp. 2-18.

WEI, JINLONG AND ZHICHENG (1997)“A Supplier Selecting System using a Neural Network”, IEEE International Conference on Intelligent Processing Systems, pp.468-471.

References…

Thank You

Supplier Evaluation Using AHP

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