2011 3rd International Conference on Advanced Management Science

IPEDR vol.19 (2011) © (2011) IACSIT Press, Singapore

Supplier selection and order allocation a main factor in supply chain

Kambiz Shahroudi 1, Hajar Rouydel2†, Shamin Assimi3 and Hamid Reza Eyvazi4
1
Assistant professor industrial management department, Islamic Azad University, Rasht Brunch, Rasht, Iran
2+
Young Researchers’ club member, Islamic Azad University-Rasht Brunch, Rasht, Iran
3
Young Researchers’ Club member, Islamic Azad University-Rasht Branch, Rasht, Iran
4
Master degree in business administration, Islamic Azad University-Qazvin Branch, Qazvin, Iran
Abstract. Supplier management is one of the most important parts in supply chain management that is
increasingly recognized as a critical decision in the globalization process. Most of firms have been spending
considerable amount of their revenues on purchasing. Hence supplier selection is one of the most important
functions of purchasing management. The aim of this research is to introduce an integrated model for
supplier’s selection and order allocation in an automotive company. Therefore the research was performed in
two sections and four steps. In first section in order to select the best suppliers we used an integrated AHP-
TOPSIS approach. Therefore, after library studies and interview with experts, managers and specialists in
supply chain management filed, decision criterion were identified through Delphi contains of main criteria
and sub criteria for suppliers selection process. Then in the second section for order allocation to every
selected suppliers in first section; we used a multi-objective linear programming model. Therefore objectives
and subjective of suppliers and Automotive Company were identified in this section. Results show that
applying a two phase AHP-TOPSIS methodology causes to select the best suppliers. Also Automotive
Company’s total costs will be minimized with using a MOLP model.
Keyword: Supplier selection, Analytical Hierarchy Process, Supplier evaluation, TOPSIS, MOLP.

1. Introduction
Basically the issues related to supplier selection are two types. The first type (single sourcing), in which
a supplier is able to meet all buyers’ needs including demand rate, quality, and delivery time. In this
condition the management should just decide which supplier is the best? In type II (multiple sourcing) a
supplier alone is not able to meet all needs of buyer and buyer must meet their demands through several
suppliers. In this case, management should take two types of decisions: first, which suppliers are the best?
And second, how much should be purchased from each supplier? [1]
In many cases, organizations usually choose more than one supplier for their products, until facing with
non-competence of one supplier to ensure continuity of supply. They can also compare prices and services
from various suppliers during the period of time. Hence, in present study we discuss solving the selection of
supplier in the state of multiple sourcing. Increasingly importance of selecting appropriate supplier, as a
critical decision in supply chain management, lead organizations in different industries to use systematically
formed models to choose suppliers and allocate orders to them. The present study using the suggested model
to answer two mains research questions: How to select suitable suppliers in order to meet company’s need?
How to determine the optimal amount of order to each selected supplier? The research is done in the two
section, and 4 steps that will explain more in the following.
2. Literature Review
At least four journal articles have already reviewed the literature related to suppliers’ evaluation and
selection models [2,3,4,5]. Ghodsypour and O'Brien (2001) suggested mixed integer non-liner programming
model to solve supplier's problem with multiple criteria and suppliers capacity [6]. Choy et al (2002)[7],
Choy and Lee (2003)[8], Choy et al (2003a)[9], Choy et al (2003b)[10], Choy et al (2004)[11], Choy et al
(2005)[12], developed the CBR-based model to aid decision makers in the supplier selection problem. Amid
et al. (2006) constructed a fuzzy multi-objective linear programming model to choose appropriate suppliers.

†
Corresponding Author, Tel:+989112387381
Email address: [email protected]
148
This model was able to control the ambiguity and inaccuracy of the input data, and help decision-makers to
find the optimal order quantity of each supplier. In this model, three objective functions with different
weights and one algorithm was developed to solve the model [13]. Saen (2007) suggested an integrated
AHP-DEA approach to evaluate and select suppliers that somewhat were inconsistent. The experts stated that
many of the suppliers are not using their entries and inputs completely to supply and produce outputs. In this
approach AHP was used to determine the relative weight of each supplier. Then DEA was applied to
calculate the relative efficiency of each supplier [14]. Kull & Talluri (2008) developed an integrated AHP-
GP approach to evaluate and select suppliers according to risk indexes and product life cycles. In the
proposed model, AHP was used to evaluate suppliers according to the risk factors, and according to this;
some scores was given to the suppliers and then GP model formulated to assess alternative suppliers based
on the objectives of multiple risk and various hard restrictions[15].

3. Methodology
The research was carried out in automotive industry. Overall, this study is doing in four steps. In the first,
in order to answer the first question of the research, concerning how to select best supplier(s), after reviewing
the research literature, interview with the experts, and survey the managers, in a company custodian to
automotive supply chain management group, decision-making criteria were identified using Delphi method
including criteria and sub-criteria affecting on suppliers selection. Then, in order to calculate the weight of
each indices and final ranking of desired parts suppliers, integrated AHP-TOPSIS techniques were used.
After that, in order to answer the second question of the research concerning allocation quantity of orders to
each supplier, multi-objective linear programming model (MOLP) was used. First, the multi-objectives of
the company were identified then suppliers’ and buyers’ constraints were considered. Finally the equations
solved by LINGO software and the optimum amount of order to each supplier identified.
3.1. Step 1: identifying evaluation criteria and sub-criteria
Selecting criteria and indicators is for this purpose that the important aspects and characteristics of
suppliers being measured. In fact, suppliers’ selection indices indicate the present status and present/future
supplier’s performance. Therefore, the design and selection of indices as the input of decision-making model
has a direct impact on model efficiency. In our case study, automotive company used Delphi model in order
to identify criteria and sub-criteria, with regard to their strategic goals. Therefore, the automotive company in
a meeting consists of 25 managers, experts and specialists in supply chain area identified the criteria
influencing on the process of appropriate suppliers selection. The criteria were identified in the form of two
main criteria and 10 sub-criteria as follows in Fig. 1:
3.2. Step 2: Implementing AHP technique
AHP technique which developed by Thomas L. Saati in 1980 is a powerful tool for solving complex
problems of decision-making with regard to quantitative and qualitative criteria [16]. According to the
solution algorithm in this technique as shown in Fig. 1 at first, decision-making hierarchical structure is
determined to simplify supplier selection. It should be noted that despite the frequency of the number of
suppliers and parts, in order to test the model, some parts makers who had the highest evaluation (grade A)
and was able to produce four parts with codes A, B, C, and D were selected.

149
 Packaging design

Qualitative Criteria
Quality
Supplier 1
Finance

Customer Service
Supplier 2

Supplier Selection
Production Capacity

IT System Supplier 3

Quantitative Criteria
Supplier 4
On time delivery

Cost
Supplier 5
Turnover

Distance

Fig. 1: “Hierarchical structure to select best suppliers”

After the hierarchical structure drew; in order to determine the criteria, and sub-criteria weights, a
questionnaire concerning to pairwise comparisons matrix was given to 42 managers, experts, and specialists
in the field of supply chain management. Then the data gathered from them, entered into specialized
software of Expert Choice to calculate the weight of suppliers indices and to ensure the accuracy of judged
and inconsistency rate. Because of smaller inconsistency rate from 0.1 the accuracy of judgments were
confirmed. Table 1 shows the weights obtained for each of the criteria, sub-criteria, and the decision-making
alternatives using the AHP technique.
Table 1: Final weights of criteria and sub-criteria and alternatives
Weights Weights of
Criteria Sub-criteria S1 S2 S3 S4 S5
of criteria sub criteria
D1: Packaging design 0.324 0.347 0.261 0.513 0.033 0.564
D2: Quality 0.453 0.153 0.425 0.122 0.055 0.236
Qualitative D3: Finance 0.132 0.235 0.200 0.200 0.200 0.450
0.423
Criteria D4: Customer Service 0.259 0.134 0.555 0.267 0.140 0.174
D5: Production Capacity 0.206 0.267 0.261 0.513 0.133 0.098
D6: IT System 0.056 0.056 0.036 0.230 0.230 0.450
D7: On time delivery 0.096 0.126 0.520 0.079 0.128 0.342
Quantitative D8: Cost 0.120 0.287 0.289 0.041 0.044 0.159
0.302
Criteria D9: Turnover 0.118 0.136 0.156 0.352 0409 0.326
D10: Distance 0.206 0.128 0.216 0.513 0.133 0.230

3.3. Step 3: implementation of TOPSIS technique

TOPSIS is a widely accepted model that proposed by Huang and Yoon in 1981, and then in 1992 was
developed by Chen and Huang. In this method, alternatives are ranking based shortest distance from the
positive ideal solution and the farthest distance from the negative ideal solution.
The weight obtained by the AHP technique converted to normalize weighted matrix By TOPSIS
technique.
Then, positive and negative ideal solution is obtained. The next step of TOPSIS technique is to calculate
the Euclidean distance of each alternative to the positive and negative ideals.
In the final stage, relative closeness of suppliers to ideal solution obtained and ranked according to
relative approximately descending order of suppliers. Table 2 represents the ranking of suppliers based on
combining two techniques of AHP and TOPSIS.
Table 2: final ranking in two-phase AHP-TOPSIS approaches
Alternatives S1 S2 S3 S4 S5
C +j 0.314 0.340 0.529 0.302 0.615
Ranking 4 3 2 5 1

150
3.4. Step 4: Mathematical Modeling
As was observed, in the first phase of this study using two techniques of AHP and TOPSIS in integrated
form, suppliers were classified with regard to criteria and sub-criteria. While in the second phase, using a
mathematical model it was identified that how much order should be allocated to each supplier. Thus, the
second phase is included designing a multi-objective linear programming model. Table 3 is briefly described
to the symbols used in equations.
Table 3: introducing mathematical parameters model
definition
Decision variables
xij Order quantity of the jth part from the ith supplier
parameters
tij Average delivery delay of the jth part from the ith supplier

pij The price of jth part that be suggested by ith supplier to automotive company

Aij Rate of perfect raw material i from supplier j

Bj Purchasing budget for the jth part

Dj demand for jth part

Vij quantity supply of jth part from the ith supplier

qij Average defect percent of jth part from the ith supplier

Qj Maximum acceptable scarp rate of the jth part

zi Objective function

Multi-objective linear programming model was designed this way, that at first, automotive company
multiple targets are formulated as three objectives function that include:
The first objective function (Z1): purchase costs
m n
MinZ1 =   pij ∗ X ij
i j

The second objective function (Z2): Quality

m n
MaxZ 2 =   Aij ∗ X ij
i j

The third objective function (Z3): Delivery

m n
MinZ 3 =   t ij ∗ X ij
i j
Subject to:
Then the limitation of company's suppliers and automotive company are specified in five constraints as
follows.
First limitation: shopping budget
m
 pij .xij ≤ B j j = A, B, C, D
i =1
Second limitation: Buyers demand
n
 X ij ≥ D j j = A, B, C, D
i =1

The third limitation: Suppliers capacity

X ij ≤ Vij ∗ Yij j = A, B, C , D i = 1,2,3,4,5
Fourth limitation: quality control

151
 m
 qij .xij ≤ Q j .D j j = A, B, C, D
i =1
Fifth limitation: non-zero limit (integer)
X ij = Integer j = A, B, C, D i = 1,2,3,4,5
After gathering data about decision variables and parameters of mathematical model, the information
obtained to resolve was entered into software (LINGO). Table 4 shows that automotive company in order to
minimize the purchase costs, returned rate from defects, and delivery time, must buy from any supplier in the
amount specified by the model,
Table 4: the order quantity allocation
Part A B C D Total
Alternative
Supplier 1 1200 2850 3100 2250 9400
Supplier 2 4200 2800 3000 2500 12500
Supplier 3 4500 3700 4300 5500 18000
Supplier 4 - 1500 2000 1500 5000
Supplier 5 6200 4500 5100 1200 17000
Z1= 57167325 Z2= 74 Z3=9

4. Conclusion
What should be considered is that the allocation order to suppliers, based on score alone, is not an
appropriate method. So that the proposed model shows although supplier obtained highest score in phase (1)
and also holds a high productive capacity, but because it does not meet the objectives and the priorities of
automotive company; therefore, it is not a good approach that just because of a higher rank, the highest order
being allocated to this supplier. These not only never results in meeting the goals of company, but also
causes to waste too much time and cost. While executing the proposed model causes to save energy, cost and
time. It is a great privilege for large organizations and industries that seek competitive advantage in global
markets.

5. References
[1] E.A. Demirtas, o. ustun, an integrated multi objective decision-making process for supplier selection and order
allocation, International Journal of Management Science, Omega. 2008, 36, pp.76-90
[2] C.A. Weber, J.R, Current, and W.C, Benton, Vendor selection criteria and methods, European Journal of
Operational Research. 1991, 50, pp.2-18
[3] Degrave, Z., Labro,E., and Roodhooft, F., An evaluation of supplier selection methods from a total cost ownership
perspective, European Journal of Operational Research. 2000, 125(1): 34-58
[4] L. De Boar, E. Labro, P. Moralacchi, A review of methods supporting supplier selection, European Journal of
Purchasing & Supply Management. 2001, pp.75-89
[5] W. Ho, x. Xu., Multi criteria decision-making approaches for supplier evaluation and selection: A literature review,
European Journal of Operational Research. 2010, 202, pp.16-24
[6] S.H. Ghodsypour, C. O'Brien, the total cost of logistics in supplier selection, under conditions of multiple sourcing,
multiple criteria and capacity constraints, International Journal of Production Economics. 2001, 73, pp.15-27.
[7] K.L., Choy, W.B., Lee, A generic tool for the selection and management of supplier relationships in an outsourced
manufacturing environment: the application of case based reasoning, Logistics information management. 2002,
15(4): 235-253.
[8] K.L., Choy, W.B., Lee, A generic supplier management tool for outsourcing manufacturing, supply chain
management: An International Journal. 2003, 8(2): 140-154.
[9] K.L., Choy, K.K.H., Fan, V., Lo Development of an intelligent customer supplier’s relationship management
system: the application of case-based reasoning, Industrial Management and Data System, 2003a, 103(4): 263-274
[10] K.L., Choy, W.B., Lee, Design of a case based intelligent supplier relationship management system: the
integration of supplier rating system and product coding system, Expert System with applications. 2003b, 25(1),
87-100

152
[11] K.L., Choy, W.B., Lee, V., Lo, An enterprise collaborative management system: A case study of supplier
relationship management, The Journal of Enterprise Information Management. 2004, 17(3): 191-207
[12] K.L., Choy, W.B., Lee, V., Lo, A knowledge-based supplier intelligence retrieval system for outsource
manufacturing, knowledge-based system. 2005, 18(1): 1-17
[13] S.H. Amid, C. Ghodsypour, O’Brein., Fuzzy multi objective linear model for supplier selection in a supply chain,
International Journal of Production Economics. 2006, 104(2): 394-407
[14] R.F., Saen, A new mathematical approach for supplier selection: Accounting for non-homogeneity is important,
Applied Mathematical and Computation. 2007, 185(1): 84-95
[15] T.J., Kull, , S., Talluri A supply risk reduction model using integrated multi-criteria decision-making, IEEE
Transactions on Engineering Management. 2008, 55(3): 409-419
[16] S.C., TingD, I., Cho, An integrated approach for supplier selection and purchasing decision, Supply Chain
Management: an International Journal. 2008, 13(2): 116-127

153