Supply Chain Management: An International Journal

An integrated approach for supplier selection and purchasing decisions

Shin-Chan Ting Danny I. Cho
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Shin-Chan Ting Danny I. Cho, (2008),"An integrated approach for supplier selection and purchasing decisions", Supply Chain
Management: An International Journal, Vol. 13 Iss 2 pp. 116 - 127
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 Research paper

An integrated approach for supplier selection

and purchasing decisions
Shin-Chan Ting
Department of Transportation and Navigation Science, National Taiwan Ocean University, Keelung, Taiwan, ROC, and
Danny I. Cho
Faculty of Business, Brock University, St Catharines, Canada

Abstract
Purpose – The paper seeks to provide academic researchers and practitioners with a better understanding about purchasing strategies through an
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integrated approach to supplier selection and purchasing decisions.

Design/methodology/approach – This paper views supplier selection as a multi-criteria problem. Through the analytical hierarchy process (AHP), in
consideration of both quantitative and qualitative criteria, a set of candidate suppliers is identified. A multi-objective linear programming (MOLP)
model, with multiple objectives and a set of system constraints, is then formulated and solved to allocate the optimum order quantities to the candidate
suppliers.
Findings – The paper provides tradeoffs among different objectives, which are more consistent with the complexity and nature of the real-world
decision-making environment. It also offers better information and solutions supporting effective purchasing decisions.
Research limitations/implications – The main concept of the proposed approach can be applicable to any organization with a purchasing function.
However, its implementation will be very specific to a particular organization of interest, as each individual organization must define its own subjective
criteria and constraints. The area of decision support system development, which automates (or computerizes) the input process of the proposed
models and integrates with other databases in a company, will provide great opportunities for future research.
Practical implications – The paper provides practitioners with flexibility and effectiveness in their supplier selection and purchasing decision process
and with a better understanding about their future purchasing strategies. The results from the application of the proposed models to the supplier
selection problem at a high-technology firm in Taiwan show that the models are effective and applicable.
Originality/value – This paper takes an integrated approach to problem analysis (i.e. multi-objectives with both quantitative and qualitative
information), uses a sound scientific methodology in model development (i.e. integrating AHP with MOLP), and provides practical use of the models. It
offers additional knowledge and value to both academics and practitioners.

Keywords Supplier evaluation, Order systems, Analytical hierarchy process, Linear programming

Paper type Research paper

Introduction many multinational companies have increased their level of

outsourcing and currently rely more heavily on their supply
A supply chain is a complex network, which consists of all chain as a source of their competitive advantage. Thus
stages (e.g. order processing, purchasing, inventory control, supplier selection and purchasing decision in the supply chain
manufacturing, and distribution) involved in producing and have become key strategic considerations; however, managing
delivering a final product or service. The entire chain the purchasing task has been a challenge for these companies.
connects customers, manufacturers and suppliers, beginning Over the past decade the need to gain global
with the creation of raw material or component parts by competitiveness on the supply side has increased
suppliers, and ending with consumption of the product by substantially. Particularly for companies that spend a high
customers. Like the term “supply chain”, outsourcing has portion of their sales revenue on raw materials and
become part of the business lexicon since the 1980s. component parts, savings from reduction in unit prices
Outsourcing in an indiscriminate fashion, however, could become much more important as their material costs take a
hurt company image and customer trust. In spite of this, larger percentage of total costs. Obviously selection of the
right suppliers plays a key role in any organization because it
The current issue and full text archive of this journal is available at significantly reduces the unit prices and improves corporate
www.emeraldinsight.com/1359-8546.htm price competitiveness. However, emphasis on quality and
timely delivery, in addition to the cost consideration, in
today’s globally competitive marketplace adds a new level of
Supply Chain Management: An International Journal complexity to outsourcing and supplier selection decisions.
13/2 (2008) 116– 127
q Emerald Group Publishing Limited [ISSN 1359-8546]
Among the issues of supply chain management regarding
[DOI 10.1108/13598540810860958] purchasing decision, supplier selection is the most important

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 An integrated approach for supplier selection and purchasing decisions Supply Chain Management: An International Journal
Shin-Chan Ting and Danny I. Cho Volume 13 · Number 2 · 2008 · 116 –127

activity of a firm’s purchasing department. Thus the The proposed approach, which integrates the two
purchasing department plays a key role in the organization’s important types of purchasing decisions in the multi-
efficiency and effectiveness because its purchasing decisions sourcing supplier selection problem, can be used to
have a direct effect on cost reduction, profitability and the determine the number (and identity) of the candidate
flexibility of the company. suppliers, as well as to allocate the optimal order quantity
In practice there could be several criteria used by a firm for among the selected suppliers. By changing the weights of the
its supplier selection decision, such as price offered, part defined objectives, the proposed models enable the
quality, on-time delivery, after-sales services, response to management to reflect corporate strategies in the purchasing
order change, supplier location, and supplier’s financial activities and to analyze trade-offs among multiple objectives
status. Apparently, supplier selection is a multi-criteria such as cost, quality, and delivery reliability, simultaneously
problem, which includes both quantitative and qualitative and interactively. The models have been applied to the
factors. For the firm to select the best suppliers it is necessary supplier selection problem at a high-technology company in
to make trade-offs between these tangible and intangible Taiwan, which mainly manufactures motherboards for
factors, some of which may conflict with one another. desktop PCs and notebook computers. The results show
Ghodsypour and O’Brien (2001) argued that there are two that the models are effective and applicable, and provide the
types of supplier selection problem decision makers with a better understanding of their
1 single sourcing; and purchasing decisions.
2 multiple sourcing. The rest of the paper is organized as follows. In the next
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section, the literature pertinent to our research is reviewed.

Single sourcing problems assume that each supplier can The methodology, a two-step decision-making procedure
satisfy the buyer’s entire requirements in terms of demand, utilizing AHP and MOLP, for selecting candidate suppliers
quality and delivery. In this case, the management of the and finding the optimal allocations of order quantities to the
buyer needs to make only one decision – which supplier is the candidate suppliers is introduced in the following section. In
best? Multiple sourcing problems, on the other hand, assume the subsequent section, the application of the two-step
that there are some limitations in suppliers’ capabilities to decision-making procedure to the purchasing practice at a
satisfy the buyer in terms of demand, quality and delivery. In high technology company in Taiwan is demonstrated and its
other words, a single supplier may not be able to satisfy the results are discussed. Finally, some conclusions, followed by
buyer’s total requirements, and thus the buyer needs to recommendations for further research, are made.
purchase some parts from one supplier and the other parts
from other suppliers to compensate for the shortage of
Literature review
capacity or low quality of the first supplier. In such a case, the
buyer looks for more than one supplier who can satisfy its Academic attention to the purchasing decision in general and
entire needs. Even though perhaps one supplier can satisfy the supplier selection in particular through more systematic
buyer’s total requirements, many buying organizations have methods has increased over the last two decades. Weber et al.
an ingrained practice of shopping around for superior deals. (1991) and De Boer et al. (2001) presented extensive
Under these circumstances, the management of the buyer overviews of methods and tools used for supporting supplier
needs to make two types of decision: selection. Ghodsypour and O’Brien (2001) did a
1 Which suppliers should be used? comprehensive review of numerous quantitative techniques
2 What is the order quantity of a part allocated to each of used for supplier selection, including linear programming,
the selected suppliers? mixed integer programming, goal programming, multi-
objective programming, and non-linear programming. To
Traditionally, purchasing teams used such methods as quantify qualitative information based on managerial
supplier rating or supplier assessments in order to choose judgments in multi-criteria decision-making environment,
suppliers from the candidate supplier list. These methods some researchers (Bhutta and Huq, 2002, Liu and Hai, 2005;
assessed suppliers based on a selected number of criteria in a Hou and Su, 2006; Saen, 2007) used the AHP approach to
linear manner. Facing the new challenges in the supply chain, determine priority in selecting suppliers. AHP provides a
however, a buyer now faces multiple objectives to achieve framework to formulize the evaluation of trade-offs between
simultaneously in its purchasing decision. Quality of parts, the conflicting selection criteria associated with the various
delivery reliability and other criteria as well as price should suppliers’ offers (Render and Stair, 2000). Realizing the
now be taken into account in selecting the best suppliers. In existence of many unstructured decision rules and lack of
this paper, an integrated approach to model development and precise data availability, a number of researchers (Wray et al.,
analysis of the multi-sourcing supplier selection problem is 1994; Albino et al., 1998; Minis et al., 1999; Choy et al.,
presented. A hierarchical structure for supplier selection 2002; Chen et al., 2006; Bevilacqua et al., 2006; Amid et al.,
considering both quantitative and qualitative criteria is 2006; Florez-Lopez, 2007; Chan and Kumar, 2007) took
developed using the analytical hierarchy process (AHP) to somewhat innovative approaches, which are based on artificial
identify a set of candidate suppliers. Subsequently, a multi- intelligence (AI) techniques such as neural networks and fuzzy
objective linear programming (MOLP) model with three logic. These methods are shown to be quite applicable to real
objectives to optimize (i.e. total purchasing costs, quality, and life situations when suppliers evaluation is perceptive and
delivery reliability) and with a set of system constraints (i.e. decision-makers express heterogeneous judgments. Min
purchasing budget, production demand, suppliers’ capacities, (1994) and Petroni and Braglia (2000) used approaches not
quality control and inventory control) is formulated and requiring a precise weight assessment such as conjoint
solved to find the optimum order quantities allocated to the analysis, indifference trade-off method, and principal
candidate suppliers. component analysis to derive weights of selection criteria.

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 An integrated approach for supplier selection and purchasing decisions Supply Chain Management: An International Journal
Shin-Chan Ting and Danny I. Cho Volume 13 · Number 2 · 2008 · 116 –127

Many articles have addressed the importance of selecting the Rosenthal et al. (1995) developed a mixed integer
right suppliers and the attributes for making such a decision programming model to deal with the case of supplier
(Narasimhan, 1983; Pan, 1989; Weber et al., 1991; Briggs, selection with bundling, in which a buyer needs to buy
1994; Donaldson, 1994; Swift, 1995; Choi and Hartley, 1996; various items from several suppliers whose capacity, quality,
Ghodsypour and O’Brien, 1998; De Boer et al., 1998; Verma and deliveries are limited and who offer bundled products at
and Pullman, 1998; Yahya and Kingsman, 1999; Petroni and discounted prices. Considering price, quality, delivery and
Braglia, 2000; Karpak et al., 2001; Choy et al., 2002, 2003; De suppliers’ capacity as important criteria for the buyer, they
Boer and van der Wegen, 2003; Humphreys et al., 2003; used a single objective programming to formulate a decision
Dulmin and Mininno, 2003; Gao and Tang, 2003; Bharadwaj, model. Ghodsypour and O’Brien (1998) developed an
2004; Liao and Rittscher, 2007; Xia and Wu, 2007). A number integrated AHP and linear programming model to help
of people (Kamann and Bakker, 2004; Hong et al., 2005; Araz managers consider both qualitative and quantitative factors in
and Ozkarahan, 2007; Huang and Keskar, 2007) developed choosing the best suppliers and placing the optimum order
supplier evaluation and selection methods for strategic sourcing quantities to maximize the total value of purchasing.
based on long-term relationships and strategic partnerships. Ghodsypour and O’Brien (2001) formulated a mixed-
Choi and Chang (2006) proposed a knowledge-based integer non-linear programming model to solve the multiple
optimization modeling approach that formulates a goal model sourcing problem. In their model they take into account the
through model identification and supplier screening process for total cost of logistics, which is the sum of net price to buyer
strategic supply selection and allocation. Traditionally, several and storage, transportation and ordering costs, as well as
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studies focused on a technical output evaluation, in terms of buyer limitations on budget and quality and service
quality, delivery speed and reliability, price, and other criteria. requirements. Karpak et al. (2001) discussed one of the
Nevertheless a recent study suggests that suppliers be selected user-friendly alternative multiple criteria decision support
according to their global performances as the buyer/supplier systems – visual interactive goal programming (VIGP). This
relationship becomes closer and longer-term based and the PC-based technique was applied to an original equipment
manufacturer’s multiple-replenishment purchasing problem
number of decision criteria used for supplier selection decision
to assist the firm in selecting suppliers and allocating orders.
increases. Global evaluations could range from total costs
Gao and Tang (2003) established a multi-objective linear
analysis (Roodhooft and Konings, 1996; Ellram, 1996; Tagaras
programming model for the special issues of purchasing raw
and Lee, 1996; Bhutta and Huq, 2002) to the consideration of
materials for a large-scale steel plant, and indicated that
suppliers’ capacity, their future manufacturing capability and/
selecting items, selecting suppliers, and deciding order
or strategic partnerships (Chan and Kumar, 2007). It now
quantity are the key issues in optimizing purchasing policies.
becomes obvious that the supplier selection process should not
Xia and Wu (2007) proposed a multi-objective, mixed-integer
only consider price, but also a wide range of factors such as
programming model for a multiple sourcing and multiple
quality, organization, culture and supplier capability in a long- products problem when suppliers offer price discounts on
term and strategic way. Articles closely pertinent to our business volume.
proposed research are described below. Much attention has been paid to the development of
Pan (1989) proposed multiple sourcing in supplier selection effective supplier selection models, trying to deal with
decision in order to improve the reliability of supply for structured/unstructured relevant information, qualitative/
critical materials. Arguing that most purchasing managers quantitative criteria, and their weights. As discussed in De
agree that buying from more than one source will protect the Boer et al. (2001), a typical supplier selection problem
buying firm from possible shortages or stock-out situations, consists of four phases:
he formulated a single objective linear programming model to 1 problem definition;
find the best suppliers, based on three decision criteria: 2 formulation of criteria;
1 price; 3 pre-qualification of suitable suppliers; and
2 quality; and 4 final selection of the ultimate suppliers.
3 service.
Some authors (Bhutta and Huq, 2002; Cebi and Bayraktar,
In the model, the total cost is minimized subject to the given 2003; Liu and Hai, 2005) have applied the AHP, rating
levels of quality and service constraints. Weber and Current systems, mixed integer, goal and multi-objective
(1993) applied multi-objective linear programming for programming to solve this problem with quantitative and/or
supplier selection to systematically analyze the trade-offs qualitative evaluation, objectives and constraints.
between a number of conflicting factors. In this model, total Nevertheless, there still exist significant problems in
price, quality and late delivery are considered as objectives, considering some important qualitative factors in supplier
whereas the following two sets of constraints are included: selection, especially when buyer/supplier partnership is taken
1 system constraints – the constraints which are not directly into account. On the other hand, most studies in the literature
under the control of the purchasing managers such as focused on developing models to deal with “selecting”
supplier capacities, demand satisfaction, minimum order suppliers. The overall supplier selection problem should not
quantities established by the suppliers, and the total only select the right suppliers, but also allocate the right order
purchasing budget; and quantity among the selected suppliers, based on a set of given
2 policy constraints – those that can be controlled by the objectives and constraints. For the multiple sourcing
purchasing managers, including maximum and/or problems with multiple decision criteria and a set of
minimum order quantities purchased from a particular purchasing related constraints discussed earlier, little
supplier, and the maximum and/or minimum number of attention has been paid to finding optimal ways of allocating
suppliers to be employed. order quantities to the appropriate suppliers. Only a few

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 An integrated approach for supplier selection and purchasing decisions Supply Chain Management: An International Journal
Shin-Chan Ting and Danny I. Cho Volume 13 · Number 2 · 2008 · 116 –127

mathematical programming models (by Ghodsypour and judgment, Saaty suggested the consistency index, CI ¼
O’Brien, 1998; Gao and Tang, 2003) to analyze such ðl max 2 nÞ=ðn 2 1Þ to measure the degree of consistency.
decisions have been published to date; however, even these In general, a value of CI of less than 0.1 is satisfactory.
studies considered only part price such as the product prices, When the size of the consistency index is exposed to the
excluding the costs of transportation, ordering and storage, effect of the nominal scale and the rank numbers of
which could be significantly important to a firm’s purchasing reciprocal matrix, then the consistency index produced
decision. from such a reciprocal matrix is dubbed a random index
(RI). The test of consistency ratio (CR) has employed the
Methodology comparison value of CI and RI (CR ¼ CI=RI). CR # 0:1
can be taken as sufficiently consistent.
This section presents the two-step decision-making procedure 4 Calculating the overall priorities for the decision alternatives.
– the analytical hierarchy process (AHP) for selecting a set of Finally, the overall priority for each decision alternative is
a firm’s candidate suppliers, followed by formulation of a calculated by multiplying the priority for each alternative
MOLP model for optimal allocations of order quantities to under each criterion by the priority (weight) of the same
the candidate suppliers. criterion, and then adding them for all criteria. The
outcome of this step is the ranked order of the decision
The analytical hierarchy process alternatives. The decision maker selects the decision
The analytic hierarchy process (AHP), originally developed alternative with the highest overall priority.
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by Thomas Saaty in 1971 (Saaty, 1980; Saaty and Vargas,

1981; Saaty and Vargas, 2000), is a process designed for The hierarchical structure for selecting suppliers
solving complex problems involving multiple criteria. It is a The initial eight dimensions and 28 criteria used for selecting
popular technique often used to model subjective decision- suppliers were originally obtained by reviewing several related
making processes because it is conceptually simple, easy to studies and by brainstorming with members of the purchasing
understand, and robust enough to handle the complexities team at a high-technology company in Taiwan. By surveying
of real-world decisions. The AHP divides a complex the team members and colleagues who were sampled from
decision problem into a hierarchical system of decision purchasing departments at other manufacturers in a similar
elements. A pairwise comparison matrix of these elements is industry with Likert-scale questionnaires, the final six
constructed, and then the normalized principal eigenvector dimensions and 16 criteria were extracted. The hierarchical
is calculated for the priority vector, which provides a structure to deal with the supplier selection problem is shown
measure of the relative importance (weight) of each in Figure 1. The characteristics of each dimension and the
element. The procedure for the AHP can be summarized required data and/or concerned departments are described
in four steps as follows: below.
1 Constructing the hierarchical system. The first step is to D1. Purchasing costs are concerned with the total material/
construct a hierarchy with two or more levels for part acquisition costs, which have a direct effect on
evaluating candidate alternatives. The concepts of a corporate price competitiveness.
system are used to build a hierarchy for deciding the C1. Product price – offered by the suppliers or the
belonged-relation at various levels. Each level includes latest price.
several independent elements. In general, the AHP divides C2. Transportation costs – acquired according to
a complicated problem into three levels: the overall goal of trade terms with the suppliers.
the problem; the evaluation criteria (objectives) used; and C3. Ordering costs – calculated by the purchasing
the decision alternatives considered. The criteria for the department.
performance evaluation for each dimension should be D2. Product quality indicates the percentage of the good
mutually independent (Saaty, 1980). quality products acceptable to the quality control
2 Making pair-wise comparisons for the criteria and for the department.
decision alternatives. The second step is to follow the C4. Defect and scrap ratio – defective items reports.
hierarchy relevance and to generate input data consisting C5. Product rejection ratio – rejected items reports.
of pair-wise comparison matrix of each level to find the C6. Quality system – presence or absence of the
comparative weights among the attribute of the decision supplier’s quality standards/certifications.
elements. The nominal scale is used for quantification and D3. Delivery reliability refers to how well the delivery of
the decision makers subjectively make many positive pair- product meets the due date or delivery time-windows,
wise comparison matrixes, each of which should pass the and/or to the order received complies with the order
consistent test. The outcome of this step is the ranked quantity specified by the purchasing department.
order priorities of the criteria and the ranked order C7. Delivery time-delays – time delivery reports.
priorities for the decision alternatives under each C8. Delivery quantity-shortage – product delivery
criterion. reports.
3 Calculating the weights and testing the consistency. Saaty used D4. Customer services show the perception of the services
the principal eigenvector of the comparison matrix to find provided by the suppliers.
the comparative weights among the criteria of the C9. Response to change – perceived by the
hierarchy systems. For each n £ n pair-wise comparison purchasing department.
matrix A, by using the theory of eigenvector, i.e. C10. Lead time to order – stipulated on supply
ðA 2 l max IÞw ¼ 0, to calculate the eigenvalue lmax and contracts or acquired by historical delivery data.
the eigenvector w (w1, w2, . . . , wn), weights of the criteria C11. Response to inquiry – perceived by the
can be estimated. To test the consistency of the intuitive purchasing department.

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 An integrated approach for supplier selection and purchasing decisions Supply Chain Management: An International Journal
Shin-Chan Ting and Danny I. Cho Volume 13 · Number 2 · 2008 · 116 –127

Figure 1 The hierarchical structure for supplier selection

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D5. Cooperation and partnership specifies the long-term Notation and assumptions
and close cooperative relationship with suppliers. We use the notation shown in Table I for model development.
C12. Co-design production – evaluated by the We also make the following assumptions for the model:
department of research and development. .
daily consumption for each item is random and normally
C13. Supply contracts – the trade terms and distributed;
termination date. .
the management specifies a required safety level of each
D6. Financial status represents the long-term trade item;
reliability of the supplier, which can be described by .
the initial stock quantity of each item is known to
the basic accounting statements used for reporting inventory management;
corporate activity. .
the selected suppliers are able to supply several items
C14. Assets and debts – the annual balance sheet. required by the purchasing department; and
C15. Income and earnings – the annual income .
unit transportation and unit ordering costs are calculated
statement. by averaging these costs over the past three months,
C16. Cash flow – the annual financial cash flow. respectively, which can be obtained from the supplier/
As discussed earlier, many firms utilize multiple sourcing purchasing records.
strategies in order to secure their required orders against some
limitations and differences of individual suppliers’ capacity, Model formulation
quality, price, and delivery reliability. After the candidate The proposed MOLP model consists of three objectives (i.e.
suppliers have been selected through the AHP analysis optimizing total purchasing costs, quality, and delivery
previously discussed, the purchasing team needs to make the reliability) and a set of system constraints such as
next decision: what is the order quantity allocated to each of purchasing budget, production demand, suppliers’
the selected suppliers? Thus a multi-objective linear capacities, quality control, and inventory control. The total
programming (MOLP) model, which allocates the optimum purchasing costs considered in the MOLP model not only
order quantities to the candidate suppliers, is formulated. The include product price but transportation and ordering costs.
weights of objectives and values of the parameters defined in The three objective functions are as follows:
the model can be obtained by the purchasing team in a similar 1 Purchasing costs – the first objective function of the model
way as described in the previous step. is to minimize total purchasing costs:

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 An integrated approach for supplier selection and purchasing decisions Supply Chain Management: An International Journal
Shin-Chan Ting and Danny I. Cho Volume 13 · Number 2 · 2008 · 116 –127

Table I Notation 3 Delivery reliability – the third objective function of the

model is to minimize total deviations from due date of
Notation Definition delivery:
Decision variables m X
X n
xij Order quantity of the the jth item from the ith supplier min Z 3 ¼ t ij xij : ð4Þ
(SKU, stock-keeping unit) i¼1 j¼1

Parameters
The constraints in the MOLP model are as follows:
cij Unit purchasing cost of the jth item from the ith supplier
1 Purchasing budget constraints – the total purchasing
($/SKU)
payment for each item cannot exceed the budget for the
dij Average defect or scrap ratio of the jth item from the ith
item:
supplier (percent)
tij Average delivery delay of the jth item from the ith X
m

supplier (week/SKU) pij xij # Bj j ¼ 1; 2; . . . ; n: ð5Þ

i¼1
pij Unit price of the jth item from the ith supplier ($/SKU)
fij Unit transportation cost of the jth item from the ith 2 Production demand constraints – the total order quantity of
supplier ($/SKU) each item from all suppliers must meet the demand
oij Unit odering cost of the jth item from the ith supplier ($/ quantity for the item:
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SKU)
X
m
Bj Purchasing budget for the the jth item ($) xij $ Dj j ¼ 1; 2; . . . ; n: ð6Þ
Dj Production demand quantity for the the jth item (SKU) i¼1
Sij Maximum supply quantity of the jth item from the ith
3 Suppliers’ capacity constraints – the order quantity of the
supplier (SKU)
the jth item from the ith supplier cannot exceed each
qij Average defect percent of the jth item from the ith
supplier’s capacity stipulated in contracts, in which
supplier (percent)
S ij ¼ 0, when the ith supplier cannot supply the jth item:
Qj Maximum acceptable defect ratio of the the jth item
(percent) xij # S ij i ¼ 1; 2; . . . ; m; j ¼ 1; 2; . . . ; n: ð7Þ
Lj Lead time of the the jth item from the suppliers to
delivery factories (week) 4 Quality control constraints – the total defect quantity of
each item cannot exceed maximum total acceptable defect
Aj Average consumption quantity of the the jth item (SKU/
quantity:
week)
zj Safety factors of the the jth item (no unit) X
m
SDj Standard deviation of consumption quantity of the the qij xij # Qj Dj j ¼ 1; 2; . . . ; n: ð8Þ
i¼1
jth item (SKU/week)
I0j The initial stock quantity of the the jth item (SKU) 5 Inventory control constraints – the total order quantity plus
Z1, Z2, Z3 Values of the objective functions ($, SKU, week) the initial stock quantity must be greater than or equal to
w1, w2, w3 Weights of Z1, Z2, Z3 objectives (no unit) the average consumption quantity plus the safety stock.
Z*1 ; Z*2 ; Z*3 Minimum values of Z1, Z2, Z3 derived from ideal solutions The average consumption quantity of each item during
($, SKU, week) pffiffiffiffiffi is LjAj, and the safety stock of each item is
lead time
Z**1 ; Z ** ; Z** Maximum values of Z , Z , Z derived from non-ideal
2 3 1 2 3 zjSDj Lj ;, which is the amount of inventory that the
solutions ($, SKU, week) factories need to keep at the warehouse to protect against
l Maximum deviation from minimum values Z*1 ; Z* *
2 ; Z3
deviations from the average demand during lead time
(percent) (Simchi-Levi et al., 2003):
X
m pffiffiffiffiffi
xij $ Lj Aj þ zj SDj Lj 2 I 0j j ¼ 1; 2; . . . ; n; ð9Þ
i¼1
m X
X n
min Z 1 ¼ cij xij ; ð1Þ where zj is a constant, referred to as the safety factor of the
i¼1 j¼1
jth item which is associated with the safety level.
Corresponding z values for the different safety level,
where the unit purchasing cost cij is the sum of unit price, which implies the probability of stocking out is 1 2 ð, are
unit transportation cost, and unit ordering cost: shown in Table II.
6 Variable non-negativity constraints – the final constraints
cij ¼ pij þ f ij þ oij : ð2Þ
are non-negativity restrictions on the decision variables:
2 Quality – the second objective function of the model is to xij $ 0 i ¼ 1; 2; . . . ; m; j ¼ 1; 2; . . . ; n: ð10Þ
minimize total amount of defect or scrap and rejected
quantity: The above MOLP model can be converted into a single
m X
X n objective model using a Minimax formulation. Let
min Z 2 ¼ d ij xij : ð3Þ Z *1 ; Z *2 ; Z *3 be the ideal solutions (minimum values) of the
i¼1 j¼1 model and Z ** ** ** be the non-ideal solutions
1 ; Z2 ; Z3
(maximum values), which can be obtained by solving each

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Shin-Chan Ting and Danny I. Cho Volume 13 · Number 2 · 2008 · 116 –127

Table II Safety levels and z values

Safety level a (percent) 90 91 92 93 94 95 96 97 98 99 99.9

z 1.29 1.34 1.41 1.48 1.56 1.65 1.75 1.88 2.05 2.33 3.08

of the single objective linear programming problems weights of dimensions and criteria from the AHP analysis
separately. l is a parameter that ensures the solution to were obtained by taking the average of the individual priorities
minimize the maximum deviation from the minimum values, (shown in Table III). Note that all of the calculated weights of
Z *1 ; Z *2 ; Z *3 , specified for the three objectives. The the dimensions and criteria passed the consistency test (i.e.
constraints specified by equations (12), (13) and (14) CI # 0:1 and CR # 0:1). In addition, the variation of level of
measure percentage deviations from the minimum values the respondents’ perception of the relative importance of
when the weights w1, w2, w3 for the three objectives are criteria and dimensions for measuring respondents’ consensus
considered. The weights can be adjusted to reflect the represented by the standard deviation (SD) were obtained.
decision maker’s subjective preference regarding each Based on the AHP analysis on the dimension and criteria,
objective. we have found that the three most important dimensions are:
Minimax model: 1 purchasing costs (D1);
2 product quality (D2); and
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min Z ¼ l; ð11Þ
3 delivery reliability (D3).
subject to: The most important criterion under each dimension is:
m X
X n
.
product price (C1);
cij xij þ lðZ *1 2 Z ** *
1 Þ=w1 # Z 1 ; ð12Þ .
defect and scrap ratio (C4);
i¼1 j¼1
.
delivery time delays (C7);
.
lead time to order (C10);
m X
X n
d ij xij þ lðZ *2 2 Z ** * supply contracts (C13); and
.
2 Þ=w2 # Z 2 ; ð13Þ
i¼1 j¼1
.
cash flow (C16).

X
m X
n These orders of importance are very much consistent with the
t ij xij þ lðZ *3 2 Z ** *
3 Þ=w3 # Z 3 ; ð14Þ ranking of the criteria (i.e. highest weight on manufacturing
i¼1 j¼1 costs, medium weight on quality, and lowest weight on
service) resulting from AHP in the supplier selection problem
and the constriants given by equations (5)-(10). discussed in Bhutta and Huq (2002). It is worth noting,

An example of applications Table III Weights of dimensions and criteria for selecting suppliers
In this section, the application of the two-step decision- Dimension and criteria Weight SD
making procedure developed in the previous section is
demonstrated using a case study of a high-technology firm D1: Purchasing costs 0.29 0.06
in Taiwan and its results are discussed. C1: Product price 0.67 0.10
C2: Transportation costs 0.19 0.06
AHP model and results C3: Ordering costs 0.14 0.09
The proposed AHP model was applied to the supplier
selection problem at a high-technology firm in Taiwan that D2: Product quality 0.22 0.04
mainly manufactures motherboards for desktop PCs and C4: Defect and scrap ratio 0.46 0.16
notebook computers. The purchasing team at the company C5: Product rejection ratio 0.18 0.09
needed to make the first decision: which suppliers should be C6: Quality system 0.37 0.20
selected for the candidate list? As the purchasing team D3: Delivery reliability 0.19 0.03
promoted the idea of multiple sourcing for its supplier C7: Delivery time-delays 0.64 0.25
selection decision, it was originally considering 12 potential C8: Delivery quantity shortage 0.36 0.25
suppliers, many of which could meet its needs, entirely or
partially. The team also agreed that the company would get D4: Customer services 0.09 0.02
the maximum benefits (e.g. quantity discount, buyer/supplier C9: Response to change 0.28 0.11
relationship, etc.) if the total number of suppliers it was C10: Lead time to order 0.49 0.18
dealing with did not exceed five. The application was based C11: Response to inquiry 0.23 0.10
on the hierarchical structure outlined in Figure 1. As
D5: Cooperation and partnership 0.12 0.04
discussed in the previous section, the input data required
C12: Co-design production 0.38 0.27
for the AHP were obtained from a survey of the selected
C13: Supply contracts 0.62 0.27
sample consisting of ten members of the purchasing team at
the company and ten colleagues who were in charge of D6: Financial status 0.08 0.02
purchasing tasks at other similar-trade manufacturers. These C14: Assets and debts 0.33 0.13
people were familiar with the AHP concepts as well as with its C15: Income and earnings 0.36 0.15
potential benefits. Each member in the sample group went C16: Cash flow 0.31 0.13
through the AHP individually and independently, and the

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 An integrated approach for supplier selection and purchasing decisions Supply Chain Management: An International Journal
Shin-Chan Ting and Danny I. Cho Volume 13 · Number 2 · 2008 · 116 –127

however, that the order of importance (i.e. price, quality, and Single objective solutions
lead-time) found in our example was based on the survey of The single objective solutions for minimizing purchasing
selected sample members. These rankings could change if costs, for minimizing defect or scrap and rejected quantity,
different groups of people are surveyed. In fact, in the 1970s and for minimizing deviations from due date of delivery, are
and 1980s manufacturers competed based on quality. presented in Table IV. Z 1* ; Z *2 ; Z *3 and Z 1** ; Z 2** ; Z **
3 are
Companies that emphasize zero defects and Six Sigma will also obtained by solving the individual single objective LP
rank the criteria in the order of quality, lead time, and cost, models. The results show that minimizing defect or scrap and
and select suppliers who can provide them with a high level of rejected quantity (i.e. objective function (3)) compared to
quality material and supplies. Although cost and quality are minimizing total purchasing costs (i.e. objective function (1))
still crucial, however, manufacturers today are under pressure increases the amount of purchasing costs by $29,371, but
from their customers to cut lead times and improve speed. In reduces deviations from due date of delivery by 2.8 weeks.
such a situation, companies will rank the criteria in the order Minimizing deviations from due date of delivery (i.e. objective
of lead time, quality, and cost, and select suppliers who can function (4)) leads to the worst values for the other two
provide a rapid response to their needs. Thus a different objectives.
sample of groups of experts used by a particular company
might select a different ranking of quality, lead time and price Multiple objective solutions
as most important criteria, which will affect the results of the The Minimax model developed earlier is solved under the
proposed supplier selection and purchasing decision analysis. weights for the first three dimensions, which are obtained
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Having obtained the weights of the dimensions and criteria, from the AHP analysis (i.e. D1: purchasing costs (0.29); D2:
the purchasing team collected the required data and statistics product quality (0.22); D3: delivery reliability (0.19)). These
relevant to each criterion, and scored the suppliers under each original weights are normalized to (w 1, w 2, w3) ¼
criterion through a group decision in order to obtain the (0.42, 0.31, 0.27)) so the sum of these weights becomes 100
priorities of the 12 suppliers for each of all criteria. Finally, percent. The optimal solution to the Minimax model is shown
in Table V.
the team calculated the overall performance (priority) for each
The results in Table V match sequential logic thinking very
supplier by aggregating (multiplying) the priority for each
well, but the weights can be adjusted to reflect the individual
supplier under each criterion by the priority (weight) of the
decision maker’s subjective knowledge about importance of
same criterion, and then adding them for all criteria. The
each objective. Table VI shows the multiple objectives
results after the entire AHP process were the ranked order of
solutions for different weight combinations. From the
the 12 suppliers. The team selected the top five candidate
results presented above, it is apparent that minimizing
suppliers into the next step to allocate order quantity among purchasing costs and minimizing defect or scrap quantity
them. are competing objectives. A similar situation holds for the
correlation between purchasing costs and deviations from due
MOLP model and results date of delivery. Improving the level of one objective always
The MOLP model has been applied to order quantity comes at the expense of the level of one or more of the other
allocation of the aforementioned company, which mainly two objectives. Such trade-offs are more consistent with the
manufactures motherboards for desktop PCs and notebook complexity and nature of the real-world decision-making
computers. According to the company’s bill of materials environment. For this reason, the multi-objective formulation
(BOM), a motherboard (shown in Figure 2) consists of the offers better information and solutions supporting effective
following major components: purchasing decisions.
.
chipset;
.
clock generator; Concluding remarks
.
pulse width modulator (PWM);
.
electrically erasable programmable read-only memory The overall supplier selection problem of multiple sourcing is
(EEPROM); not only to select the right suppliers, but also to allocate
.
metal-oxide semiconductor field effect transistor optimal order quantity among the selected suppliers, based on
(MOSFET); a number of key criteria such as costs, quality, and delivery
.
accelerated graphics port (AGP); reliability, etc. For these purposes, the two-step decision-
.
super I/O; making procedure was developed in this paper. Firstly, a
.
battery; hierarchical structure for supplier selection was developed
.
capacitor; through the analytical hierarchy process, in consideration of
.
resistor; both quantitative and qualitative criteria, in order to identify a
.
regulator; set of candidate suppliers. Secondly, to help management
.
coil; allocate the optimum order quantities to the candidate
.
PCI to ISA bridge; suppliers, a multi-objective linear programming model with
.
PCI standard host CPU bridge; three objectives (purchasing costs, quality, and delivery
.
PCI IDE controller; reliability) and with a set of system constraints was
.
PCI to USB open host controller; formulated. The MOLP model was reformulated as a
.
PCI to USB enhanced host controller; Minimax model, which was then solved as a single objective
.
AC audio; and LP model. The proposed models were applied to the supplier
.
PCI fast ethernet NIC. After consulting with the selection problem at a high-technology company in Taiwan.
purchasing team at the company, we chose seven The results have shown that the models are effective and
components for our case study. applicable. The proposed approach contributes to supply

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 An integrated approach for supplier selection and purchasing decisions Supply Chain Management: An International Journal
Shin-Chan Ting and Danny I. Cho Volume 13 · Number 2 · 2008 · 116 –127

Figure 2 The layout of a PC motherboard

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Table IV The order quantity allocation of single objectives solutions (unit: SKU)
Purchasing item 1 2 3 4 5 6 7 Total
Objective function (1): Z* ** 5 24:7
1 5 2; 626119; Z2 5 3; 443; Z3
Supplier 1 5,500 3,100 5,000 0 8,000 6,500 2,500 30,600
Supplier 2 8,500 5,000 7,400 4,497 9,000 7,200 5,253 46,850
Supplier 3 0 0 5,000 7,500 5,000 4,200 4,200 25,900
Supplier 4 0 3,000 1,100 8,600 8,500 0 0 21,200
Supplier 5 4,500 7,400 0 0 6,500 600 7,400 26,400

Objective function (3): Z1 5 2; 655; 490; Z*

2 5 2; 769; Z3 5 21:9
Supplier 1 6,000 6,100 5,000 3,997 8,000 6,500 2,500 38,097
Supplier 2 8,500 5,000 7,400 8,000 7,000 7,200 6,000 49,100
Supplier 3 2,000 0 3,600 0 5,000 4,200 4,200 19,000
Supplier 4 2,000 0 0 8,600 8,500 0 3,500 22,600
Supplier 5 0 7,400 2,500 0 8,500 600 3,153 22,153

Objective function (4): Z**

1 5 2; 670; 005; Z**
2 5 3; 530; Z*3 5 17:8
Supplier 1 0 6,100 0 5,400 8,000 3,600 2,500 25,600
Supplier 2 8,500 5,000 6,500 8,000 9,000 7,200 6,000 50,200
Supplier 3 4,200 0 5,000 7,197 5,000 4,200 4,200 29,797
Supplier 4 2,000 0 4,500 0 6,500 0 3,500 16,500
Supplier 5 3,800 7,400 2,500 0 8,500 3,500 3,153 28,853

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 An integrated approach for supplier selection and purchasing decisions Supply Chain Management: An International Journal
Shin-Chan Ting and Danny I. Cho Volume 13 · Number 2 · 2008 · 116 –127

Table V The order quantity allocation of multiple objectives solutions (ðw1 ; w2 ; w3 Þ ¼ ð0:42; 0:31; 0:27Þ)
Purchasing item 1 2 3 4 5 6 7 Total
Minimax model: Z1 5 2; 641; 316; Z2 5 3; 126; Z3 5 21:5; l 5 14:54 percent
Supplier 1 0 6,100 4,235 0 8,000 6,500 2,500 27,335
Supplier 2 8,500 5,000 7,400 8,000 9,000 7,200 6,000 51,100
Supplier 3 4,200 0 5,000 3,997 5,000 4,200 4,200 26,597
Supplier 4 2,000 0 0 8,600 8,500 0 2,823 21,923
Supplier 5 3,800 7,400 1,865 0 6,500 600 3,829 23,995
Total 18,500 18,500 18,500 20,597 37,000 18,500 19,353 150,950

Table VI The multiple objectives solutions for different weight combinations (w1, w2, w3)

w1 0.15 0.25 0.33 0.42 0.50 0.60 0.70 0.80

w2 0.70 0.50 0.33 0.31 0.25 0.20 0.15 0.10
w3 0.15 0.25 0.33 0.27 0.25 0.20 0.15 0.10
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l (percent) 11.09 12.33 14.77 14.54 14.09 12.45 10.31 10.14

Z1 2,650,088 2,647,769 2,645,571 2,641,317 2,638,489 2,635,225 2,632,582 2,630,230
Z2 2,858 2,957 3,106 3,126 3,198 3,243 3,292 3,339
Z3 21.6 21.2 20.9 21.5 21.7 22.1 22.5 23.0
Supplier 1 35,719 32,225 28,437 27,335 27,649 28,413 29,315 27,828
Supplier 2 50,161 51,100 51,100 51,100 51,100 51,100 48,852 47,597
Supplier 3 22,600 24,248 24,860 26,597 26,597 26,597 28,845 30,100
Supplier 4 22,600 22,600 21,548 21,923 20,124 19,757 20,200 21,947
Supplier 5 19,870 20,777 25,005 23,995 25,480 25,082 23,738 23,478

chain field in both the academic world and the real business computerized integrated system will help the purchasing
world through an integrated approach for multi-objective department evaluate potential suppliers faster and make more
decision making problems. Our models have several efficient and effective purchasing decisions. Furthermore, as
advantages: computer and telecommunication technologies become so
.
they can deal with multiple (both quantitative and advanced, dynamic inventory control and supplier relation
qualitative) criteria such as costs, quality, delivery management (SRM), two extended issues regarding supplier
reliability, customer services, cooperation/partnership, selection and purchasing decision, will provide great
and financial status in supplier selection problems; opportunities for future research in the field of supply chain
.
total purchasing costs used in the MOLP model not only management.
consider product price, but include transportation and
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Corresponding author
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Verma, R. and Pullman, M. (1998), “An analysis of the

supplier selection process”, Omega, Vol. 26, pp. 739-50. Danny I. Cho can be contacted at: [email protected]

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