Supplier Evaluation Using Ahp

Supplier Evaluation using Analytic Hierarchy Process (AHP) Under Guidance of Prof. V.N.A. Naikan

By Subhani Shaik M.Tech 2nd Year, 05IM6013 Dept. of Industrial Engineering and Management. IIT Kharagpur.

 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.

Project Scope  The dissertation work covers the evaluation of prototype suppliers of mechanical components of Sensing & Control department.

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 Methods Method

Reference

Quantitative / Qualitative Parameters

Advantages

Disadvantages

Categorical

Timmerman (1986)

-Quality -Delivery -Service -Price

-The evaluation process is clear and systematic -Inexpensive -Requires a minimum Performance data

-Attributes are Weighted equally -Subjective -Imprecise

Weighted Point

Timmerman (1986)

-Quality -Delivery -Service -Price

-Attributes weighted by Importance

-Subjective -Difficult to effectively consider qualitative criteria

Cost Ratio

Timmerman (1986)

-Quality -Delivery -Service -Price

-Subjectivity is reduced -Flexibility

-Complexity and requirement for a developed cost accounting system -Performance Measures (cost ratios) are artificially expressed in the same Units

Literature : Supplier Evaluation Methods… Method

Quantitative / Reference Qualitative Parameters

Total cost of ownership

Ellram (1995)

Analytic Hierarchy Process (AHP)

Advantages

Disadvantages

-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

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

Literature : Performance Factor – Quality… PPM for Continuous Data : Let p= Prob. that produced items not meeting requirements p= P(XUSL) PPM =p * 1,000,000 PPM for Discrete Data : Total no of defective items PPM = ------------------------------ 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. Sigma Quality Level 6σ 5σ 4σ 3σ 2σ 1σ

Percent Accepted 99.9999998% 99.999943 99.9937 99.73 95.45 68.27

Defective PPM 0.002 0.57 63 2700 45500 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.

Literature : Performance Factor – Quality… 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 Process Capability Ratio Cp = ---------------

R-Bar Where σ = Estimated Sigma = ---------

6*σ

d2

min (USL-μ, μ-LSL) Process Capability Index Cpk = -------------------------3*σ

Literature : Performance Factor – Quality… 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

Literature : Performance Factor - Delivery 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 time PPM = ------------------------------------------ X 1,000,000 Total No of times delivered Rating System (Delivery before / after delivery date) 1 More than One week

3 Up to One Week

5 3-4 days

7 1-2 days

9 On time

Literature : Performance Factor - Cost Cost factor in supplier evaluation process can be measured by Rating method as follows.

Cost : Sub-factors i.

Max Points

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

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  Net Cost Reduction Performance  Cost Management Initiative  Performance during product delivery process  Service  Proactive Communication  Responsiveness  Extraordinary Arrangements  Accessible / Diligent  Flexibility  Analytic Hierarchy Process

(10 Points) (10 Points) (5 Points) (5 Points) (5 Points)

(5 (5 (5 (5

Points) Points) Points) Points)

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 then synthesizes the results.

comparisons,

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 LEAVENWORTH Statistical 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

References… 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.

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