Using the Analytic Hierarchy Process to Structure the Supplier Selection Procedure

The supplier selection problem is perhaps the most important component of the purchasing function. Some of the common and influential criteria in the selection of a supplier include quality, price, delivery, and service. These evaluation criteria often conflict, however, and it is frequently impossible to find a supplier that excels in all areas. In addition, some of the criteria are quantitative and some are qualitative. Thus, a methodology is needed that can capture both subjective and objective evaluation measures. The Analytic Hierarchy Process (AHP) is a decision-making method for ranking alternative courses of action when multiple criteria must be considered. This article shows how AHP can be used to structure the supplier selection process. This method of selection is described, and a detailed, hypothetical example of how AHP can be used also is provided. Finally, a framework is presented that any buying organization can adapt to fit its specific set of needs. INTRODUCTION Supplier selection may be the single most important phase of the purchasing process. [1] The objection of this stage is to find the optimal supplier - not necessarily the supplier offering the best technical service or the lowest price or the shortest delivery. Thus, firms must consider multiple criteria in their attempts to distinguish between items offered by potential suppliers. [2] This article presents a framework that can be used to formalize the process of evaluating the tradeoffs between the conflicting selection criteria established by purchasers. Current Developments in Supplier Selection The past few years have seen the relationship between the buyer and the supplier change. [3] Historically adversarial or quasi-adversarial relationship between the buyer and the seller often existed. However, current business trends, including shortened product life cycles, increased rates of technological change, and foreign sourcing,[4] have given rise to a growing trend toward improved communication and cooperation between the two parties, as well as the possibility of single sourcing rather thant multiple sourcing. The implications of these recent developments are that the supplier selections decisions is becoming even more important. If buyers are less willing to change suppliers, the choice of an unacceptable supplier is more damaging than it was previously. In addition, once an acceptable supplier is identified, the buyer has an opportunity to establish a long-term relationship with the supplier, which may provide a strategic advantage. [5] The Supplier Seclection Procedure When a supplier selection decision needs to be made, the buyer generally establishes a set of evaluation criteria that can be used to compare potential sources. [6] The basic criteria typically utilized for this purpose are pricing structure, delivery (timeliness and costs), product quality, and service (i e., personnel, facilities, research and development, capability, etc.). [7] For global markets, the set of criteria is expanded to take into account the new variables an risks associated with international business transactions. [8] Frequently, these evaluation criteria conflict with one another. For example, one supplier may offer inexpensive parts that have slightly below average quality, while another supplier may offer higher quality parts, with uncertain, delivery. In addition, the importance of each criterion varies from one purchase to the next. This situation can be complicated further by the fact that some of the criteria are quantitative (price and perhaps quality) and some are qualitative (service). Thus, technique is needed that can adjust for the decision maker's attitude toward the importance of each criterion for each item, as well as capture both subjective and objective criteria. Two approaches commonly used to assess supplier performance - and subsequently to assist in the sourcing decision - are the categorical and the weighted point evaluation plans. …