Supplier Evaluation and Selection Using Multi-Criteria Decision Making Method
If you are a part of a startup or a big business, you know how crucial is the supplier selection process for different product or service requirements of your business. At the same time, it is quite difficult, especially when there are multiple supplier alternatives to choose from.
Selecting a suitable supplier can help you grow your business, but on the other hand, a wrong supplier selection decision can cost you a lot of time, money and many a time, customers as well. So we understand the importance of supplier evaluation and selection process in the overall growth of the business.
The suppliers can be evaluated based on a number of criteria, both qualitative and quantitative, to make an informed decision of supplier selection. This makes the supplier selection a multi-criteria decision making (MCDM) problem and numerous MCDM methods are suitable for solving this particular problem systematically and with sufficient information.
One such MCDM method is Technique for Order of Preference by Similarity to Ideal Solution (TOPSIS). This method uses the closeness of the alternative to the ideal solution as the metric for ranking different available alternatives based on considered criteria. So first, let's understand the various criteria based on which we can assess the suppliers of products or services.
Supplier Evaluation Criteria
Literature related to supplier evaluation and selection process mentions a number of selection criteria. We can select suitable criteria from these to rank suppliers and make the final decision. These criteria are discussed in brief below:
Quality
Quality is one of the most important criteria for supplier selection, along with the delivery and cost. It refers to the supplier's ability to meet the quality specifications consistently. These specifications cover the materials utilized, dimensional tolerances maintained, intelligent design, and durable construction. This criterion also includes the production quality, such as the production line, manufacturing processes, and machinery. To satisfy quality requirements and accomplish continuous improvement, the organization should have quality systems in place, such as internal processes like quality control (QC) and quality assurance (QA), database systems, and quality certifications.
Delivery
As previously stated, delivery is one of the essential factors since it pertains to time constraints. This criterion examines the supplier's ability to satisfy predetermined delivery deadlines for the product or service. We may include the lead-time and on-time performance in the schedules. This criterion also consists of the product's fill rate and the return policy for faulty or broken products. The delivery elements are influenced by the supplier's location and mode of transportation. The supplier should adhere to the Incoterms, or International Commercial Terms, issued by the International Chamber of Commerce (ICC), which govern international commercial law.
Price
Before the recent adoption of the MCDM approach for the supplier selection problem, the price was the only criterion considered for a long time. This criterion includes the unit price of the products or services as well as the pricing terms. The prices also include the exchange rates for converting from one currency to another, the goods or service's tax implications, and any discounts provided by the suppliers on the product or service's base price.
Cost
As previously mentioned, the cost is one of the three most important factors to examine, and it is more inclusive than the price criterion. The cost criterion aims to include elements that aren't directly quantified in monetary units. As a result, it is the monetary assessment of aspects such as effort, time and utility consumption, incurred risks, and missed opportunities in the context of product or service creation and delivery. The cost also includes the monetary value of the products and resources utilized.
Performance History
The supplier's performance history indicates the organization's integrity, dedication to product supply, actions the supplier takes for supply chain improvements, past clients and their reputation, controversies or legal issues faced, and general behavioural elements of the supplier. The supplier's financial and economic history is included in the performance history, covering sales, earnings, financial setbacks, economic growth, technical investments, and debts. A long-term relationship between the supplier and the buyer requires financial stability. This criterion also considers the supplier's social, organizational, and societal history. In light of the supplier's competitive nature, historical production plan, market reaction, and readiness to establish commercial contacts and business references, the supplier's performance history should be thoroughly evaluated.
Production Capacity
The production capacity of a supplier refers to their ability to deliver products or services in a specified volume utilizing already available resources such as human resources, financial resources, inventory and storage, machinery and equipment. In addition, the supplier's ability to grow capacity is a decisive element in meeting a specific demand or developing a new product following market conditions.
Capability and Technology
It is critical to accept and adopt new technologies in order to remain relevant and competitive, as well as to deliver better services as technology advances. This criterion considers the supplier's technical competence as well as their capacity to adopt cutting-edge technology. The criterion also indicates the supplier's promise to get the necessary technical resources for research and development in the relevant field.
Warranties and Claim Policies
A warranty is a written contract that guarantees the fulfilment of a commitment to repair or replace a product in the event of failure or damage within a certain time frame. The claim policy is a formal document that presents a request for coverage or reimbursement for a loss incurred or in the event of an occurrence that meets the policy's criteria. The supplier should have clear rules for the claim policy, with no hidden conditions, and should give a warranty for the product for a sufficient amount of time to cover a major percentage of the device's functioning life.
Repair Service
The supplier should be able to provide excellent aftermarket services, such as replacement or restoration of damaged, defective, or worn-out items to like-new condition. This is critical since such situations are unavoidable, and the supplier's attitude toward repair services may make or break the relationship.
Geographical Location
The supplier's location has a significant impact on the decision to select a supplier. The distance between the supplier and the buyer is the most important factor to consider since it might impact shipping time and cost. Delays are more likely for suppliers who are located far away from the buyer. It is critical to verify the social and economic state of the supplier's home region or country, as well as political and government influences since these factors might affect the supplier's capacity to fulfil the order.
Mutual Trust and Ease of Communication
Mutual trust is a crucial criterion for the development of long-term relationships. This refers to the buyer's level of confidence in the supplier's work quality. There are a few commitments that both the buyer and the supplier must adhere to, and mutual trust is based on these commitments. Suppliers who have a greater level of mutual trust are constantly in demand. The ease of communication comes from a high level of mutual trust, as well as a straightforward information flow between the buyer and the supplier.
Communication system
The communication system plays an important role in creating a successful relationship between the buyer and supplier. Trust is established when there is a defined protocol for conveying information about the current status of the buyer's orders. The communication system is also used to exchange different types of information.
Industry Reputation and Position
As any industry is competitive with multiple suppliers, each has a reputation and ranking associated with their brand, a specific product that the buyer is interested in, or the company. The sales volume is a useful measure of the supplier's reputation and position compared to competitors in the industry that provide similar products or services. The reputation of a firm reflects its overall success, industry domination, and client base.
Reliability
One can judge the supplier's dependability and trustworthiness based on various factors, including their references, economic standing, former and present clients, management hierarchy, and corporate culture.
Management and Organization
The reputation of the supplier's higher management and their level of control over business operations are crucial factors for the supplier entity's successful operation. A decisive element is management's general attitude toward various components of the supply chain. Supplier success and long-term relationships are influenced by the organization's structure and chain of command. The management team's vision and mission and their activities toward achieving them are indicative of their intentions.
Attitude and Professionalism
Despite the fact that attitude is a qualitative and subjective metric, it is an essential criterion for selecting suppliers. When buyers contact a supplier, the supplier's attitude reveals a lot about them. Politeness and confidence are two qualities of a positive attitude to look for in the supplier. Also, the supplier should be qualified and skilled enough to fulfil the requirements of professional obligations.
Risk Factor
In the case of supplier selection, there are various risk factors to consider, particularly when the supplier is from a foreign country, such as the country's political and economic status. This is because rules can change, currency values vary, and governments can impose prohibitions, all of which might influence the supplier's ability to fulfil the order. There is also a chance of fraud or other misconduct by the supplier or the individuals in the supplier's firm. Terrorism has also been a significant concern in several countries during the last few decades.
Commercial Plans and Structures
The supplier's business objectives might have an impact on the buyer's relationship. The supplier should explain why they believe these stated objectives are feasible in the format statement, what strategies they will put in place to accomplish these goals, and how they will build the infrastructure necessary to meet them.
Workplace Relations
The working conditions of its employees determine any organization's success. A positive relationship between management and employees increases the overall quality of the supplier's service. Any conflict between these two might cause dissatisfaction in the organization, and the supplier's efficiency may suffer.
Service
The supplier offers physical products and intangible products like customization, communication, flexibility, understanding of business requirements, and change adaptation. The supplier's performance based on these factors also needs to be taken into consideration.
Process Improvement
The supplier should be aware of the benefits and drawbacks of current business processes and be able to spot wasteful processes, analyze them, and make adjustments based on the findings. The supplier is aware of these aspects and willing to put in efforts to take necessary actions is the ideal choice.
Product Development
It is indeed possible that the supplier's product has flaws or might be modified to meet the buyer's requirements better. Suppliers should be aware of and prepared to update or alter existing features and produce new products.
Environmental and Social Responsibility
The usage of resources, emissions, pollutants, and other environmental burdens are all a part of every supply chain activity. Suppliers should be aware of these consequences and should be willing to improve procedures in order to reduce the negative impact on the environment while also conserving the resources they have at their disposal.
Supplier Information Matrix
Generally, few of the criteria mentioned above are selected for supplier evaluation. The required information for different suppliers against the specified criteria is not usually available in one place or with a single person, and the opinions of multiple experts are required to complete the information matrix. Here, the information matrix refers to a table with the alternatives as rows and the selected criteria as columns. We need to fill this table by adding the information of each supplier for the corresponding criteria.
The decision-makers can use brainstorming or sophisticated methods like the Delphi method for selecting the criteria for assessing the suppliers and coming up with the scores for the suppliers against the selected criteria.
Let's see one example to understand the supplier information matrix. Consider a company X that wants to purchase a product Y in some specific quantity (say m items) for a period of time and is searching for a suitable supplier. There are five different suppliers available in the market who can fulfil the company requirements. The team of decision-makers has selected five criteria to evaluate the suppliers, which are: quality, delivery, cost, performance history and production capacity.
Quality is a measure where we require the experts' opinion to evaluate the suppliers based on this criterion. We can obtain the delivery information by contacting the suppliers. The overall costs involved can be calculated from the quotes from the suppliers by the experts in the company. We can assess the performance history of the supplier from the information available on the supplier website and by getting the answers to the questionnaire from related stakeholders. The suppliers also provide the production capacity information when asked.
In the case of qualitative criteria, verbal terms like high-low, average-good-excellent should be converted to numerical values using a five-point or ten-point scale.
We can assign the suppliers a score based on a five-point scale for criteria like quality, delivery and performance history. The cost and production capacity has actual numerical values which can directly enter into the information matrix.
The criteria can be beneficial or non-beneficial. For the beneficial criteria, the higher value is better, such as 'Quality' in the example. For the non-beneficial criteria, the lower value is better, such as the 'Cost'.
Also, not all criteria are equally important for us. In some cases, quality is the most important criterion, even if it means spending more money. But if there are budget restrictions, then cost can be the more important criterion, and some compromise can be made with the quality. Similarly, other considered criteria have different levels of importance. The level of importance is indicated by the weights assigned to the criteria.
We can solve this problem using the TOPSIS MCDM method. This method has different calculations, and it is time-consuming to do the calculations by hand. Another option is to create an Excel sheet with the TOPSIS formulation. However, there are limitations to Excel sheets, especially when we want to work in a collaborative setting.
To solve this problem, I have developed a Notion Template, which implements the TOPSIS method. The functionality of Notion allows us to collaborate and edit the information live and remotely. This helps in making decisions with online meetings by brainstorming during the meeting with the TOPSIS template. We can use this method for numerous other decisions, where one is faced with multiple alternatives or options, and the selection decision depends on multiple criteria or attributes. For those who don't know what is Notion:
Notion is an application that provides components such as notes, databases, kanban boards, wikis, calendars and reminders. Users can connect these components to create their own systems for knowledge management, note-taking, data management, project management, among others.
We can create useful templates in Notion and share them with the world to help people solve their problems with unique solutions we have come up with.
Supplier Evaluation and Selection Using Notion Template
We can evaluate up to ten alternatives (suppliers) using up to ten criteria using this template. More alternatives and criteria can be added if required for a specific application. The supplier information matrix created above is replicated in the template.
The next step is to add the preferences of criteria using weights and indicating whether a particular criterion is a beneficial or non-beneficial one. Beneficial criteria should be assigned the value of 1, while the non-beneficial criteria should have a value of -1 for the ‘Type of Criterion/Attribute’. Also, we need to make sure that the sum of weights for all the criteria adds up to one.
The calculations are performed according to the TOPSIS formulation by creating a weighted vector normalized matrix and calculating the Euclidean distances of the alternatives from the ideal solution.
The TOPSIS method ranks the alternatives based on their distance from the ideal solution. The final rankings of the suppliers based on the information we have provided are:
As we are giving more importance to quality and delivery, and are giving low importance to cost, performance history and production capacity, ‘Supplier 1’ has the highest score as the score for important criteria is high. Note that, ‘Supplier 1’ is ranked first even though they have high costs and considerably low production capacity compared to other suppliers due to the level of preferences given to different criteria.
Reconsider the scores and weightings you’ve used if your intuition tells you that the highest-scoring alternative isn’t the best. This might suggest that some criteria are more important to you than you previously thought.
This is just an example and the template can be used to make many other decisions. I am working on more articles covering the different use cases for the template and will post them here soon. You can get this template from my Gumroad listing.
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Please check the template and leave your feedback in the comments.
Also, check the articles on other use cases of this template:
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Check the article on a simple method of Decision Matrix and get a FREE Notion Template: