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www.elsevier.com/locate/dsw

ownership perspective

Zeger Degraeve, Eva Labro *, Filip Roodhooft

Department of Applied Economics, Katholieke Universiteit Leuven, Naamsestraat 69, 3000 Leuven, Belgium

Received 1 March 1998; accepted 1 March 1999

Abstract

Many dierent vendor selection models have been published in the purchasing literature. However there has been no

systematic approach to compare the relative eciency of the systems. In this paper we propose to use the concept of

Total Cost of Ownership as a basis for comparing vendor selection models. We illustrate the comparison with a real life

data set of the purchasing problem of ball bearings at Cockerill Sambre, a Belgian multinational company in the steel

industry. From a Total Cost of Ownership perspective mathematical programming models outperform rating models

and multiple item models generate better results than single item models for this specic case study. 2000 Elsevier

Science B.V. All rights reserved.

Keywords: Purchasing; Management accounting/Operations research

1. Introduction

In the literature (Dickson, 1966; Weber et al., 1991) several dimensions are mentioned that are important

for the multiple objective vendor selection decision. These include net price, quality, delivery, performance

history, capacity, communication system, service, geographical location, etc. The problem is how to select

suppliers that perform optimally on the desired dimensions. The published vendor selection decision models

formulate answers to this multiple objective problem. Some authors propose linear weighting models in

which suppliers are rated on several criteria and in which these ratings are combined into a single score.

Others propose mathematical programming formulations in which quantiable criteria are taken into

account. Some approach the problem on an item-by-item basis, others consider it a multiple item decision.

Only a few authors incorporate the multi-period inventory management issue into the supplier selection

decision (Bender et al., 1985; Degraeve and Roodhooft, 1999b; Ronen and Trietsch, 1988).

E-mail address: eva.labro@econ.kuleuven.ac.be (E. Labro).

0377-2217/00/$ - see front matter 2000 Elsevier Science B.V. All rights reserved.

PII: S 0 3 7 7 - 2 2 1 7 ( 9 9 ) 0 0 1 9 9 - X

35

No research has been done on how to compare these dierent approaches to vendor selection and to nd

out the ``best'' way to handle the decision. The problem is to nd a basis for comparison that is theoretically

sound. In this paper we propose the concept of Total Cost of Ownership (TCO) to compare the relative

eciency of dierent vendor selection decision models. The Total Cost of Ownership quanties all costs

associated with the purchasing process throughout the entire value chain of the rm. We apply each of the

vendor selection models proposed in the literature to a real life data set describing the purchasing problem

of ball bearings at Cockerill Sambre. Subsequently, we calculate the TCO of the resulting solutions, i.e.

choices of what to buy from whom and when. In this way, we are able to evaluate and compare the existing

vendor selection models from a TCO perspective.

The contribution of this paper is fourfold. First, we present a literature review and classication of

published vendor selection models. Second, these models are evaluated from a TCO perspective. Third,

the application and evaluation of the dierent vendor selection models is done using a real life data set

describing the purchasing problem of ball bearings at Cockerill Sambre. The data consist of information

on various criteria other than the traditional quality, time and quantity discount parameters. Fourth,

several conclusions will be drawn regarding the eciency of the dierent kinds of vendor selection

models.

The rest of the paper is organised as follows. In Section 2, we explain the TCO perspective from which

the evaluation will be made and all parameters associated with it. We discuss the classication of the vendor

selection models in Section 3. In Section 4 we describe the real life case used to evaluate the published

vendor selection models. In Section 5 the results of the comparison will be discussed. Finally, we will draw

conclusions and make suggestions for future research in Section 6.

2. The total cost of ownership approach

The TCO quanties all costs associated with the purchasing process throughout the entire value chain of

the rm. The cost of the acquisition and subsequent use of an item or service that is to be purchased is

determined. The approach goes beyond price to consider all costs over the items entire life such as those

related to service, quality, delivery, administration, communication, failure, maintenance, etc. (Ellram,

1994, 1995b). The analysis of costs throughout the extended value chain of a company is an important topic

in todays management accounting literature (Shank and Govindarajan, 1992). Activity Based Costing

(ABC) permits us to analyse activities and determine cost drivers for the dierent activities dened. While

suppliers are an important part of the total value chain, the application of ABC ideas to the vendor selection problem has received little attention. Roehm et al. (1992) discuss the use of the system in a purchasing department. They assign additional purchasing costs to products, but not to suppliers. Ellram

(1995a) and Roodhooft and Konings (1997) develop the link between the selection of suppliers and ABC.

Also Carr and Ittner (1992), Cavinato (1992) and Ellram and Sierd (1993) elaborate on the use of the TCO

concept in purchasing.

Degraeve and Roodhooft (1999b) recognise a hierarchical structure in activities with respect to the

purchasing problem: (1) the supplier level activities, (2) the order level activities and (3) the unit level

activities. The rst hierarchical level describes costs incurred and conditions imposed whenever the

purchasing company actually uses the supplier over the decision horizon. Examples of costs on the

supplier level include a quality audit cost incurred by the buyer for the evaluation of a supplier, the cost

of a dedicated purchasing manager and additional research and development costs due to using a particular supplier. The order level parameters indicate costs incurred and conditions imposed each time an

order is placed with a particular supplier and include, amongst others, costs associated with reception,

invoicing, transportation, ordering and receiving credit notes. At the unit level we nd costs incurred and

conditions imposed related to the units of the products for which the procurement decision has to be

36

made, for example, price, internal failure, external failure and inventory holding. It is important to make

this classication of activities into separate levels since the overall cost driver (number of suppliers,

number of orders, number of units procured) for each level of activity is independent of the activities in

other levels.

The use of ABC in supplier selection models has several advantages. First, it is important to note that

the quantication of the criteria and the trade-o between them is no longer a problem, because the objective function is dened as the TCO with respect to the purchasing decision caused by the suppliers.

Second, an important advantage of this approach over other methodologies exists in arriving at objective

cost measures in a systematic way. Third, the system will enable companies to develop interorganisational

activity based management opportunities given the importance of close relationships between the purchaser

and a limited number of reliable suppliers. Fourth, the model allows us to answer all sorts of ``what if''

questions dealing with cost management and strategic decision making such as (1) the cost impact of

making dierent/alternative supplier selections, (2) the consequences of performance improvement by

suppliers with respect to dierent important criteria and the reduction or elimination by the purchasing

company of some of the costs or activities caused by the purchasing decision and (3) the evaluation of

alternative company policies with respect to the number of suppliers, order quantities and minimum and/or

maximum quantities to buy. A disadvantage of the approach is that determining the TCO of selecting a

supplier for the delivery of a certain item based on ABC information requires an extensive management

accounting system that captures the relevant costs of the activities by supplier and item purchased. We

recognise the importance of the incremental costs of developing, installing and maintaining such an ABC

system. Experience shows however (Turney, 1990) that most companies overestimate these costs and that

several rms have implemented ABC systems at a cost that was acceptable for management. Recent

management accounting literature (Kaplan and Cooper, 1997) states that rms start to and should integrate comprehensive ABC systems with enterprise-wide information systems from SAP, Oracle, PeopleSoft,

Baan, and others, which makes it easy to collect the necessary data. However, it is not necessary to implement a company-wide ABC system to provide decision support for vendor selection. Only information

on activities relevant to the purchasing function has to be gathered. The benets of adopting this approach

outweigh the cost. For example, Degraeve and Roodhooft (1998,1999a) succeed in saving more than 11%

on TCO for two dierent product groups at Cockerill Sambre. This resulted in the development of a

company-wide purchasing system based on ABC and TCO information.

In the following sections we discuss the dierent vendor selection models more thoroughly and evaluate

them from a TCO viewpoint whenever the Cockerill Sambre ball bearings data set allows us to do so. First,

we have applied the dierent vendor selection models to the data set using the advocated methodology

while trying to stay as close as possible to the philosophy of the authors. Then the TCO resulting from the

vendor selection and inventory management models, i.e. combinations of what to buy, from whom and

when is computed. These are compared to the solution that minimises TCO (Degraeve and Roodhooft,

1999b) and to the other vendor selection models. When a model only gives a solution to the vendor selection problem, i.e. what to buy from whom, the TCO is calculated under two dierent assumptions. First

it is assumed that all orders for the full time horizon are placed in the rst period. Subsequently we assume a

TCO optimal inventory policy, xing what to buy from whom using the original vendor selection model.

This second assumption gives the maximum possible credit to the vendor selection model that is compared

to the TCO approach. When a single item model is to be compared, we have applied it item by item to the

ball bearings case in order to nd a solution for the multiple item problem. A few of the compared models

were build around a specic case. For these approaches either the inventory carrying costs were of minor

importance or there was only a single item to be purchased. When applying them to the Cockerill Sambre

ball bearings case, we tried to stay within the philosophy of the original paper as much as possible and by

making the TCO optimal inventory assumption, we gave these vendor selection models the most credit

possible.

37

As reported in Table 1, a distinction can be made between single item (Timmerman, 1986; Gregory,

1986; Nydick and Hill, 1992; Barbarosoglu and Yazgac, 1997; Willis et al., 1993; Li et al., 1997; Soukup,

1987; Thompson, 1990; Monczka and Trecha, 1988; Smytka and Clemens, 1993; Chaudhry et al., 1993;

Weber and Current, 1993; Pan, 1989) and multiple item models (Grando and Sianesi, 1996; Turner, 1988;

Current and Weber, 1994; Akinc, 1993; Sadrian and Yoon, 1994; Rosenthal et al., 1995; Benton, 1991;

Bender et al., 1985; Degraeve and Roodhooft, 1999b; Ronen and Trietsch, 1988). Single item models select

vendors for one product, but fail to take into account various interdependencies that could exist among the

dierent products. For example, a supplier can be oering a larger discount based on total sales volume,

irrespective of the product mix. Order level costs could be minimised by combining orders for several

products into one single order form. Single item models also underestimate the supplier level costs that arise

because of working with a supplier (e.g., plant visit, purchasing manager's time to negotiate). Moreover,

those costs are often completely disregarded. More than half of the vendor selection models handle the

problem on an item-by-item basis and have to be applied iteratively to select suppliers for multiple items.

Most of the existing literature treats vendor selection without multi-period inventory management. It

could be argued that purchasing managers should incorporate the decision to schedule orders over time

with the vendor selection decision. For example, at the order level, costs can dier substantially between the

dierent possible suppliers due to the possibility of ordering via Electronic Data Interchange (EDI). If, due

to inventory management reasons frequent ordering is necessary, a supplier with a low unit price but a high

order cost e.g., no EDI, can generate a higher TCO than a supplier with a higher unit price and an EDI

system. Another example is the trade o between receiving a quantity discount and the inventory holding

costs when buying larger lotsizes. It should be noted that, to our knowledge, no single item models with

Table 1

Classication of vendor selection models

Single item

Multiple item

over time

time

Rating/linear

weighting

Total cost

approaches

Mathematical

programming

Rating/linear

weighting

Mathematical

programming

Mathematical

programming

Statistical

Timmerman

(1986) (categorical

method, linear

averaging)

Gregory (1986)

Timmerman

(1986) (cost

ratio method)

Chaudhry

et al. (1993)

Grando and

Sianesi (1996)

Turner (1988)

Bender et al.

(1985)

Ronen and

Trietsch (1988)

Monczka and

Trecha (1988)

Weber and

Current (1993)

Current and

Weber (1994)

Smytka and

Clemens

(1993)

Pan (1989)

Akinc (1993)

Degraeve and

Roodhooft

(1999b)

(1992)

Barbarosoglu and

Yazgac (1997)

Willis et al. (1993)

Li et al. (1997)

Soukup (1987)

Thompson (1990)

Sadrian and

Yoon (1994)

Rosenthal

et al. (1995)

Benton (1991)

38

inventory management over time exist, except for Degraeve and Roodhooft (1998), but this is in fact the

multiple item model of Degraeve and Roodhooft (1999b) applied to the single item purchasing case of

heating electrodes at Cockerill Sambre.

To our knowledge, Degraeve and Roodhooft (1999b) is the rst model that makes the widely accepted

theoretical construct (e.g. Ellram, 1995a,b) of TCO operational in a purchasing context and uses ABC and

TCO information in an objective mathematical programming model to simultaneously select vendors and

determine order quantities for multiple items over a multiple period time horizon. The model is programmed in LINGO (Schrage, 1998) and can be solved on a Pentium with 32 Mb RAM in about 5 minutes

for the case of the ball bearings (Degraeve and Roodhooft, 1999a). Apart from Degraeve and Roodhooft

(1999b), only Bender et al. (1985) and Ronen and Trietsch (1988) deal with inventory management over

time and vendor selection in one model. Bender et al. do not include the mathematical programming model

in their paper. Ronen and Trietsch propose a decision support system that selects suppliers and schedules

order placements over time, but that is focusing on the lead time management of large projects. In this

specic situation there is a demand for a particular item at only one moment in time, xed via the PERT

environment in which the DSS is embedded. The inventory management problem here is essentially answering the question for every item ``how long before the due date will the order have to be placed?''

A third distinction exists between rating and linear weighting models, total cost approaches, mathematical programming models and statistical models. Rating models (Timmerman, 1986; Gregory, 1986;

Nydick and Hill, 1992; Barbarosoglu and Yazgac, 1997; Willis et al., 1993; Li et al., 1997; Soukup, 1987;

Thompson, 1990; Grando and Sianesi, 1996) are very subjective and often very sensitive to dierent rating

scales, weights and/or ratings by dierent people. Most of the linear weighting models are compensatory,

though some are non-compensatory (Grando and Sianesi, 1996). In a compensatory model a low rating on

one criterion can be compensated by a high rating on another criterion, whereas in non-compensatory

models dierent minimum levels for each criterion are required. Soukup (1987) and Thompson (1990)

include uncertainty with respect to certain features of the problem in their rating models. Total cost approaches (Timmerman, 1986 (cost ratio method); Monczka and Trecha, 1988; Smytka and Clemens, 1993)

attempt to quantify all costs related to the selection of a vendor in monetary units. Mathematical programming models (Chaudhry et al., 1993; Weber and Current, 1993; Pan, 1989; Turner, 1988; Current and

Weber, 1994; Akinc, 1993; Sadrian and Yoon, 1994; Rosenthal et al., 1995; Benton, 1991; Bender et al.,

1985; Degraeve and Roodhooft, 1999b) often consider only the more quantitative criteria. They can be

subdivided in linear, (mixed) integer or goal programming models. Statistical models (Ronen and Trietsch,

1988) incorporate uncertainty into the vendor selection decision.

Only few of the vendor selection models could not be applied to the problem of the ball bearings

procurement at Cockerill Sambre because of data availability or applicability reasons. Nydick and Hill

(1992) and Barbarosoglu and Yazgac (1997) use the analytic hierarchy process (AHP) to structure the

vendor selection problem following Narasimhan (1983). They formalise the trade os between the conicting selection criteria that are weighted relative to the importance attached to them by several specialists

from dierent subelds in the company. To evaluate this paper this process should have been carried out by

dierent managers at Cockerill Sambre, which was impossible.

Soukup (1987) introduces uncertainty with respect to the requirements patterns in a single item rating

model without inventory management. The forecasting of the market probabilities remains a subjective

process. Since in the Cockerill Sambre case the demand is stable and certain, we do not apply this approach

to the ball bearings problem.

Grando and Sianesi (1996) develop a multiple item rating model to help visualise possible vendor selection strategies. The dierent criteria are assessed on the basis of historical longitudinal data that are not

available for the Cockerill Sambre ball bearings case either. Although the model could be used noncompensatory the authors propose to give weights to each of the indices to get a single rating for each

supplier.

39

To apply the Ronen and Trietsch (1988) decision support system to the vendor selection and inventory

management problem the distribution of the lead time has to be known. The authors assume an exponential

distribution for simplicity but contend that in practice the distribution can be deduced from historical data.

It seems to us that in the context of large one-o projects this could pose severe problems.

Bender et al. (1985) describe a mixed integer programming model used at IBM that simultaneously

selects vendors and determines order quantities over a multiple time frame horizon with the objective to

minimise purchasing, inventory management and transportation costs. We cannot evaluate this model,

since the specic mathematical formulation is not included in their paper.

4. The problem of purchasing ball bearings at Cockerill Sambre

We study the procurement of ball bearings at Cockerill Sambre S.A., a Belgian multinational

company in the steel industry with external purchases approaching 0.6 billion annually accounting for

more than 70% of total costs. Management wants to improve the eciency of the purchasing process

and to reconsider the sourcing strategies for dierent product groups. Our case study refers to the ball

bearings, a product selected for study by the purchasing managers of the rm and a business of about

833,000 per year. There are 33 ball bearings types in the problem for which purchasing decisions must

be made.

The ball bearings are mainly used for transportation of the hot steel slabs after steel has been produced

in the converters and cast to form the slabs. The transportation lines consist of several rows of vertical steel

cylinders as depicted in Fig. 1.

The steel cylinders and the ball bearings are used in very arduous conditions under extremely high

temperatures. This causes the surface of the steel cylinders to deteriorate quickly such that they have to be

replaced frequently and brought to a maintenance department for reproling. At the time of replacement of

the cylinders, the ball bearings are also replaced in anticipation of potential problems and thus before they

have been used for their full lives. There is a salvage value associated with used ball bearings based on their

weight, amounting to 100 per ton. There are six possible suppliers, two of which are currently used by the

company. Important price dierences exist at the level of the individual ball bearing type. No quantity

discounts apply to this product group.

Whereas the literature (Dickson, 1966; Benton, 1991) mentions a variety of dimensions which could be

considered in vendor selection, the presented evaluation of vendor selection models is based on the case of

40

ball bearings and does encompass only the criteria relevant to this purchasing problem. The dimensions on

which the suppliers dier from each other are price, possibility to deliver a certain item, service level, cost of

the purchasing manager to establish a relationship with a certain supplier, the possibility of EDI, the reliability of delivery visualised by the need to maintain a safety stock and the terms of payment. The more

traditionally used dimensions of quality, lead time management and quantity discounts are not relevant to

this case. The operational life span of the steel cylinders is shorter than that of the ball bearings, but the ball

bearings are replaced every time a cylinder is changed, before they are worn out. Therefore, the quality is

not a crucial issue in the case of ball bearings. Lead time is the same for all possible suppliers, but delivery

reliability diers from supplier to supplier, as visualised in the need to maintain safety stock. There are no

quantity discounts available.

For the ball bearings problem specically we consider at the supplier level, the cost of a dedicated

purchasing manager and a discount resulting from service provided by the supplier. Service includes

technical assistance, training, taking back of scrap and exibility. In this specic case study there is a return

instead of a cost on supplier level, because the service provided by the supplier exceeds the cost of the

purchasing manager. The order level costs include invoice cost per order, order cost per order and reception

cost per order. At the unit level we nd the salvage value of the used ball bearings, the price of the ball

bearings, the price discount as a percentage per time bucket due to payment delay given by a particular

supplier and the inventory holding cost.

5. Results of comparison from a total cost of ownership perspective

In Table 2, we summarise the resulting TCO for the solutions of the dierent vendor selection models.

The second and third column, respectively, state the inventory management and order splitting assumption, if applicable. The fourth column gives the TCO in percentages of the results of the TCO

minimising Degraeve and Roodhooft (1999a) model. The fth, sixth and seventh column give the three

components of the TCO, namely supplier level cost, order level cost and unit level cost in percentages.

Observe that there is a return (or negative cost) on the supplier level in this case. In Appendix A to the

paper we give details of the application of the dierent supplier selection models to the Cockerill Sambre

ball bearings case.

Almost half of the evaluated vendor selection models are single item rating and linear weighting models.

Timmerman (1986) proposes three dierent methods in order to accommodate the dierent situational

requirements of the procuring organisation. In the case of medium-sized manufacturers he proposes ``linear

averaging'' with a moderate ease of implementation and the highest cost/benet ratio. For the application

to the ball bearings case we have used the price and the payment delay as cost items. Service includes

technical assistance, education, buy back and recycling of scrap, competence and swiftness of intervention,

delivery reliability and the administrative costs of ordering and paying, as rated by the purchasing managers of Cockerill Sambre. No product specic items are taken into account, since for the ball bearings case

there are no dierences in the quality of the products for dierent suppliers. To obtain a rating on the price

component we used the method of Zenz (1994) who uses lowest price divided by actual price multiplied by

maximum rating. A problem not treated in Timmerman (1986) is what to do when two or more suppliers

receive the same rating for a specic item. To evaluate the model from a TCO perspective we have used

three assumptions to solve the problem: (1) the orders are split so that each supplier gets 1/x of the order

with x the number of suppliers receiving the same maximum rating for the item, (2) the whole order is given

to the supplier with the lowest price of those who attain the maximum rating and (3) we have only constrained the choice of the supplier(s) to those receiving the maximum rating and let the TCO model optimise the decision. Again, this assumption gives the most credit to the supplier selection model studied. As

can be seen in Table 2, the TCO of Timmerman's (1986) linear averaging method, varies, depending on the

41

Table 2

Evaluation of vendor selection models from a total cost of ownership perspective results

Timmerman linear averaging

Timmerman linear averaging

Timmerman linear averaging

Timmerman linear averaging

Timmerman linear averaging

Timmerman linear averaging

Timmerman categorical method

Timmerman categorical method

Timmerman categorical method

Timmerman categorical method

Timmerman categorical method

Timmerman categorical method

Gregory

Gregory

Thompson

Thompson

Willis, Huston and Pohlkamp

Willis, Huston and Pohlkamp

Li, Fun and Hung on example

Willis et al.

Li, Fun and Hung on example

Willis et al.

Li, Fun and Hung

Li, Fun and Hung

Timmerman cost ratio method

Timmerman cost ratio method

Monczka and Trecha

Monczka and Trecha

Smytka and Clemens

Smytka and Clemens

Pan

Pan

Weber and Current

Weber and Current

Models that simplify to minimising

price

Models that simplify to minimising

price

Benton

Benton

Current and Weber SPLP

Current and Weber SPLP

Current and Weber PMLP 6 suppl.

Current and Weber PMLP 5 suppl.

Current and Weber PMLP 4 suppl.

Current and Weber PMLP 3 suppl.

Current and Weber PMLP 2 suppl.

Current and Weber PMLP 1 suppl.

Current and Weber PMLP 6 suppl.

Current and Weber PMLP 5 suppl.

Inventory

management

assumption

Order splitting

assumption

Total cost

of ownership (%)

Supplier

level cost

(%)

Order

level cost

(%)

Unit level

cost

(%)

N.A.

Period 1

Period 1

Period 1

TCO optimal

TCO optimal

TCO optimal

Period 1

Period 1

Period 1

TCO optimal

TCO optimal

TCO optimal

Period 1

TCO optimal

Period 1

TCO optimal

Period 1

TCO optimal

Period 1

N.A.

Split orders

Lowest price

TCO optimal

Split orders

Lowest price

TCO optimal

Split orders

Lowest price

TCO optimal

Split orders

Lowest price

TCO optimal

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

100

115,53

114,72

114,72

108,33

107,53

107,53

119,01

114,62

114,62

110,06

107,40

107,40

122,58

115,33

122,58

115,33

121,29

114,04

120,95

100

179,40

175,75

175,75

179,40

175,75

175,75

166,85

149,83

149,83

154,01

149,83

149,83

217,61

217,61

217,61

217,61

211,13

211,13

209,01

100

16,67

16,67

16,67

87,5

100

100

8,33

8,33

8,33

50

50

50

2,08

12,5

2,08

12,5

4,17

18,75

4,17

100

116,85

115,98

115,98

109,73

108,86

108,86

120,03

115,39

115,39

110,96

108,27

108,27

124,52

117,40

124,52

117,40

123,12

116,00

122,75

TCO optimal

N.A.

113,71

209,01

Period 1

TCO optimal

Period 1

TCO optimal

Period 1

TCO optimal

Period 1

TCO optimal

Period 1

TCO optimal

Period 1

TCO optimal

Period 1

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

120,39

113,15

109,89

102,72

107,59

100,40

107,59

100,40

110,76

103,57

119,02

111,79

107,30

201,30

201,30

129,11

129,11

80,32

80,32

80,32

80,32

139,68

139,68

192,09

192,09

91,31

TCO optimal

N.A.

100,13

91,31

Period 1

TCO optimal

Period 1

TCO optimal

Period 1

Period 1

Period 1

Period 1

Period 1

Period 1

TCO optimal

TCO optimal

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

107,30

100,13

107,32

100,13

107,29

107,30

107,31

107,30

107,06

106,28

100,12

100,12

91,31

91,31

91,12

91,12

91,29

91,29

91,28

91,26

95,73

100

91,29

91,29

25

4,17

25

20,83

125

16,67

100

16,67

100

20,83

95,83

16,67

52,08

20,83

125

20,83

125

14,58

87,5

16,67

16,67

16,67

16,67

16,67

16,67

100

100

115,63

122,05

114,93

110,34

103,22

107,14

100,02

107,14

100,02

111,40

104,28

120,52

113,40

107,06

99,94

107,06

99,94

107,09

99,97

107,07

107,07

107,07

107,04

106,85

106,07

99,95

99,95

42

Table 2 (Continued)

Current and Weber PMLP 3 suppl.

Current and Weber PMLP 2 suppl.

Current and Weber PMLP 1 suppl.

Inventory

management

assumption

Order splitting

assumption

Total cost

of ownership (%)

Supplier

level cost

(%)

Order

level cost

(%)

Unit level

cost

(%)

TCO

TCO

TCO

TCO

N.A.

N.A.

N.A.

N.A.

100,12

100,12

100,07

100

91,28

91,26

95,73

100

100

100

100

100

99,95

99,95

99,98

100

optimal

optimal

optimal

optimal

assumptions, between 107.5% and 115.5 % of the TCO minimising model. This illustrates the advantage in

TCO of including inventory management in the supplier selection decision. In the sensitivity analyses we

have counted how many item-supplier combinations changed in comparison to those of the original model

when changing weights and rating limits. Although Timmerman's (1986) linear averaging method is not

sensitive to changes of weights within a certain category such as service, we have observed that it is very

sensitive to changes in weights across categories and to changes in rating limits. In investigating the impact

of such changes, we observed in our computational experiments that up to half of the items were ordered

from a dierent supplier.

For small organisations, Timmerman (1986) proposes the categorical method which is the easiest to

implement and has the lowest cost, but also the least clear results. For the application to the ball bearings

case cost, service and speed of delivery are rated good, neutral or unsatisfactory and combined into a total

rating. Again, the product quality is irrelevant to the case at hand. Making the same assumptions w.r.t.

inventory management and order splitting as with the comparison of the linear averaging method, we

obtain a TCO varying from 107.40% to 119.01%. The categorical method is very sensitive to changes in

ratings: 29 out of 33 combinations suppliers-item change. For large organisations with computerised cost

accounting systems Timmerman (1986) proposes the cost-ratio method. This method is treated below since

it is not a rating method.

Gregory (1986) describes the vendor rating system used by Texas Instruments, that again works with

weights on two levels. He recognises ve main categories, each divided into subcategories. For our application we use, in the ``proposal responsiveness'' category, ratings on terms and conditions and on

timeliness of deliveries. In the ``quality/reliability'' category we make two subcategories that are relevant for

the case: experience with the company and electronic data interchange (EDI). In the ``cost'' category we

rate the unit price, again using Zenz method. The ``general'' category encompasses ratings on past delivery

history and payment provisions. In our case there is no ``technical'' category since all products have similar

specicity and quality. In contrast to Timmerman, Gregory proposes two methods for order splitting.

When applying the method to the ball bearings case no two suppliers received the same maximum rating.

From Table 2 we observe that the TCO of Gregory (1986) varies between 115.3% and 122.6 % depending

on the inventory management assumption made. The model is not sensitive to changes in rating limits, i.e.

no combination supplier/item changed and only somewhat sensitive to changes in weights. The sensitivity

analyses resulted in 1 and 4 changes in combinations supplier-item on 33 possible combinations for changes

in weights within and between category, respectively.

Thompson (1990) introduces Monte Carlo simulation to reduce the uncertainty innate to the rating

mechanism. Ratings can be simulated using a uniform or a triangular distribution. The interpretation of the

resulting distribution of scores happens by judging modus, variance and overlap. Giving weights to the

various criteria remains a subjective process. Only uncertainty related to the rating process itself is dealt

with in this model. Soukup (1987) introduces uncertainty related to the requirements. Quite strange, in the

Thompson paper, only qualitative criteria are rated and in the presented example no price variable is included. To evaluate the TCO of this model we have made a simulation for the ratings from a uniform

43

distribution, using scores on compatibility of systems (EDI), service and delivery reliability. From Table 2,

we see that the TCO of Thompson (1990) varies between 115.3% and 122.6% depending on the inventory

management assumption made.

Willis et al. (1993) use ``dimensional analysis'' in a single item model where a series of pairwise comparisons are made among suppliers using a Vendor Performance Index, dened as follows:

s

w

n

Y

Xi i

w

VPI

Yi

i1

with Xi and Yi criterion performance score for supplier X and Y, respectively, wi is weight assigned to

criterion i and w sum of all weights.

The advantage of this method is that each criterion can be measured in its own units, but the rating and

weighting system remains highly subjective. Also it is impossible to obtain a zero score on a criterion since

division by zero is not dened. For the application to the ball bearings case, in the philosophy of the paper,

we have used the criteria price, delivery performance and stocking policies, ease of ordering (EDI) and

service. The TCO of Willis et al. (1993) varies between 114% and 121.3 % depending on the inventory

management assumption. Their model proves to be insensitive to changes in weights and ratings, i.e. no

combination supplier-item changed.

Li et al. (1997) have published a paper in reaction to the Willis et al. (1993) paper in which they describe

the disadvantages of the VPI. Alternatively, they propose a fuzzy sets methodology by introducing the SUR

index that takes the inconsistency of the evaluator into account for each qualitative criterion. If we apply

this approach to the criteria proposed in Willis et al. (1993) the TCO varies between 113.7% and 121%

depending on the inventory management assumption, which is slightly better than the TCO of Willis et al.

being 99.7%. We have observed that the sensitivity to changes in weights and ratings is very high with 11

and 18 changes out of 33 possible combinations, respectively, surely compared to that of the Willis et al.

model. If we apply the Li et al. methodology and their proposed criteria and weights to the ball bearings

case, using ratings on price, delivery, exibility and response without the specic compensation for

judgement since there are no data available for this case, we nd TCO between 113.2% and 120.4 %. Our

sensitivity analyses indicate that the model remains very sensitive to changes in weights and ratings with 12

and 15 changes out of 33, respectively.

Observe from Table 2 that all these single item rating models without inventory management overestimate the return on supplier level and the cost on unit level and underestimate the cost on order level. The

cost on supplier level is underestimated because in most of the rating models the cost of the dedicated

purchasing manager is not taken into account. The cost on order level is underestimated because of the oneperiod time frame. Many of the costs that are in fact varying with the number of orders are regarded in

these single item rating models as driven by unit.

To overcome the subjectivity of the rating process, single item total cost approaches without inventory

management quantify the costs associated with working with a specic vendor as much as possible in

monetary units. For large organisations with computerised cost accounting systems Timmerman (1986)

proposes the ``cost-ratio method''. This method collects all costs related to quality, delivery and service

and expresses them as a percentage of unit price. Again, quality is not relevant to this specic case.

Summing the two percentages for the above categories leads to a total penalty or benet percentage that

is used to adjust the quoted price to obtain the net cost. Although this method is not a rating method and

goes far in collecting total cost information, the dierent categories are implicitly weighted equally since

the percentages are summed. From Table 2 we see that the TCO of Timmerman (1986), cost-ratio

method, varies between 109.89% and 102.72% depending upon the inventory management assumption

made.

44

Monczka and Trecha (1988) develop a supplier performance index that adjusts the net price for nonperformance costs associated with the supplier. Apart from this cost index, a separate rating on the service

level of the supplier is calculated, but it is not clear how this plays in the vendor selection decision. For the

application to the ball bearings case net price and the costs of ordering, invoicing and the purchasing

manager are included, in the philosophy of the paper. Depending on the inventory management assumption, TCO of 100.40% and 107.59% are obtained.

Smytka and Clemens (1993) also develop a more elaborated total cost approach in which they rst assess

`risk factors' on a go/no go basis. Then they develop rates on several ``business desirable factors'' such as

delivery performance, but it is not clear how these ratings are used in the vendor selection process. Finally,

they collect information on a very extensive list of ``measurable cost factors'' and calculate total cost. In the

ball bearings case all six vendors are considered `go' and price, payment delay, ordering, invoicing, purchasing manager and inventory holding are the measurable cost factors. Depending on the inventory

management assumption, TCO of 100.40% and 107.59% are obtained. All the single item total cost approaches without inventory management underestimate the return on supplier level and overestimate the

cost on unit level.

To the best of our knowledge three mathematical programming single item models without inventory

management exist. Pan (1989) proposes a single item linear programming model in order to allocate order

quantities among suppliers in a multiple sourcing context. He minimises aggregate price subject to predetermined constraints on quality and service level and lead time. For the application to the ball bearing

case quality is irrelevant and the delivery constraint is met by all six vendors, although their delivery

performance dier. Only a constraint on service is included. TCO varies from 110.76% to 103.57%, depending on the inventory management assumption made. Pan (1989) is very sensitive to changes in predetermined levels on the constraints. In the application to the ball bearings case, only 7 out of 33 items

where bought from the same suppliers if the predetermined levels on service were changed by one percent

up or down. The allocation of order quantities stays the same for only 4 out of these 7 items.

Weber and Current (1993) use multi-objective mixed integer programming to select vendors for a

single item. They propose price, delivery and quality objectives. Using more complex weighting and

constraint methods, they overcome the problem of sensitivity to predetermined levels inherent to Pan

(1989). Weber and Current (1993) provide decision support to purchasing managers by presenting the

trade o curves among the dierent objectives. When we apply this method to the ball bearings case only

price and delivery objectives are relevant. Instead of the quality constraint we included a service constraint since this is very important to the case at hand. We nd TCO of 119.02% and 117.79% depending

on the inventory management assumption. Weber and Current (1993) use a value path analysis to

graphically display the results. Their method can be easily extended to handle multiple items (Weber,

1991). Weber and Desai (1996) propose Data Envelopment Analysis (DEA) for evaluation of vendors

that were already selected. Weber et al. (1998) combine the multi-objective and the DEA method to

provide a negotiation tool with vendors that are not selected in the rst instance. The methodology can

be used by purchasing managers to negotiate with these vendors so that they can move to ecient points

on the DEA curve.

Chaudhry et al. (1993) develop linear and mixed binary integer programming models for a single item

and take special interest in the modelling of price breaks, i.e. quantity discounts vs. surcharges, all-units vs.

incremental discounts. The authors include constraints on quality level and delivery. Since for the ball

bearings case there is no dierence in quality, the delivery constraint is met by all vendors and there are no

discounts available, the model simplies to minimising net price. A TCO between 100.1% and 107.3% is

obtained depending on the inventory management assumption.

Also, many of the mathematical programming multiple item models without inventory management

simplify to minimising price for the ball bearings case (Rosenthal et al., 1995; Sadrian and Yoon, 1994;

Akinc, 1993; Turner, 1988). Rosenthal et al. (1995) develop a multiple item mixed integer programming

45

model for the special case in which suppliers oer discounted prices for bundled products. The same quality

and delivery constraints as in Chaudhry et al. (1993) are added for every item.

Sadrian and Yoon (1994) propose a multiple item mixed integer programming model that is focusing on

the modelling of business volume discounts. The so called ``reliability costs'' are not modelled. None of the

optional constraints the authors propose, nor the volume discounts are relevant to the Cockerill Sambre

case.

Akinc (1993) concentrates mainly on the number of suppliers. To start with, he proposes two models to

obtain the extreme number of vendors. One model chooses the cheapest supplier for each item, what leads

to the largest rational number of suppliers. The second model chooses the smallest number of suppliers that

can deliver all items, disregarding cost. For the ball bearings case this number of suppliers is 6 and 1 respectively. Then, model one and two support model three in which the trade-o between number of suppliers and cost is analysed. A number of heuristics are proposed to make the model workable for large data

sets. Since in the case of Cockerill Sambre there is no dierence on the quality criterion nor are dierent

minimum levels of delivery performance required for dierent items, also this model results into minimising

prices.

Turner (1988) describes the linear programming routine for the multiple item problem of British Coal.

Instead of solving the integer problem, the LP formulation is repeated in an interactive manner to allow the

purchasing managers to check on several possible solutions. Apart from price and discounts only capacity

constraints and region limits are modelled. Since there are no discounts nor region limits in the Cockerill

Sambre case, also Turner (1988) model simplies to minimising net prices.

Current and Weber (1994) and Benton (1991) are the only two papers of the multiple item mathematical

programming variety without inventory management that do not result into minimising prices.

Benton (1991) presents a heuristic procedure to solve the multiple item problem with a non-linear

objective function with discontinuities that minimises the sum of ordering costs, holding costs and net

price, giving special attention to the modelling of quantity discounts. He adds constraints on the total

inventory investment and the warehousing space occupied. Since in the ball bearings case there are no

quantity discounts, nor constraints on inventory investment or space, this single time period model

simplies to minimising the sum of price, ordering and holding costs. TCO of 107.3% and 100.1% are

obtained depending on the inventory management assumption. The return on supplier level is underestimated.

Current and Weber (1994) make an application of facility location modelling constructs to the vendor

selection problem. First they formulate the Single Plant Location Problem (SPLP) as a vendor selection

model minimising the sum of xed costs and ``actual purchasing'' costs. The decision variables are the

fraction of item is demand purchased from vendor j and a binary variable that denotes whether vendor j is

selected or not. Expediting costs and internal processing costs are classied with the xed costs, though they

are dependent on the number of orders or set ups in multiple time frame models. Because, the SPLP

formulation does not take inventory management into account these costs are underestimated. For the

application to the ball bearings case, xed costs are the sum of contract set up, internal processing, ordering

and invoicing costs. TCO of 107.3% and 100.1% are obtained depending on the inventory management

assumption. They also propose a SPLP formulation with the minimisation of late deliveries, but this is

irrelevant to our case. Also, this model sums two dierent units, namely number of units and cost in a

currency. Second, they propose a model based on the p-Median Location Problem (PMLP). The decision

variables are the same as in the SPLP formulation. After removing a typographical error in the objective

function (ai has to be removed or else the unit would be quantity squared) and adding a constraint that

forces at least one unit to be ordered from a selected supplier, the formulation is identical to the SPLP case

except for xing the desired number of suppliers. The constraint has to be added because by xing the

number of suppliers the program could add the xed cost of a selected supplier without ordering anything

because of the high variable cost. The evaluation of the PMLP model is made in comparison to the TCO

46

model with a xed number of suppliers. TCO varies between 100.1% and 107.3%. Finally, they introduce

the Set Covering Location Problem (SCLP) minimising the number of suppliers, assuming that total cost

and price are unimportant. A disadvantage of this model is that it can not select suppliers when more than

one supplier is able to deliver all the desired products. When applied to the Cockerill Sambre case one single

supplier is selected since only this supplier is able to deliver all the types of ball bearings. TCO of 122.6%

and 115.3% are obtained depending on the inventory management assumption. All the Current and Weber

(1994) models underestimate the return on supplier level and the cost on order level.

6. Conclusions and suggestions for future research

Given the TCO perspective, several conclusions can be drawn from Table 2. First, multiple item

mathematical programming models are always performing better than single item rating models. Single

item models fail to take into account the interdependencies that could exist among the dierent products. A

supplier can be oering a larger discount based on total sales volume, irrespective of the product mix. Order

level costs could be minimised by combining orders for several products into one single order form.

Mathematical programming models approach the problem in a more objective way than rating models by

optimising an explicitly stated objective function. Second, total cost approaches outperform rating models

by objectifying the supplier selection process. Third, it is a good strategy to incorporate inventory management into the vendor selection decision. For example, at the order level, costs can dier substantially

among the dierent suppliers due to the possibility of ordering via EDI. If, due to inventory management

reasons frequent ordering is necessary, a supplier with a low unit price but a high order cost (e.g., no EDI),

can generate a higher Total Cost of Ownership than a supplier with a higher unit price and an EDI system.

Another example is the trade-o between the receiving a quantity discount and the inventory holding costs

when buying larger lotsizes. Fourth, it is not rewarding to x in advance the number of suppliers to use.

There is no unequivocal relationship between the number of suppliers and the TCO. Fifth, dierent levels in

the ABC hierarchy are under- or overestimated in the dierent vendor selection models. All the single item

rating models without inventory management overestimate the return on supplier level and the cost on unit

level and underestimate the cost on order level. The multiple item mathematical programming models

underestimate the return on supplier level. All the models without inventory management underestimate

order level costs seriously and overestimate unit costs, under the assumption that everything is bought in

the rst period.

Future research should be conducted in developing multiple item mathematical programming vendor

selection models with inventory management, since the simultaneous decision to select vendors and to

determine order quantities seems to be saving on TCO. A second fruitful path for future research is to

introduce uncertainty with respect to requirements, deliveries, quality, prices etc. in decision models.

Thirdly, the same methodology of comparison can also be applied to other real life data sets to check

whether the conclusions remain. At the moment we are working on a very extensive data set of Alcatel

Bell where other criteria and costs are of importance. As one of the referees suggested, the models being

benchmarked will perform quite dierently under dierent procurement situations. In the repeat buying

situation of procuring ball bearings at Cockerill Sambre where all supplier characteristics are readily

known from procurement history, most costs will be incurred at the unit level. From Table 2, we see

that many of the benchmarked models perform well in this case. However, we speculate that the TCO

approach will even perform better in other procurement situations like such as rst time buys where

costs on supplier and order level are of considerable importance. The costs on these levels are often

neglected or underestimated in the benchmarked models. Future research could investigate which

approach performs best in dierent buying situations such as repeat buy vs rst time buy and JIT vs

non-JIT.

47

Appendix A. Details of the application of the dierent supplier selection models to the Cockerill Sambre ball

bearings case

Due to condentiality reasons we are not allowed to present the actual data of the case study used to

evaluate the dierent vendor selection models. Therefore, we choose to work with the following symbols,

representing the real data. While using these symbols to discuss all the supplier selection models studied, it

becomes clear how they were applied to the ball bearings case.

N

M

P

mcs

ses

vcs

ocs

rcs

rev

wti

psi

dcs

SSi

dit

di

h

nis

slc

mins

maxs

olc

bsi

api

aulc

arev

purc

invc

ulc

zs

ust

xtst

sdsit

xsit

ysit

vsit

sxit

set of time periods, index t

set of suppliers, index s (1 to 6)

yearly cost of a dedicated purchasing manager for supplier s incurred for the time devoted to

managing the specic ball bearings in the problem, "s 2 P

cost savings resulting from extra service provided by the supplier, "s 2 P

cost of invoicing per order placed with supplier s, "s 2 P

cost of ordering per order placed with supplier s, "s 2 P

cost of receiving per order placed with supplier s, "s 2 P

salvage value of used ball bearings in BF per kilogram

weight in kilogram of ball bearing type i, "i 2 N

price for ball bearing type i oered by supplier s, "i 2 N, "s 2 P

price discount as a percentage per time period due to a credit period given by supplier s,

"s 2 P

safety stock of ball bearing type i, "i 2 N

demand for ball bearing type i in time period t, "i 2 N, "t 2 M

total demand for ball bearing type i, "i 2 N

inventory holding cost per period as a percentage of the products price

number of dierent items that can be delivered by supplier s, "s 2 P

total supplier level costs per year

minimum number of suppliers to use over the total time horizon

maximum number of suppliers to use over the total time horizon

total order level costs per year

beginning inventory of ball bearing type i bought from supplier s, "s 2 P, "i 2 N

average price of ball bearing type i in BF, "i 2 N

the ``additional'' unit level costs generated per year

revenue generated from selling o used ball bearings per year

total purchase costs per year

the yearly inventory holding cost

total unit level costs per year

1, if we buy from supplier s during the year, 0, otherwise, "s 2 P

1, if we buy from supplier s in time period t, 0, otherwise, "s 2 P, "t 2 M

total number of ball bearings bought from supplier s in period t, "s 2 P, "t 2 M

consumption of ball bearings type i bought from supplier s in period t, "s 2 P, "i 2 N, "t 2 M

amount of ball bearings type i bought from supplier s in period t, "s 2 P, "i 2 N, "t 2 M

1, If we buy ball bearing type i from supplier s in period t, "s 2 P, "i 2 N, "t 2 M

inventory of ball bearing type i bought from supplier s at the end of time period t, "s 2 P,

"i 2 N, "t 2 M

total amount of ball bearing type i bought in period t, "i 2 N, "t 2 M

48

syit

svit

rsi

VEN

Pi

inventory of ball bearing type i at the end of time period t, "i 2 N, "t 2 M

fraction of ball bearing is demand purchased from vendor s, "s 2 P, "i 2 N

number of vendors to be employed

set of vendors that can supply item i, "i 2 N

A more thorough explanation of how the Degraeve and Roodhooft (1996) model applies to the

Cockerill Sambre ball bearings case is provided in Degraeve and Roodhooft (1998b). The mathematical

formulation is repeated here:

Min

X XX

X

mcs zs

ses

psi xsit ;

slc

s2P

olc

s2P

i2N t2M

XX

vcs ocs rcs ust ;

s2P t2M

purc

XXX

XXX

invc

h psi vsit

arev

X

i2N

6 h api SSi ;

XX

rev wti dit ;

i2N t2M

XX

sdsit dit

8t 2 M; 8i 2 N ;

s2P i2N

vsit1 xsit vsit sdsit

xsit 6

dil ysit

8s 2 P ; 8i 2 N ;

8s 2 P ; 8i 2 N ; 8t 2 M n f1g;

8s 2 P ; 8i 2 N ; 8t 2 M;

l2M; l P t

X

xsit xtst

i2N

8s 2 P ; 8t 2 M;

xtst 6

ust 6

i2N

l2M;l P t

ysit

dil

ust

8s 2 P ; 8t 2 M;

8s 2 P ; 8t 2 M;

i2N

ysit 6 ust

8s 2 P ; 8i 2 N ; 8t 2 M;

X

zs P mins;

s2P

X

zs 6 maxs;

s2P

zs 6

X

ust

8s 2 P ;

t2M

ust 6 zs

8s 2 P ; 8t 2 M;

zs 2 f0; 1g

8s 2 P ;

8s 2 P ; 8t 2 M;

X

xsit sxit

8s 2 P ; 8i 2 N ; 8t 2 M;

8i 2 N ; 8t 2 M;

s2P

X

vsit svit

8i 2 N ; 8t 2 M;

s2P

sxit 6

l2M; l P t

syit 6

ysit

dil syit

8i 2 N ; 8t 2 M;

s2P

ysit 6 syit

8s 2 P ; 8i 2 N ; 8t 2 M;

l

X X

X

sxit 6

dir

t2C

8i 2 N ; 8t 2 M;

t2C

rt

!

syit svil ;

49

50

(a) Linear averaging. Ratings were given by management of Cockerill Sambre for every item i 2 N and

every vendor s 2 P using the following criteria and weights.

Item i

Weight

Cost criteria

BEF cost

Terms of sale

Quality costs

0.4

0.1

0a

Service criteria

Technical support, education, buy back and recycling

of scrap, competence, swiftness of intervention

Delivery reliability

Administrative costs of ordering and paying

Lead time

s1

s2

s3

s4

s5

s6

0.3

0.1

0.1

0a

0a

Product criteria

Weighted R

a

Some of the proposed criteria are given a weight of zero either because they are not relevant to the ball

bearings case (e.g. quality), or because they are the same for all suppliers (e.g. lead time, product

characteristics).

The actual purchase price for the item is converted into a rating on BEF cost using Zenz method (1994,

price

maximumrating.

p. 136): lowest

actual price

(b) Categorical method. For every item, each vendor is rated on cost, service and delivery performance

``good (+)'', ``neutral (0)'' or ``unsatisfactory ())''. The combination of ratings result in, from high to low:

++,++,+, 0,),) ),) ) ) . The vendor with the highest score is selected.

(c) Cost-ratio method. For every item, the costs associated with quality, delivery and service are determined. Then, each is converted into a cost ratio, in which the cost is expressed as a percentage of the total

value of the purchase. Since quality is not relevant to the ball bearings case, only a delivery and a service

cost ratio are calculated. These are combined into a total cost adjustment percentage, which is applied to

the quoted price per unit, resulting in the net adjusted cost per unit in BEF. The supplier with the lowest net

adjusted cost per unit is selected

Delivery cost ratio (dcris ) for item i

s1

s2

s3

s4

s5

s6

s1

s2

s3

s4

s5

s6

Ordering (ocs )

Invoicing (vcs )

Delivery performance cost SSys 6h psi di

(-) Terms of payment (dcs )

R

R as a percentage of psi di

Service cost ratio (scris ) for item i

Service as a percentage of psi di ses psi di

51

Then, for every item i and every supplier s, dcris + scris is calculated and applied to psi di . For every item i,

the supplier s with the lowest net adjusted cost is selected.

Ratings were given by management of Cockerill Sambre for every item i 2 N and every vendor s 2 P

using the following criteria and weights.

Item i

Weight

Proposal responsiveness

Problem understanding

Terms and conditions

Timeliness of deliveries

Weighted total

0a

5

5

(10)

0a

Technical

Quality/reliability

Experience

Performance history

Quality of data (EDI)

Survey score

Weighted total

Cost

Unit price

Price curve

Weighted total

General

Past delivery history

Management organisation

Personnel qualications

Facilities

Payment provisions

Weighted total

4

0a

0a

0a

1

(5)

Summary

Proposal responsiveness

Technical

Quality/reliability

Cost

General

Weighted total

0a

5

4

1

(12)

s1

s2

s3

s4

s5

s6

x

y

x y=

10 100

5

0a

3

0a

(8)

7

0a

(7)

x y=

10 100

weighted

P

Some of the proposed criteria are given a weight of zero either because they are not relevant to the ball

bearings case (e.g. quality performance history), or because they are the same for all suppliers (e.g.

technical product characteristics).

52

Again, Zenz method was used to convert price into a cost rating.

A.4. Willis et al. (1993)

Item i

Weight

s1

s2

p1

p2

dp1

dp2

eo1

se1

eo2

se2

s3

s4

s5

s6

Quality

Price

Response to special orders and problems

Delivery performance and stocking policies

Financial stability

Ease of ordering

Service

P

|weight|

0

)5

0a

5

0a

2

4

16

a

Some of the proposed criteria are given a weight of zero either because they are not relevant to the ball

bearings case (e.g. quality), or because they are the same for all suppliers (e.g. nancial stability).

compared pairwisely, using the VPI-index. For example, for the comparison

r

5 5 2 4

16

p1

1

1

1

dp

eo

se

is calculated. If the result is bigger than 1,

of vendor 1 to vendor 2

p

dp

eo2

se2

2

A.5. Li et al. (1997)

1. Applying the methodology to the example for the Willis et al. (1993) paper. For every item, vendors

are compared to all other vendors, using the SUR-index. For example,

p

p1 p

5

dp1 d

5

eo1 eo

2

se1 se

4

:

pmax pmin 16 dpmax dpmin 16 eomax eomin 16 semax semin 16

2. Applying the methodology to the proposed criteria of the Li et al. (1997) paper

Item i

Quality

Cost (price)

Delivery performance

Flexibility (ease of ordering)

Response

(service)

P

|weight|

Weight

s1

s2

p1

dp1

eo1

se1

p2

dp2

eo2

se2

s3

s4

s5

s6

0

)0.25

0.2

0.1

0.1

0.65

For every item, vendors are compared to all other vendors, using the SUR-index. For example,

p

p1 p

0:25

dp1 d

0:2

eo1 eo

0:1

se1 se

0:1

:

pmax pmin 0:65

dpmax dpmin 0:65 eomax eomin 0:65 semax semin 0:65

53

For every item i and every criterion, a highest (H) and a lowest (L) rating is given by management. A

thousand simulations are performed using a uniform distribution between these highest and lowest rating.

These are weighted and a distribution for the score of each supplier is presented visually.

Item i

Weight

Compatibility

(EDI)

Service

Delivery

reliability

s1

H

s2

L

s3

L

s4

L

s5

L

5

3

For every item i 2 N and every supplier s 2 P the following costs are summed:

psi

:

di

nis

A.8. Smytka and Clemens (1993)

For every item i 2 N and every supplier s 2 P the following costs are summed:

psi 1 dcs

6hpsi :

di

nis

A.9. Pan (1989)

For every item i 2 N the following LP is solved:

X

psi xsi ;

min

s2P

X

xsi di ;

s2P

X

ses xsi P prelevs di ;

s2P

xsi 2 Z

8s 2 P ; 8i 2 N :

s6

L

54

For every item i 2 N several non-inferior solutions are generated using the following mixed integer

programming models. Then the purchasing manager selects the option of his or her preference. The rst

MIP model minimises price under dierent constraints for delivery performance and service.

min

X

psi xsi ;

s2P

X

xsi di ;

s2P

X

SSys xsi 6 delivery performance level di ;

s2P

X

ses xsi P service level di ;

s2P

xsi 2 Z:

The second MIP model maximises service under dierent constraints for price and delivery performance.

max

ses xsi ;

s2P

X

xsi di ;

s2P

X

psi xsi 6 price level di ;

s2P

X

SSys xsi 6 delivery performance level di ;

s2P

xsi 2 Z:

1. SPLP

Min

F

C F;

X

s2P

XX

psi di rsi ;

s2P i2N

XX

rsi 1

8i 2 N ;

s2P i2N

X

zs P min s;

s2P

X

zs 6 max s;

s2P

rsi 6 zs

8s 2 P ; 8i 2 N ;

zs 2 f0; 1g

8s 2 P ;

rsi 2 0; 1 8s 2 P ; 8i 2 N :

2. PMLP

Min

F

C F;

X

s2P

XX

psi di rsi ;

s2P i2N

XX

rsi 1

8i 2 N ;

s2P i2N

rsi 6 zs

8s 2 P ; 8i 2 N ;

X

zs VEN;

s2P

zs 2 f0; 1g

8s 2 P ;

rsi 2 0; 1 8s 2 P ; 8i 2 N :

3. SCLP

Min

VEN;

VEN

X

zs ;

s2P

55

56

X

zs P 1 8i 2 N ;

s2Pi

zs 2 f0; 1g

8s 2 P :

A.12. Models that simplify to minimising net prices for the ball bearings case

Akinc (1993); Chaudhry et al. (1993); Rosenthal et al. (1995); Sadrian and Yoon (1994); Turner (1988).

X

mipri di ;

Min

i2N

VEN

8i 2 N ; 8s 2 P ;

X

zs ;

s2P

X

zs P min s;

s2P

X

zs 6 max s;

s2P

8i 2 N ; 8s 2 P ;

8i 2 N ; 8s 2 P ;

zs 2 f0; 1g

zs 6

XX

8s 2 P ;

ysi

8s 2 P ;

s2P i2N

ysi 6 zs :

The objective is to minimise the sum of price, ordering costs and holding costs.

X

XX

XX

psi di xsi

oc zs

0:5 h psi xsi ;

Min

s2P i2N

X

s2P xsi 1

8i 2 N ;

s2P

s2P i2N

57

X

zs P min s;

s2P

X

zs 6 max s;

s2P

zs 2 f0; 1g

xsi 6 zs

8s 2 P ;

8s 2 P ; 8i 2 N :

References

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