J Intell Manuf (2016) 27:13091321

DOI 10.1007/s10845-014-0953-0

Risk analysis for the supplier selection problem using failure

modes and effects analysis (FMEA)
Simon Li Wei Zeng

Received: 4 February 2014 / Accepted: 29 July 2014 / Published online: 13 August 2014
Springer Science+Business Media New York 2014

Abstract While seeking for global suppliers is a general

trend for lower cost and better quality, it is not trivial for a
company to assess the corresponding risks in supplier selection. This paper proposes the supplier selection method that
applies failures modes and effects analysis (FMEA) to assess
the risks in the decision process. As each supplier is evaluated
under the common multi-criteria framework, risks are viewed
as the possible deviations from expected performance, and
they are interpreted as failure modes in risk analysis. Following the concepts of FMEA, each failure mode is examined with respect to the possible causes and effects. This
method generates two technical deliverables for supporting
risk analysis. Firstly, the FMEA document is developed to
support the teams discussion of supplier risks and accumulate the risk knowledge within the company. Secondly, the
ranking numbers based on FMEA (i.e., risk priority numbers) are utilized to evaluate a discount on a suppliers performance according to their risk level. A real-case example
about selecting methanol suppliers in the global market is
used to demonstrate the proposed method for risk analysis in
practice.
Keywords Supplier selection Risk analysis Failure
modes and effects analysis (FMEA)

Introduction
Instead of relying on domestic suppliers, it is common for
manufacturers to seek for global (overseas) suppliers for
better quality supplies and lower costs (Drake 2011). This
S. Li (B) W. Zeng
Department of Mechanical and Manufacturing Engineering, University
of Calgary, 2500 University Drive NW, Calgary, AB T2N 1N4, Canada
e-mail: simoli@ucalgary.ca

practice, aligned with the trend of globalization in business,

unavoidably incurs additional risks in the management of
supply chain. The basic reason behind those risks is that
the manufacturers are not necessarily familiar with the economic, political and cultural environments of the overseas
suppliers, and these environmental factors can unexpectedly
impact the supply chain.
The topic of supply chain risks is popular in the literature
of supply chain management. The relevant research ranges
from the categorization of supply chain risks (Chopra and
Sodhi 2004) to the risk management strategies (Manuj and
Mentzer 2008). In this paper, three characteristics of supply
chain risks are considered. Firstly, the measurement of risks
is not purely objective. Unlike costs, risks do not have some
recognized units that can be defined and measured physically.
Secondly, the definition of risks consists of multiple dimensions, each of which reflects a specific concern in a decision
context. That is, supply chain risk is a multi-dimensional
concept. Thirdly, expert judgments are important in risk
management because experts can utilize their experience
to manage implicit and qualitative information for decision
making. In this context, quantitative techniques should be
viewed as tools to support (rather than to replace) expert
judgments.
Due to these characteristics of risks, qualitative techniques
are considered as valid tools for managing supply chain risks.
One key issue is how to incorporate such tools systematically
so that expert judgments can be effectively reflected in the
risk management practice. This paper focuses on the supplier selection that is formulated as a multi-criteria decision
problem. Given a set of suppliers, the manufacturer needs
to choose one (or few) supplier(s) according to their performance in view of multiple criteria. While the risk issue in the
selection problem remains active in supply chain research,
the new contribution of this paper is to incorporate one

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risk management tool, Failure Modes and Effects Analysis

(FMEA), in the supplier selection process.
FMEA is a risk analysis tool that can be used in the design
process to improve the reliability of a product (Anleitner
2010; Carlson 2012). It is also recognized in industry as part
of six sigma methodology (Raisinghani et al. 2005). Two
methodical features of FMEA are highlighted as follows.
Casual relationships of failure modes: a failure mode can
be viewed as the manner in which the product or operation fails to meet the requirements (Carlson 2012, p. 28).
Suppose that one failure mode is identified. One step of
FMEA is to investigate the causes and effects related
to this failure mode. Notably, causes and effects are identified by focusing on one failure mode at a time, and the
casual chains of the failures are not particularly concerned
in FMEA (unlike Fault Tree Analysis). The basic causal
relationship of a failure mode can be conceptualized as
cause(s) failure mode effect(s).
Risk priority numbers: FMEA analyzes risks in three
dimensions: likelihood, impact and control. While the
concepts of likelihood and impact are typical in risk management (Hopkin 2013), the control concept of FMEA
is concerned with the techniques to avoid or mitigate the
risks. To evaluate each of these three dimensions, a 10point scale is used in FMEA (higher points mean worse
cases). The risk priority number (RPN) is obtained by multiplying the points associated with likelihood, impact and
control.

J Intell Manuf (2016) 27:13091321

Table 1 Characterization of supply chain risks
Ghoshal (1987)

Four risk types: macroeconomic

risks, policy risks, competitive
risks, and resource risks

Juttner et al. (2003)

Four risk elements: sources,

consequences, drivers and
migrating strategies

Chopra and Sodhi (2004)

Nine risk categories: disruptions,

delays, systems, forecast,
intellectual property,
procurement, receivables,
inventory and capacity
Four concerns in risk management:
supply, operations, demand and
security

Manuj and Mentzer (2008)

Schoenherr et al. (2008)

Seventeen risk factors based on

four sub-objectives: quality, cost,
service and management
capabilities

The rest of this paper is organized as follows. Section 2

will review the relevant literature in supply chain risks, supplier selection problem and FMEA. Section 3 will propose
and discuss the details of the FMEA selection methodology.
Section 4 will provide a real-case example about selecting
methanol suppliers in a Chinese company and demonstrate
the utility of the proposed method. Section 5 will conclude
this paper.
Literature review

As FMEA is mainly used in product development, the new

idea of this research is to interpret and adapt FMEA for risk
analysis in supplier selection. Particularly, the negative outcome of risks is interpreted as selecting the wrong supplier. Logically, the wrong supplier is possibly selected if
this supplier does not perform as expected in view of evaluation criteria (e.g., longer delivery time than expected). Then,
a failure mode is defined as the unexpected deviation of
the actual performance from the original criterion evaluation. The utility of FMEA in this context is to systematically
capture the expert judgments on the identification of failure
modes and the corresponding causes and effects.
Out of the adaption of FMEA in supplier selection,
two deliverables are developed to support decision making.
Firstly, the classical tables of FMEA are utilized to organize the expert judgments on the risk sources (causes) and
impacts (effects), and they can be used as a formal document
for discussing risks among company staffs. Secondly, the risk
priority numbers from FMEA are used to evaluate the discounts over the suppliers performance according to the risk
level (i.e., higher risk leads to more discounts). This practice
can help decision makers to incorporate the risk factor in the
final decision.

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This literature review is organized in three parts. Firstly, the

topic of supply chain risk is reviewed from a high-level perspective as this topic continues an important research area
in supply chain. Secondly, the specific issue of risk analysis is discussed in the supplier selection context. Thirdly, the
background of FMEA is surveyed to review the nature of this
technique in the domain of risk analysis.
Supply chain risk
The possible risks of supply chain in a global context are actually quite complex, and the examples can range from natural
disasters and political instability to the fluctuation of currency exchange rates and labor strikes. Table 1 summarizes
some of the characterization efforts from literature concerning supply chain risks. As commented by Zsidisin (2003) and
Peck (2005), it should be appropriate to view supply chain
risk as a multi-dimensional concept that can evolve with the
application context.
As risk is always associated with the loss, the evaluation
of the risk-related loss becomes a necessary piece of information for supply chain management and decision making

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Table 2 Methodical integration

in literature

Case examples

Decision making techniques

Implemented software with

simulation
Semiconductor industry with five
criteria (13 sub-criteria)

Fuzzy inference system

Kubat and Yuce (2012)

Supplier selection with five criteria

(13 sub-criteria)

Fuzzy AHP for determining the

weights and genetic algorithm
for allocating order quantity

Jain et al. (2012)

Pre-qualifying suppliers by
identifying critical criteria
Supplier selection with eight
criteria

Fuzzy association rule mining

Pang and Bai (2013)

Supplier selection with five criteria

Fuzzy ANP for determining the

weights and fuzzy synthetic
evaluation for selecting a supplier

Sharma and Balan (2012)

Supplier selection with six criteria

TOPSIS for determining the

weights and goal programming
for selecting a supplier

Carrera and Mayorga (2008)

Kang et al. (2012)

Ozaki et al. (2012)

(Choi and Krause 2006; Tummala and Schoenherr 2011).

Following the tradition of risk management (Hopkin 2013),
two elements are often involved for risk assessment: likelihood and impact (Harland et al. 2003; Zsidisin et al. 2004).
Since supply chain risks can involve intangible factors, several researchers suggest some numerical schemes to assess
the risks such as the 4-point scale from the US Military Standard (Hallikas et al. 2002; Tummala and Schoenherr 2011).
Besides, some other assessment techniques have been used
in literature such as checklists and scorecards (Zsidisin et al.
2004) and analytic hierarchy process (AHP) (Schoenherr et
al. 2008).
Risk control is considered as the proactive actions to minimize the negative effects from the risks according to the
assessment results (Smeltzer and Siferd 1998). Some control techniques include information sharing (Christopher and
Lee 2004) and conditional guidelines (Manuj and Mentzer
(2008). Further efforts have also been devoted to the development of mathematical models for decision making such
as the disruption propagation model (Wu et al. 2007), the
multi-echelon model with operational risk factors (Kumar et
al. 2010; Singh et al. 2012), the agile supply chain model
(Babazadeh and Razmi 2012), and the mixed-integer fuzzy
model for network design (Tabrizi and Razmi 2013).
Supplier selection problem
In the domain of supply chain management, the supplier
selection problem is one popular topic, and the relevant
reviews can be found in Boer et al. (2001) and Ho et al.
(2010). The review by Ho et al. (2010) mainly covers the
literature works after year 2000, and they have classified
the works according to the techniques for decision making
(e.g., data envelopment analysis and AHP). They have also

Fuzzy analytic network process

(ANP)

Minor Analytic Network Process

(ANP)

reviewed how different techniques have been integrated for

supplier selection. Generally, various decision methods have
been integrated for two tasks: (1) determining criteria weights
and (2) deciding the final choice with the evaluation of lessintangible supplier performance. Table 2 lists some of the
works that follow this kind of methodical integration and are
not found in Ho et al. (2010).
The issue of risks has certainly been considered in supplier selection. Talluri et al. (2006) have addressed the supplier uncertainties using the chance-constrained data envelopment analysis (CCDEA). Chan and Kumar (2007) have
specified the risk criterion using four attributes (i.e., geographical location, political stability, economy and terrorism)
in the supplier selection model, which is addressed via the
fuzzy extended AHP. Kull and Talluri (2008) have described
the risks in view of five supplier failure events (i.e., delivery,
cost, quality, flexibility and general confidence) and assessed
them via failure likelihood and impact. Wu et al. (2010) have
modeled two risk-related objectives (i.e., economic environment and vendor rating) and used fuzzy multi-objective
programming for solving the supplier selection problems.
Notably, risks have been conceptualized in two ways: (1) as
the variations of criterion performance (Talluri et al. 2006;
Kull and Talluri 2008) and (2) as additional criteria in the
existing decision models (Chan and Kumar 2007; Wu et al.
2010). This observation somehow verifies that the concept
of risks in supplier selection has not been universally defined
and accepted.
As the assessments of risks often require expert judgments, the above works have applied some techniques such
as fuzzy sets and AHP to capture human reasoning and
expert judgments for risk assessment in supplier selection.
In addition, concurring with Boer et al. (1998), risks in supplier selection are not quite compensatory. That is, some

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risk impacts cannot be simply compensated by monetary

trade-off. Consequently, besides the quantitative research, it
is argued that the qualitative approach for risk analysis in
supplier selection is still practical in terms of systematically
capturing the expert judgements and reasoning for decision
making. In this context, the technique of FMEA for supplier selection is investigated, and its background is briefly
reviewed in the next sub-section.

nize and evaluate expert judgments toward the final decision.

This concurs the statement by Zsidisin et al. (2004, p. 403)
that the purpose of supply risk analysis is to facilitate(s)
the communication of possible supply failures between the
commodity and supply line managers, and the risk manager.

Failure modes and effects analysis (FMEA)

In this Methodology section, the notion of risks is first specified in the context of this research. Then, the methodical approach is overviewed, along with the descriptions of
FMEA evaluation schemes, development of FMEA documents and decision analysis. The next section (i.e., RealCase Application) will demonstrate the utility of the proposed
methodology in practice.

The origin of FMEA can be found in the US Military Procedure (revised on 1980 as MIL-STD-1629A). This technique
has been applied by NASA for the Apollo program in 1966
and adapted as another standard by Society of Automotive
Engineers (SAE) in 1996. The brief history of FMEA can be
found in Carlson (2012). As observed, FMEA was originally
developed in non-academic organizations, and it remains one
important tool in the six sigma methodology (Raisinghani et
al. 2005).
In academics, researchers have proposed various methods to enhance the features of FMEA such as the functionfailure design method (Stone et al. 2005) and design process
FMEA (Chao and Ishii 2007). One specific aspect of FMEA
research is to tackle the accuracy and appropriateness of the
risk priority number (RPN) (Pillay and Wang 2003; Kmenta
and Ishii 2004; Chang and Cheng 2011; Bradley and Guerrero 2011; Chang et al. 2013). Notably, the publication of
FMEA textbooks remains active in recent years to educate
industrial practitioners, and their FMEA procedures are systematic to reveal the fundamental logics of FMEA in risk
analysis (Anleitner 2010; Carlson 2012).
The use of FMEA for analyzing supply chain risks has
been mentioned in Zsidisin et al. (2004) and Christopher and
Lee (2004) but FMEA is used quite informally (e.g., without providing the details of how FMEA is applied) to collect
risk-related information for their own methods. In contrast,
Welborn (2007) has developed more details about how to
use FMEA for assessing supply chain risks. In the development of Supply Chain Risk Management Process (SCRMP),
Tummala and Schoenherr (2011) have used FMEA to identify supply chain risk at the stage of risk identification. In
contrast to these works, the new element of this research is
to utilize FMEA specifically for solving supplier selection
problems.
Generally, practitioners may have an impression that a
quantitative method can provide more confident results than
a qualitative method. Yet, from March and Shaira (1987,
p. 1408), the company managers do not necessarily focus
on the overall risk numbers, but they are more interested in
the feeling of the actual risks behind their decisions. It is
argued that numbers cannot replace expert judgments. The
utility of FMEA is to provide a systematic platform to orga-

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Methodology

Risk analysis in multi-criteria supplier selection

In supplier selection, the multi-criteria decision approach first
requires the selection team to identify the criteria to evaluate
individual suppliers. The selection team here is referred to
a decision-making unit responsible for selecting an appropriate supplier, and it can consist of various experts (e.g.,
procurement and logistics). In this case, the selection criteria provide an objective ground for the team to examine the
suppliers performance, and the criteria results can be used
to rank the suppliers for the final selection.
In this context, risks arise if the actual performance of a
supplier is different from the original criteria evaluations. For
example, Supplier A is expected to use 10 days for delivery.
Because of the strike at the airport, the actual delivery time is
extended to 15 days. In this case, using 10-day delivery time
as the information to assess Supplier A conveys a certain level
of risks. Notably, this notion of risks can be found in Talluri
et al. (2006) and Kull and Talluri (2008) that risks are viewed
as uncertainties with the outcomes in supplier selection.
In the context of FMEA, a failure mode is then defined
as the unexpected deterioration of the criteria performance.
Once the failure mode is specified, it becomes the focus for
the selection team to explore the risk-related information for
supplier selection. For instance, when the failure mode is
specified as longer delivery time, the selection team can
focus on this failure mode to examine relevant causes and
effects. Certainly, such discussion depends on the experience and expertise of the selection team, and some guidance
questions are suggested below.
Why and how the failure mode (e.g., longer delivery time)
takes place?
How likely the failure mode can happen to the supplier?
How the failure mode can impact the company if the supplier is selected?

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Table 3 Causes and effects of the failure mode longer deliver time

Supplier A

Supplier B
Supplier C

Causes

Effects

Possible airport
strike
Long distance
transportation
Hurricane season

Can be 5-day delay

Poor reputation on
late delivery

Very uncertain but the worst

case can be 20-day delay
Quite often for 3-day delay

In the practice of FMEA, this discussion can be organized in

a table format that lists the causes and effects of the failure
mode. Table 3 shows one example of the failure mode longer
deliver time related to three suppliers.
The use of tables in FMEA is a standard practice, and
it can support risk analysis in two aspects: communication
and documentation. Firstly, as the discussion of risks can
be experience-dependent and quite subjective, the selection
team can use the FMEA tables as the platform to avoid confusions and unify their opinions towards various risk scenarios.
Secondly, since the FMEA tables are often standardized as
the company documents, the corresponding information can
be effectively archived and checked in the future. In the next
sub-sections, a method is proposed to adapt the practice of
FMEA in the supplier selection context.
Overview of the methodical approach
Figure 1 shows the workflow of the methodology of this
paper. In this workflow, the white boxes represent the input
and output information, and the gray boxes represent the
specific methodical processes, which are briefly discussed
as follows.
Multi-criteria decision analysis: it represents the traditional multi-criteria evaluations for supplier selection.
Functionally, it receives the information of selection criFig. 1 Methodology workflow

teria to evaluate a list of suppliers. Then, each supplier

obtains an overall score for ranking and selection. Due to
its popularity, this paper does not discuss further details
of this process, and interested readers may refer to Ho et
al. (2010).
Development of FMEA evaluation schemes: based on
the selection criteria as the methodical input, the selection team classifies various risk situations and defines
the ranking schemes for the risk priority numbers (RPN).
More details are provided in Sect. 3.3.
Development of FMEA documents: each supplier is
assessed according to FMEA evaluation schemes, and the
output documents capture the typical information from
FMEA such as failure modes, causes and effects. More
details are provided in Sect. 3.4.
FMEA decision analysis: the quantitative information
from the FMEA documents is utilized to discount the
original scores of suppliers according to their risk situations. The risk-discounted scores are determined for final
ranking and selection. More details are provided in Sect.
3.5.

Development of FMEA evaluation schemes

In FMEA, one noticeable step is the evaluation of the risk
priority numbers (RPN) in order to prioritize failure modes.
In this step, the 10-point scale is usually used to examine three
aspects of risks of a failure mode (i.e., likelihood, severity and
control). Larger points indicate higher risks. With reference
to Carlson (2012, pp. 127, 139 and 147), Table 4 presents a
sample evaluation scheme that shows how the point numbers
are mapped to various risk situations. This scheme is quite
general so that it can be applied to various contexts.
In this research, the FMEA evaluation schemes are developed according to the selection criteria in the decision context. For instance, concerning the criterion delivery time,
the evaluation schemes can be constructed by considering
the following questions.

Selection criteria
List of suppliers

Development of FMEA
evaluation schemes

FMEA evaluation
schemes

Multi-criteria
decision analysis

Scores for
each supplier

Development of
FMEA documents

FMEA
documents

Risk-discounted
scores for each
supplier

FMEA decision
analysis

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Table 4 General evaluation

scheme

Rank

Likelihood

Severity

Detection/control

910

Very high and inevitable

(due to new designs)

No detection opportunity

78

High and uncertain (due to

operating conditions)

Failure to meet safety

and/or regulatory
requirements
Loss or degradation of
primary function

56

Moderate (with information

of similar designs and
simulation data)
Low (no observed failures
with almost identical
designs)

Loss or degradation of
secondary function

Possibly detected by online

planned testing

Annoying effects

Possibly detected by online

automatic continuous
testing

Very low

No discernible effects

Highly noticeable in regular

operations

24

Possibly detected by offline

testing

Table 5 FMEA evaluation scheme for the criterion delivery time

Rank

Likelihood

Severity

Control

910

Delay expected for likely every shipment

8 or more weeks late

No signs for lateness

78

About 50 % shipments delayed

47 weeks late

Can detect lateness based on external situations

56

About 30 % shipments delayed

13 weeks late

Shipment status available every day

24

About 10 % shipments delayed

36 days late

Expedited shipments available if needed

Delays not likely to happen

Within 2 days late

Noticeable before taking

alternative shipments without
extra cost and delay

Likelihood: how frequent of the time delay is considered

as serious?
Severity: how much time delay will be considered as serious and unacceptable?
Control: how possible to detect and control the situation
if time delay is about taking place?
Table 5 shows the evaluation scheme that is specific to the
criterion delivery time. By comparing Tables 4 and 5, one
effort in conducting FMEA for supplier selection is to capture the expert judgments by developing the criterion-specific
evaluation schemes. The utility of these evaluation schemes
is to harmonize the judgments by various experts so that
they collectively determine the selection of the suppliers with
trade-offs and potential risks in mind.
Development of FMEA documents
In this paper, the FMEA documents are referred to the table
forms that are constructed after performing FMEA. Particularly, one FMEA document is constructed for each supplier to
record the corresponding risk situations. One sample FMEA
document is given in Table 6, and it is prepared for Supplier A
given in Table 3 based on the evaluation scheme in Table 5.
The scope of such a FMEA document can be quite extensive when there are more criteria, failure modes, causes and
effects. While this format of FMEA documents is common

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in literature, interested readers may refer to Anleitner (2010)

and Carlson (2012) for more details.
Given below is the step-by-step procedure that is used to
develop the FMEA documents in this research.
Step 1: Set up the supplier selection problem
In this step, the supplier selection team starts with
identifying a list of potential suppliers. Then, a set of
selection criteria is identified to evaluate these suppliers accordingly. In practice, this step demands certain
amounts of efforts for gathering the corresponding
information.
Step 2: Define the failure modes
Recall that a failure mode is referred to the deviation
of criterion from the expected level. By focusing on
the selection criteria, the failure modes are further
clarified by defining the way in which the criteria
performance is deviated.
Step 3: Determine the effects and severity rankings
Focusing on each failure mode, the selection team
can analyze the potential effects if the failure mode
is materialized. Then, they can assign the severity
rankings based on their knowledge about the impacts
of the effects.
Step 4: Determine the causes and likelihood rankings
The selection team can discuss and identify the possible causes that can lead to the failure modes. Based

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Table 6 Sample FMEA document

Criterion

Failure modes

Effects

Severity
ranking

Causes

Likelihood
ranking

Control

Control
ranking

Delivery time

Longer
delivery
time

5-day delay

Airport strike

Buy insurance

5-day delay

Long distance transport

Real-time tracking

on the domain knowledge with the identified causes,

the likelihood rankings can be further determined to
classify the chance for the causes to happen.
Step 5: Identify the possible controls and assign control
rankings
To detect and control the impacts from the risks, the
selection team should investigate the possible control schemes. They can do so by focusing on each
failure mode combined with related causes. Then,
the control rankings can be assigned.
FMEA decision analysis
In the FMEA documents, one important piece of information is the rankings of severity, likelihood and control. In this
sub-section, a method is developed to utilize this ranking
information for supplier selection. The basic idea is to evaluate some discounts for the criteria scores according to the
seriousness of the risk situations. That is, if a supplier faces
a higher risk, its criteria scores will be reduced by a larger
discount. Then, the risk-discounted scores of all suppliers are
obtained and used for the final selection.
Let S, L and C denote the ranking numbers of severity,
likelihood and control, respectively, and these numbers can
be found from the FMEA documents (e.g., Table 6). The
range of each ranking number is from 1 to 10 based on the
typical practice in FMEA, where smaller number indicates
lower risk. Then, the basic problem of this sub-section is
how to determine the score discount based on the ranking
numbers of S, L and C.
The simple multiplication of S, L and C to obtain the risk
priority number (RPN) has received considerable criticisms
(e.g., Kmenta and Ishii 2004). To address this challenge,
the roles of S, L and C in risk analysis are purposely distinguished to develop the decision approach. Following the
classical definition of risk as the combination of risk impact
and likelihood, a risk number (denoted as R) is defined by
multiplying S and L, formulated as follows.
R=SL

(1)

Note that the range of R is from 1 (lowest risk) to 100 (highest

risk). Let D be the risk discount in percentage. Assume that R
=1 leading to no discount (D = 0 %) and R = 100 leading to

100 % discount (D = 100 %). The linear mapping between

R and D can be formulated as follows.
D=

(R 1) 100
99

(2)

Recall that C represents the possible detection and control

techniques that can be applied to mitigate the risks. Then,
if the good control can be put in place (i.e., low value of
C), the corresponding risk can be better managed. Thus, it is
intended to adjust the discount based on C. Assume that the
end points of Formulation (2) (i.e., R = 1 and R = 100) are
not affected by C adjustments (i.e., the control techniques
are not influential to the best and worst risk situations). By
fixing these two endpoints, the adjusted discount (denoted as
d) is formulated as follows.

d=

R1
99

ep
100

(3)

where ep is an exponent for adjustments related to C. Since

the base of the exponent is ranged from 0 to 1, higher values
of ep will lead to smaller values of d. As lower values of C
(i.e., good control for the risk) should lead to smaller values
of d, the linear mapping between C and ep is considered, and
it is formulated as follows.
ep = 0.1 C + 1.55

(4)

Note that the constants in Formulation (4) are set for the linear
mapping in this paper, and they can be modified according to
specific situations. In this formulation, it is set that the middle
value of C (i.e., (10+1)/2 = 5.5) will lead to no adjustment
(i.e., ep = 1).
To demonstrate, consider the sample FMEA document in
Table 6, where two causes are identified for longer delivery
time. The risk of airport strike has the risk number R =
4 3 = 12. As C = 2, ep = 1.35 and d = 5.15 %. In contrast,
the risk of long distance transport has the adjusted discount
equal to d = 17.67 %. These adjusted discounts correspond
to the FMEA results that the risk of airport strike has lower
(better) likelihood and control rankings.
In the next section, a real-case application is used to
demonstrate how the FMEA approach can be practically used
for risk analysis in supplier selection.

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Table 7 Some details of methanol suppliers

Supplier A

As one of the largest methanol suppliers worldwide, it operates its own tanker fleets to ensure reliable
delivery. Its global supply chain of methanol allows some favorable tariff rates for customers. It also has
also offices in Shanghai and Hong Kong for efficient management of contracts. The main disadvantage
is its high pricing

Supplier B

It is a supplier from Middle East, and it has strong support from the government. Abundant and cheap
natural gas resources enable this supplier to keep the low cost of methanol production and exportation. It
has its own research facilities to keep improving the methanol quality. Yet, people in Company H find
that it is difficult for them to negotiate the prices and other contract clauses with this supplier (due to the
corporate culture)

Supplier C

It is a supplier from Middle East, and it has been one of the largest methanol exporters to the China
market. Besides its competitive pricing, it is able to receive the quality certificate after a full set of
external audits in 2008. Yet, due to the unstable political environment, regular delivery and secure
payments become challenging

Supplier D

It is a supplier from South East Asia. The quality of its methanol production is verified by several quality
certificates (e.g., ISO 9001:2008, ISO 14001:2004, OHSAS 18001:2007 and SMK3). It also enjoys
relatively low anti-dumping duty. Yet, the current logistics relies on long-distance inland transportation,
leading to unstable delivery

Supplier E

It is a domestic supplier, and it produces methanol from coal. The local supply ensures stable delivery.
Due to the high demand of coal in recent years, the price of methanol fluctuates and keeps increasing

Supplier F

It is a domestic supplier. While it mainly produces carbamide and compound fertilizers, methanol is a
subsidiary product. It can offer most competitive price with stable delivery. Yet, the products quality
and capacity are limited due to the current scale of the facilities

Real-case application
Background
Company H is a China-based energy company. One of its
main businesses is to produce dimethyl ether (DME), which
is considered as one alternative clean fuel (Semelsberger et
al. 2006). Methanol is one raw material to produce DME, and
Company H needs to purchase up to 70,000 tons of methanol
per month to support the production level.
Originally, Company H purchases methanol from the
domestic suppliers (within 300 km of the production facility)
who use coal mines to produce methanol. Due to the proximity, Company H can arrange a flexible way to purchase
methanol. That is, at the beginning of each year, Company H
signs purchasing agreements with multiple suppliers. Each
agreement only indicates quantity/quality terms and the payment amount according to the price released by the supplier
around the delivery date. Then, Company H can place orders
to the suppliers who have good released prices. In this case,
Company H can generally receive the orders in 13 days after
ordering. Due to competitions among suppliers, Company H
can easily obtain methanol with good bargains.
However, due to the rapid development of Chinas economy, the coal supply becomes tight and its price becomes
high and unstable. This situation immediately affects the
methanol price, and even it is not economical to produce
methanol using coal. In addition, making the purchases from
many suppliers with small quantities incurs the quality issue.
Particularly, the coal-to-methanol production facility usually

123

does not have large capacities. To lower the cost, some suppliers even deliberately reduce the quality level. By receiving
almost 50 tank-trucks per day, it is costly for Company H to
inspect every single truck. As a result, the quality of methanol
received by Company H can be quite unstable, affecting the
DME production cost.
To address the challenges, Company H seeks for the
opportunities from global methanol suppliers. Through the
preliminary communications and site visits, Company H has
obtained a first-hand investigation report, and six methanol
suppliers are selected for the final selection after several
rounds of negotiation. Table 7 summarizes some details
of these candidates. Note that domestic suppliers are also
included for the overall comparisons.
In the rest of this section, the multi-criteria evaluations
used by Company H in practice are presented, and they are
actually based on the weighted scoring technique. Afterwards, the FMEA method for supplier selection is presented using the same set of criteria. In this way, it is
intended to demonstrate how FEMA can help reveal the riskrelevant information to support the company for decision
making.

Multi-criteria decision analysis

Company H has established a supplier selection team in the
purchase department, and this team has identified four selection criteria: cost, delivery, quality and service. These criteria
are briefly discussed as follows.

J Intell Manuf (2016) 27:13091321

Table 8 Criteria and original
weighted scores for supplier
selection

1317

Criterion

Weights

Supplier A

Supplier B

Supplier C

Supplier D

Supplier E

Supplier F

Cost

0.6

8.84

8.94

10.00

9.47

8.96

9.07

Delivery

0.2

9.00

9.00

7.00

7.00

10.00

10.00

Quality

0.1

10.00

10.00

10.00

9.00

8.00

8.00

Service

0.1

9.00

8.00

8.00

9.00

8.00

8.00

Weighted scores

9.00

8.96

9.20

8.88

8.98

9.04

Cost apparently has the direct impact to the companys

profit, and it is considered as the most important criterion
for the selection. For domestic suppliers, the costs include
the factory price and inland transportation. For overseas
suppliers, additional costs include CFR (Cost & Freight)
price, tariff and tax, discharging and storage fee.
On-time delivery is essential to satisfy the production
needs and reduce the inventory cost. The evaluation of
delivery is conducted via the difference between the scheduled and actual arrival dates.
The minimum quality requirement of methanol can be
found in the China national standard GB 338-2004
(methanol for industrial use). Generally, methanol suppliers are able to meet this standard. In addition, the quality of suppliers can be evaluated by Quality management
(ISO), Technological and inspection capability (Lab), and
Production facility.
Service includes the performance history of the suppliers
(in view of production schedule, response to market and
its ability to make commercial relations and business references). The payment clauses and the ease of communication (e.g., negotiability for long-term relations, cultural
factors, etc.) are also considered.

In Company H, the multi-criteria evaluations were carried

out for each supplier, and the scores are assigned accordingly (i.e., 10 for the best performance and 0 for the worst).
The weights are also defined based on the consensus of the
supplier selection team. Table 8 shows the results of criteria
and weighted scores, which are the output of multi-criteria
decision analysis indicated in Fig. 1. It is acknowledged that
the weights can be different in various contexts. For example,
the survey results by Jain et al. (2013) show the importance
of quality and delivery. The weight values in Table 8 are kept
for two reasons. Firstly, the weight values here simply report
the practice of Company H that has been experienced by one
author. Secondly, as the FMEA is applied based on these
weighted scores, the same weights are essentially applied to
both original and risk-discounted scores, and fair comparisons are considered in this way.
In practice, the situation for Company H is more complicated than just selecting the winner, who has the highest
weighted score from Table 8. For example, Company H may

choose multiple suppliers with different orders. Yet, the value

of multi-criteria evaluations in Table 8 is to provide certain
clarity for supporting the rationale behind the selection. This
point is well understood by the supplier selection team, and
they know how to interpret the numbers in Table 8 for decision making. Yet, when overseas suppliers are involved, it
is not trivial to visualize the corresponding risks. Nevertheless, the supplier selection team has certain knowledge
regarding the risks of different suppliers. In this context, the
value of the FMEA technique for supplier selection is to organize the risk information in view of these criteria systematically. In this way, the supplier selection team can combine
the results of weighted scores and FMEA to determine the
final actions.

Application of FMEA for supplier selection

At the start, the FMEA evaluation schemes are constructed
based on the four criteria. These evaluation schemes concerning severity, likelihood and control are organized for all
criteria, and they are provided in the Appendix for detailed
examinations. These evaluation schemes reflect the knowledge of supplier risks perceived by the selection team. Upon
the new knowledge of risks and decision situations, the selection team can modify and reuse these schemes.
After obtaining the FMEA evaluation schemes specific to
this application, the FMEA procedure in Sect. 3.4 can be
applied for each supplier. For the demonstration purpose,
Table 9 shows the resulting FMEA form of Supplier A. To
construct this FMEA form, the failure modes are first identified for each criterion. For example, two failure modes are
identified for the criterion cost: (1) increased at modest
rate and (2) skyrocket, as shown in Table 9. For each failure mode, the selection team needs to discuss the effects,
causes and control and assign the ranking numbers of S
(severity), L (likelihood) and C (control) according to the
evaluation schemes in the Appendix. As a result, six FMEA
forms are constructed for six suppliers respectively, and they
are reported in Zeng (2013).
After completing the FMEA forms, the ranking numbers
of S, L and C are used to determine the discounts that are
applied to the original weighted scores in Table 8. If the risk
is higher, the discount will be higher. Table 10 shows the orig-

123

1318

J Intell Manuf (2016) 27:13091321

Table 9 Resulting FMEA form of Supplier A

Criteria

Failure modes

Effects

Causes

Control

Cost

Increased at
modest rate
Skyrocket

Profit declines, or
go into the red
Break the
contract
Partial
production
Rejected
production

Tariff increase in
narrow range
Intl methanol
price jumping
Strikes

Forecast policy
of the region
Fix price range
by contract
Buy insurance

Poor quality
control

Document
mistakes

Service
procedure
problem

Share production
info. with
supplier
Keep comms.
with supplier

Delivery

Late delivery

Quality

Poor quality

Service

Poor service

Table 10 Comparison of
original and risk-discounted
scores (in bracket) for supplier
selection

Criterion

Supplier A

7
3

Supplier B

Supplier D

Supplier E

1
7

Supplier F

Cost

5.30 (5.21)

5.36 (5.02)

6.00 (5.19)

5.68 (5.23)

5.38 (4.52)

5.44 (4.43)

Delivery

1.80 (1.66)

1.80 (1.59)

1.40 (1.08)

1.40 (1.22)

2.00 (1.83)

2.00 (1.74)

Quality

1.00 (0.98)

1.00 (0.94)

1.00 (0.86)

0.90 (0.83)

0.80 (0.73)

0.80 (0.69)

Service

0.90 (0.89)

0.80 (0.76)

0.80 (0.76)

0.90 (0.86)

0.80 (0.76)

0.80 (0.76)

Total

9.00 (8.74)

8.96 (8.31)

9.20 (7.89)

8.88 (8.14)

8.98 (7.84)

9.04 (7.62)

Rank

3rd (1st)

5th (2nd)

1st (4th)

6th (3rd)

4th (5th)

2nd (6th)

inal and risk-discounted scores for comparison. To demonstrate, consider that the original weighted score of Supplier
A in Delivery is equal to 0.29.00 = 1.80. By checking
Table 9, the failure mode of late delivery yields the ranking numbers {S, L, C} = {3, 2, 7}. From the formulations in
Sect. 3.5, R = 6.0 and ep = 0.85 are obtained, resulting in
the discount d = 7.90 %. Then, the risk-discounted score is
1.80 (1 0.079) = 1.66.
Based on the original and risk-discounted scores, the suppliers are ranked respectively. Without considering the risks,
Supplier C has the highest original score as it has an advantage in cost. By checking the description of Supplier C in
Table 7, Supplier C is generally considered as a risky choice.
After applying the discounts, the rank of Supplier C drop
from the first place to the fourth place. In contrast, though
Supplier A is an expensive choice, it conveys less risk. Thus,
its rank becomes higher after applying the risk discounts.
These observations align with the notion of risk discounts in
supplier selection.

Discussion
In this study, the proposed FMEA approach can be directly
applied to the existing evaluations of the company. Particularly, the original weighted scores in Table 8 from the companys practice can be utilized to compute the risk-discounted
scores. In this way, the selection team can retain their existing
knowledge for supplier selection, and the role of FMEA is to

123

Supplier C

provide the additional risk-related information for decision

making.
Furthermore, it is considered that debates over the final
decision are unavoidable in practice no matter how comprehensively the quantitative analysis has been conducted. Even
Supplier A is suggested after computing the risk-discounted
scores, some may still insist that Supplier C is better and
argue on the quantification schemes. In this case, the advantage of the proposed method is to direct the debates back to
the FMEA documents. For instance, the supporters of Supplier C can check which criterion receives most risk-related
discounts and suggest some better control strategy to improve
it. In this way, the FMEA approach can highlight the highrisk aspects of the decision and initiate relevant discussions.
In view of limitations, the process of FMEA cannot be
fully automated, and some training of FMEA is required for
the selection team (e.g., the concept of failure modes). Nevertheless, the formal FMEA documents can support the accumulation of the teams knowledge in risk analysis. Particularly, the FMEA evaluation schemes can be tailored for the
companys context, and they can be modified and improved
along with the teams experience.

Conclusions
This paper proposes the FMEA approach to support risk
analysis in the supplier selection problem. The papers
contribution is twofold. Firstly, the FMEA concept has

J Intell Manuf (2016) 27:13091321

1319

been adapted and translated in the supplier selection context. Accordingly, the methodical procedure is proposed to
develop FMEA documents for capturing the risk issues in
supplier selection. Secondly, the evaluation procedure is
developed to calculate the risk-discounted scores based on
the FMEA ranking numbers for supplier selection.
The application of the methanol supplier selection has
been reported to demonstrate the practical aspects of the proposed method. In practice, though the company is aware of
various risks from local and global suppliers, it is difficult
to incorporate these risk factors for ranking the suppliers.
This real-case application shows the evaluation of risk factors without changing the existing company practice entirely.
In addition, FMEA provides proper documentation to track
the reasons behind individual risks in view of failure modes
and to support the accumulation of knowledge in risk analysis.

Future work is considered in two directions. Firstly, there

is still some room to improve the computation of the FMEA
rankings. Flexible ranking systems and standard rubrics can
be considered to formalize the FMEA process in the supplier
selection problem. Secondly, software development is considered to support the documentation and evaluation efforts
in FMEA. In addition, software can also be designed to suggest possible control strategies for minimizing the risks of
particular suppliers.

Appendix: FMEA Evaluation schemes for the real-case

application
This Appendix reports the FMEA evaluation schemes for
the real-case application in view of severity (Table 11), likelihood (Table 12), and control (Table 13).

Table 11 FMEA evaluation scheme for severity with four criteria

Rank of S

Cost

Delivery

Quality

Service

10

More than 30 USD

above spot market
price

More than 6
weeks late

Cause loss more

than 200,000
USD

89

25 USD above spot

market price

56 weeks late

67

10 USD above spot

market price

34 weeks late

45

5 USD above spot

market price

12 weeks late

23

3 USD above spot

market price

36 days late

Exceed 3 % lower
than GB 338-2004
standard
requirement
2 % lower than GB
338-2004 standard
requirement
1 % lower than GB
338-2004 standard
requirement
0.5 % lower than GB
338-2004 standard
requirement
0.3 % lower than GB
338-2004 standard
requirement

1 USD above spot

market price

Within 2 days
late

0.1 % lower than GB

338-2004 standard
requirement

Cause loss no
more than
1,000 USD

Cause loss about

200,000 USD
Cause loss about
100,000 USD
Cause loss about
50,000 USD
Cause loss no
more than
5,000 USD

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J Intell Manuf (2016) 27:13091321

Table 12 FMEA evaluation scheme for likelihood with four criteria

Rank of L

Cost

Delivery

Quality

Service

10

More than 50 % transaction

unexpected cost increase
happen

Delay expected for likely

every shipment

More than 50 % shipments

product nonconforming
happen

Bad service behavior

happen in every
transactions

89

About 40 % transaction
unexpected cost increase
happen

About 70 % shipments
delayed

About 40 % shipments
product nonconforming
happen

Bad service behavior

happen in about 70 % of
transactions

67

About 20 % transaction
unexpected cost increase
happen

About 50 % shipments
delayed

About 20 % shipments
product nonconforming
happen

Bad service behavior

happen in about 50 % of
transactions

45

About 10 % transaction
unexpected cost increase
happen

About 30 % shipments
delayed

About 10 % shipments
product nonconforming
happen

Bad service behavior

happen in about 30 % of
transactions

23

About 5 % transaction
unexpected cost increase
happen

About 10 % shipments
delayed

About 5 % shipments
product nonconforming
happen

Bad service behavior

happen in about 10 % of
transactions

Cost increase not likely to

happen

Delays not likely to happen

Product nonconforming not

likely to happen

Bad service behavior not

likely to happen

Table 13 FMEA evaluation scheme for control with four criteria

Rank of C

Cost

Delivery

Quality

Service

10

No chance of prediction and

control

No chance of prediction and

control

No chance of prediction and

control

No chance of prediction and

control

89

Final price based on

manufacturers monthly
released price
No price fluctuation range
limit

Without delay
compensation clause

No compensation clause

Very remote chance of

prediction and control

Do not share production

schedule information

Random inspection only

Low chance of prediction

and control

Only one production

facility, but fixed price
fluctuation range by
contract
Sign yearly contract

Cannot contact captain or

vessel owner, but have
sailing schedule

Without unloading
inspection

Moderate chance of
prediction and control

No close communication

GB 338-2004,
pre-inspection before
loading
Can be predicted and
controlled by contract

High chance of prediction

and control

67
45

23

Vessel from famous

companies, origin place
located in different
countries

Share production schedule,

direct shipment

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