CHAPTER 2 LITERATURE REVIEW

Transcription

1 29 CHAPTER 2 LITERATURE REVIEW 2.1 INTRODUCTION This literature review encompasses review on the importance of purchasing, supplier selection and its importance, supplier selection methods and supplier selection attributes. Review on supplier selection methods and the attributes had been given more emphasis, as these are the main requirements of this research work. 2.2 IMPORTANCE OF PURCHASING Purchasing holds an important position in SCM cycles, as the flow of material and money starts in this cycle. A brief summary on the review on the importance of purchasing is summarized below. Purchasing plays a crucial role in material cycle because it is concerned of the input stage up to the consumption in manufacturing (Telsang 2001) Purchasing functions as a monitor, clearing house and pipeline to supply materials needed for production (Telsang 2001). Concerning the control of costs, purchasing is by far, the most important area in the firm because two thirds of the cost of goods sold are purchased items (Chase et al 2002).

2 30 The purchasing department occupies a vital and unique position in the organization of an industrial concern, because purchasing is one of the main functions in the success of a modern manufacturing concern. Mass production industries, since they rely upon a continuous flow of right materials, demand for an efficient purchasing division. The purchasing function is a liaison agency, which operates between the factory organization and the outside vendors on all matters of procurement. Purchasing implies - procuring materials, supplier, machinery and services needed for production and maintenance of the concern. Early research in the area of procurement by Lewis (1943) found that the selection of a proper source of material as the most important responsibility placed on the purchasing officers. The role of an organization s purchasing department, as noted in textbooks, is to buy the correct items, at the specification, in the right quantity, for delivery at the right time to the right customer (Monczka and Trecha 1988). The purchasing function is one of the most critical activities of a firm (Thompson 1990). Wisner and Stanley (1999) stated that purchasing is often the initial and primary contact for the firm s external supplier selection.

3 31 Purchasing is not restricted to buying material. Purchasing function has a large impact on the determination of the characteristics of material, components and services purchased (Burt 1989). The purchasing department is a liaison between product design group and other planning teams for all parties involved in the procurement process (Wisner and Stanley 1999). The purchasing department has shifted its focus from an administrative scope to a strategic role in order to increase the competitive advantage of the organization. The manufacturing capabilities of an organization are a result of the firm s people, skills, knowledge, processes, systems, and equipment (Zahra and Nielsen 2002). In addition to being one of the most important decisions made by a purchasing department, it may also be one of the most critical and most difficult (Sarkis and Talluri 2002). 2.3 SUPPLIER SELECTION Source or supplier selection is the most critical part in purchasing as it decides the other principles of purchasing. There are many reasons to be a critical part as follows: Supplier selection is a multi-criteria decision making problem which includes both qualitative and quantitative factors. Supplier selection decisions are important components of production and logistics management for many firms.

4 32 With the increasing significance of the purchasing function, purchasing decisions become more important. As organizations become more dependent on suppliers, the direct and indirect consequences of poor decision making become more severe. For example, in industries, share of purchasing in the total turnover typically ranges between % (Telgen 1994), thus making decisions about purchasing strategies and operations primary determinants of profitability. In addition, several developments in industry environment further complicate purchasing decision making (Luitzen de Boer et al 2001). Purchasing commands a significant position in most organizations, since purchased parts, components, and supplies typically represent 40 to 60 percent of the sales of its end products. Thus relatively small cost reductions gained in the acquisition of materials can have a greater impact on profits. Organization s ability to produce a quality product at a reasonable cost and in a timely manner is heavily influenced by its suppliers capabilities. These capabilities can be obtained from the internal sources of the firm and external sources, such as suppliers (Teece et al 1997). Supplier selection is one of the key issues of SCM because the cost of raw materials and component parts constitutes the main cost of a product.

5 33 The most important task performed by purchasing is the selection of suppliers (Monczka et al 1988, Vokurka et al 1996). Hay (1990) and Nydick and Hill (1992) also stated that the supplier selection may be the single most important phase of the purchasing process. It is usually said that the essence of the purchasing process lies in a rational selection of the sources from which supplies of materials are obtained (Menon 1997). In spite of the expertise of the purchase manager to provide technical assistance on various matters like determining price trends, helping to define quality requirements, maintaining control on inventories, etc., his primary responsibility is to find out suitable sources of supply and ensure that right quality material is obtained in the right quantities at the right time, at the right place and at the right price Literature Review on Supplier Selection Extensive works in the area of supplier selection have been carried out in terms of conceptual, frameworks, case studies, criteria papers, literature review, mathematical modeling etc. There are two significant issues involved in supplier selection. First is what criteria should be used and the other, what methods can be used to compare suppliers. In this section, review on the supplier selection works are covered, whereby, the majority emphasis will be given on the selection criteria. In the supplier evaluation and selection, role of criteria plays vital role by encompassing all the requirements. So, selection of criteria also is dealt more care. Author believes that it is necessary to first present a review of the supplier selection methods, followed by a review of the selection criteria in the next section.

6 Review of the Supplier Selection Methods Supplier selection methods are the models or approaches used to select the supplier in an optimized way. The methods chosen are extremely important to the overall selection process and can have a significant influence on the selection results. It is important to understand why a firm chooses one method (or a combination of different methods together) over another. Certain methods have been popular selection choices for years, while other methods have only emerged recently. When a company sets out to develop or choose a supplier selection method, the result is usually a combination of several different methods and different strengths suited to meet the company s specific selection needs. Therefore, it is important to explore a range of different selection methods and to discuss their different applications. Benyoucef et al (2003) divide the supplier selection methods into three straightforward categories, which include: the elimination method, the optimization method, and the probabilistic method. The elimination method s primary purpose is to eliminate those suppliers whose score, based on the corresponding criteria, is lower than the accepted average. All suppliers must meet the most basic criteria, and suppliers with the highest scores will be chosen. The optimization method is used to ensure that the criteria function is optimized. There are two possible options for this method, which include a list of criteria subject to a set of specific constraints, or those criteria without constraints. The Analytical Hierarchic Process (AHP) is a good example of situation inwhich no constraints are present. With regard to the probabilistic method, Benyoucef et al (2003) believe that supplier selection decision can often be handled in a relatively routine fashion.

7 35 Further to Benyoucef et al (2003) classification approach of supplier selection methods, Liao and Kuhn (2000) have chosen to classify supplier selection methods into sorting methods and supplier final selecting methods. The main purpose of the supplier sorting method is to eliminate the inefficient suppliers in the beginning of the process, such as through the use of a categorical approach, cluster analysis or Data Envelopment Analysis (DEA). The supplier final selecting method includes a range of different methods, such as the cost based method, multi-attribute utility approach and linear weighing. Liao and Kuhn (2000) also point out the importance which mathematical programming plays in supplier final selecting methods, which can be seen in the linear programming method, mixed integer programming method, goal programming method, and the multi-objective programming method. This research has shown that many of the models used tend to be based on a quantitative approach, which is generally more systematic and reliable than a qualitative approach. Over the years, researchers have begun to classify and group the individual supplier selection methods into a number of broader categories, with each classification having both advantages and disadvantages. Table 2.1 below, presents a description of some of the most widely used methods for supplier selection. Additionally, some of the more commonly used methods, such as the Analytical Hierarchy Process (AHP), the Multiple Attribute Utility Theory (MAUT), the Activity-Based Costing Approach (ABC), and the Total Cost of Ownership (TCO) approach, will be given additional focus and further explanation Methods used for Supplier Selection Some of the methods used for the analysis and selection of suppliers are discussed to familiarize on the supplier selection methods.

8 36 Table 2.1 Methods used for supplier selection Technique Proponents Methodology Applications Analytic Hierarchy Process (AHP) Saaty, Belton, Dyer, Bard, Bhutta, Nydick, Hill Unit Total Cost Harding, Porter, Monckza Total Cost of Ownership (TCO) ABC Costing Approach Life Cycle Costing Approach Multi-Objective Programming Multi-Attribute Utility Theory (MAUT) Dynamic Programming Data Envelopment Analysis (DEA) Ellram, Carr, Cavinto, Porter, Bhutta Tyndall, Morris, Kaplan Jackson, Ostrom, Handfield, Panneri Weber, Ellram Weber, Nitszch Masella, Rangone Weber, Kleinsouza, Claska, Kent (Source: Khurrum, Bhutta 2003) AHP provides a framework to cope with multiple criteria situations involving intuitive, rational qualitative and quantitative aspects. Unit total cost is the total cost to the purchaser per unit after inclusion of all relevant factors TCO is a methodology and philosophy, which looks beyond the price of a purchase to include many other purchase-related costs. This approach has become increasingly important as organizations look for ways to better understand and manage their costs Categorizing costs into ABC categories and then making a selection based on the criteria selected Prioritizing alternatives Cost of product is less significant than other costs Cost of product is less significant than other costs When cost categories of parts is critical Looks at the cost of the product over its whole life When periodic maintenance or replacement is needed and costs are high The use of a multi-objective programming approach is generally used in the just-in-time scenarios. The analysis occurs in a decision support system environment. Use of MAUT, can help purchasing professionals to formulate viable sourcing strategies, as it is capable of handling multiple conflicting attributes inherent in international supplier selection By setting input variables as control and environmental variables, state variables as the internal workings of the organization, and the output variables as the performance achieved by the organization based on the selection of suppliers made. DEA is an optimization method of mathematical programming used to generalize single input/ single-output technical efficiency measure to the multiple-input/ multiple-output case by constructing a relative efficiency score as the ratio of a single virtual output to a single virtual input. Where multiple conflixing criteria have to be considered in a JIT environment. In situations of International supplier selection, where the environment is more complicated and risky. Where output is a measured quantity and discretization of variables can be achieved. Where there are multiple inputs and outputs that make comparisons difficult.

9 37 Multiple Attribute Utility Theory (MAUT): The MAUT method is recognized here, most notably for its systematic nature. MAUT is often cited as an ideal method for solving complex problems when multiple criteria are present. Since most supplier selection problems encompass multiple criteria, MAUT is an appropriate approach. Based on a previous research studies, Min presents a six-step example for the application of MAUT: 1. Identify the objectives for the decision, and define the scope of the problem. 2. Form a list of attributes concerning the decision, and then organize them in the order of hierarchy. 3. Determine the importance of the different attributes. 4. Build upon the decision maker s utility function. 5. Calculate the overall utility score for each alternative, and then rank the alternatives. 6. Perform sensitivity analysis. Analytical Hierarchy Process (AHP): Review of the supplier selection literature showed the AHP method to be one of the most commonly applied methods in practice. AHP is an ideal method for ranking alternatives when multiple criteria and sub-criteria are presented in the decision-making process. Similar to that of the Multiple Attribute Utility Theory (MAUT), AHP allows the decision-maker to structure complicated problems in the form of a decision hierarchy. The hierarchy usually consists of three different levels, which include goals, the criteria, and alternatives. With regard to supplier selection, a goal might be the ability to choose the right supplier, the criteria such as quality, price, etc., and alternatives, for example, consider having different suppliers. AHP is often considered as an ideal supplier

10 38 selection method because it allows decision makers to rank suppliers based on the relative importance of the criteria and the suitability of the suppliers. Activity-Based Costing (ABC): The ABC method is the method which is most focused on cost. The ABC method is most commonly used to assess the direct and indirect resources of an organization and compare them to the activities performed based on the consumption. In the ABC method, resource costs are determined by identifying the amount of resources, which are necessary or consumed in performing a specific activity. The activity costs are then traced to the specific products, services, or customers and is decided based on how frequently the activity is performed in support of these cost objects. Total Cost of Ownership (TCO): TCO is another method where the emphasis is placed on cost. TCO can also be used for communicating with suppliers, as well as for evaluating suppliers performance. Since cost is one of the major criteria of supplier selection, TCO is a valuable approach. TCO is a structured method used to find out the total costs associated with the acquisition of, and subsequent use of a specific component from a given supplier. This method determines that an item s purchase price is only a portion of the total cost of acquiring an item, and that the cost of ordering, expediting, receiving, and inspecting is related to the supplier s performance. The TCO method identifies the total acquisition price by incorporating the costs of purchasing, holding, poor quality, delivery failure and others. Multi-Objective Programming: This approach is especially suitable to just- in-time scenarios. The analysis occurs in a decision support system environment. A multi objective programming decision support system allows for judgment in decision making while simultaneously trading off key supplier selection criteria. An additional flexibility of this model is that it

11 39 allows a varying number of suppliers into the solution and provides suggested volume allocation by supplier. Categorical methods: Basically, categorical methods are the qualitative models. Based on historical data and the buyer's experience, current or familiar suppliers are evaluated on a set of criteria. The evaluations actually consist of categorising the supplier's performance on a criterion as positive, neutral or negative. After a supplier has been rated on all criteria, the buyer gives an overall rating, again through ticking one of the three options. In this way, suppliers are sorted into three categories. The categorical method is discussed widely in (primarily) purchasing textbooks, e.g. Zenz (1981) and Timmerman (1986). Data Envelopment Analysis: Data Envelopment Analysis (DEA) can be applied in Supplier selection problems especially when multiple conflicting criteria have to be considered. DEA identifies an efficient frontier from the inputs and outputs to be evaluated creating Decision Making Units (DMU s) and then the efficiency of each of these DMUs are compared to the efficient frontier for identifying the most efficient DMU. This method can also be applied to supplier selection. DEA is built around the concept of the efficiency of a decision alternative. The alternatives are evaluated on benefit criteria (output) and cost criteria (input). The efficiency of an alternative (e.g. a supplier) is defined as the ratio of the sum of its outputs (i.e. the performance of the supplier) weighted against the sum of its inputs (i.e. the costs of using the supplier). For each supplier, the DEA method finds the most favourable set of weights, i.e. the set of weights that maximises the supplier's efficiency rating without making its own or any other supplier's rating greater than one. In this way the DEA method aids the buyer in classifying the suppliers (or their initial bids)

12 40 into two categories: the efficient suppliers and the inefficient suppliers. Weber has primarily discussed the application of DEA in supplier selection in several publications (Weber and Ellram 1992, Weber and Desai 1996 and Weber et al 1998). Apart from just categorising suppliers, Weber shows how DEA can be used as a tool for negotiating with inefficient suppliers. Other publications featuring DEA in supplier selection are Papagapiou et al (1996) and Liu et al (2000). Cluster analysis (CA): CA is a basic method from statistics which uses a classification algorithm to group a number of items which are described by a set of numerical attribute scores into a number of clusters such that the differences between items within a cluster are minimal and the differences between items from different clusters are maximal. Obviously, CA can also be applied to a group of suppliers that are described by scores on some criteria. The result is a classification of suppliers in clusters of comparable suppliers. Hinkle et al (1969) were the first to report this, followed some 20 years later by Holt (1998). Case-based-reasoning (CBR) systems: CBR systems fall in the category of the so-called artificial intelligence (AI) approach. Basically, a CBR system is a software-driven database which provides a decision-maker with useful information and experiences from similar, previous decision situations. CBR is still very new and only few systems have been developed for purchasing decision-making. There are many different supplier selection methods and a number of selection criteria presented in current literature, which can be used in effective supplier selection. When an organization sets up its supplier selection, oftentimes they will make use of several of the popular selection methods and important selection criteria, by employing various aspects of

13 41 multiple methods and criteria for a combined approach. Therefore, it is important to understand the relative strengths and weaknesses of the different methods and selection criteria, in addition to the ones, which are most widely used and recognized, as presented above Review of the Supplier Selection Process and Selection Criteria Benyoucef et al (2003) describe supplier selection, as a strategic decision process influenced by multiple factors, numerous criteria and subjective measures, all of which are considered to be typical characteristics of supplier selection. More specifically, they describe supplier selection as an important decision, which must be consistent with the company s strategic goals. For example, it is necessary that the supplier selection decisions be based on a cooperative effort of the different departments within a company. It is also important that the various supplier selection criteria support one and reinforce one another. Oftentimes supplier selection includes a number of subjective criteria, which can be described as those criteria, which are based on personal judgment, such as, quality or attitude. Subjective criteria can be complicated to measure and generally, tend to be less accurate than objective criteria (such as quantitative measures). A number of research studies have been conducted which focus on the importance of choosing the right criteria for supplier selection. Three major studies are chosen which were conducted between 1966 and 2003, in order to see how the different selection criteria have changed over the past few decades and where the current emphasis lies. Dickson s 1966 study was based on a questionnaire, which was sent to two hundred and seventy-three purchasing agents and managers, all members of the U.S. National Association of Purchasing Managers. Based on his findings, Dickson s study

14 42 identified twenty- three different criteria as being essential to supplier selection which are listed in Table 2.2. Table 2.2 Dickson s supplier selection criteria Rank Factor Mean Rating Evaluation 1 Quality Extreme importance 2 Delivery Performance History Warranties and Claims Policies Considerable Importance 5 Production Facilities and Capacity Price Technical Capability Financial Position Procedural Compliance Communication System Reputation and Position in Industry Desire for Business Management and Organization Operating Controls Repair Service Attitude Average Importance 17 Impression Packaging Ability Labor Relations Record Geographical Location Amount of Past Business Training Aids Reciprocal Arrangements Slight Importance Refer Dickson (1966), 0 = no importance, 4 = extreme importance

15 43 Two of the most popular and often cited studies are a result of research conducted by Dickson and Weber et al. Along the list, an ensuing ranking of the criteria is also presented from studies conducted by Dickson (1966), Weber et al (1991), and Zhang et al (2003). This is done in an effort to show how the importance of the various selection criteria has changed over the last few decades. Dickson s 1966 study was based on a questionnaire, which was sent to two hundred and seventy-three purchasing agents and managers, all members of the U.S. National Association of Purchasing Managers. Based on his findings, Dickson s study identified twenty-three different criteria as being essential to supplier selection. Dickson s study concluded that quality, delivery time and performance history were among the most important factors for supplier selection. Weber et al (1991) had reviewed, annotated and classified 74 articles, which had appeared since Specific attention had been given to the criteria and analytical methods used in the vendor selection process. Based on Weber et al s reviews 22 of the 23 criteria ranked by Dickson were addressed in at least one of the articles. 47 of the articles discussed more than one criterion. Net price, delivery and quality were discussed in 89%, 59% and 54% of the articles respectively. Dickson rated these three criteria as having extreme or considerable importance. Production facilities and capability, geographical location and technical capability were discussed in 31%, 22% and 20% of the articles respectively. Production facility and capability and technical capability were categorized as having considerable importance, while geographical location was considered to have only average importance in Dickson s ranking. Other criteria are considered as considerable importance and slight importance as having in the Table 2.2. Weber et al (1991) study reviewed seventy-four different articles written between 1966 and 1991, concerning different supplier selection

16 44 criteria and methods. This study found that net price, deliver precision, quality, production and capacity, and location were among the most important selection criteria at the time. Weber et al study also concluded that it would be impossible to successfully produce low cost, high quality products with the use of satisfactory suppliers and appropriate selection and maintenance of suppliers. Finally, Zhang et al (2003) study collected forty-nine articles published between 1991 and The study concluded that net price, quality, and delivery were the most important supplier selection criteria. As can be discerned from the three different studies, price became the number one selection factor, replacing Dickson s number one ranked quality criteria. Additional criteria, which were not listed in his study, have also become important in the selection process. These attributes include issues such as product design and development, flexibility, and the relationship with suppliers. The different ranking of attributes also suggests that supplier selection decisions are inherently multi-objective. While some of the attributes have changed, the major attributes have, for the most part, remained the same, reinforcing its significance. Comparison of three different studies in supplier selection attributes ranking has been shown in Table Works on Supplier Selection Criteria Using the categorization scheme in Ellram (1990), supplier selection research can be categorized as either descriptive, describing actual practice, or prescriptive, modeling how suppliers should be selected given a set of selection attributes. Descriptive studies have addressed a wide array of issues. Early studies focused on identifying the attributes used by buyers to select suppliers (eg. Dickson 1966, Lehmann and O'Shaughnessy 1982).

17 45 Table 2.3 Supplier selection attributes ranking: Comparison of three different studies Criteria Dickson (1966) Weber et al (1991) Zhang et al (2003) Rank Rank Rank Net price Quality Delivery Production Facilities and Capacity Technical Capability Financial Position Geographical Location Management and Organization Performance History Operating Controls Communication System Reputation and Position in Industry Repair Service Packaging Ability Training Aids Procedural Compliance Labor Relations Record Warranties & Claims Policies Attitude Reciprocal Arrangements Impression Desire for Business Amount of Past Business Source: Megan E. Bross and Guangbin Zhao (2004), Elaboration, Based on Dickson (1966), Weber et al (1991), Zhang et al (2003).

18 46 Several studies have also examined the relative importance of different selection criteria under different buying conditions (e.g., Lehmann and O'Shaughnessy 1974, 1982, Wilson 1994). While quality, cost, and delivery performance have been consistently identified as being important determinants of supplier selection, it is also apparent that specific criteria and their relative importance are highly dependent on the type of purchase being made. Apart from these criteria, many criteria are to be considered for the supplier selection, Dickson (1966) in his seminal paper identified 23 supplier selection criteria, which deeply influenced later researches in this area. A number of studies have addressed supplier selection in the light of contemporary business pressures. Mahmut Sanmez (2006) reviewed 147 refereed academic journal articles that appeared between 1985 and 2005 on supplier selection. In his review, he briefed about the papers, involved with the decision criteria. Abratt (1986) analyzed the buying process and determined the relative importance of the factors influencing supplier selection. Shipley et al (1991) had compared the performance of two channel designs in meeting customer sourcing criteria for industrial re-buy products. Weber et al (1991) reviewed on the criteria and analytical methods used in the vendor selection process. Wilson (1994) compared the relative importance of supplier selection criteria of late seventies and eighties with those of nineties.

19 47 Deng and Wortzel (1995) presented the results of an empirical study of the supplier selection criteria used by U.S importers in three merchandise categories when selecting an Asian supplier. Swift (1995) had aimed to determine whether there are differences in supplier selection criteria between purchasing managers who have a preference for single sourcing and those who prefer multiple sourcing. Thorelli and Glowacka (1995) reported on factors thought to have an impact on decisions of purchasing professionals to source internationally. Pearson and Ellram (1995) examined and explored the differences in decision criteria used for supplier selection in small and large organizations. Choi and Hartley (1996) aimed to identify supplier selection practices based on a firm s position on supply chain and to provide recent supplier selection practices that incorporate contemporary supplier management issues. Patton (1996) attempted to find out what criteria and which methods purchasing professionals use in practice. Mummaleneni et al (1996) examined the Chinese managers preferences of decision criteria when selecting suppliers. Craig et al (1997) aimed at exploring the criteria used during the selection of systems / software vendors for all or part of an integrated logistics information system. Lambert et al (1997) examined the decision criteria used by health care organizations and looks at the weights assigned to them. Min and Galle (1997) had drawn attention to include environmental criteria in the supplier selection process. Noci (1997) attempted to incorporate environmental factors into supplier selection process. Hirakubo and Kublin (1998) examined the purchasing behaviour in the Japanese electronic and office equipment industries. Verma and Pullman (1998) examined the differences in weights assigned to decision criteria in actual choice of suppliers and perceived

20 48 importance of decision criteria before selecting the suppliers. Avery (1999) identified the criteria used for IT purchases and factors affecting MRO supplier selection. Avery (2000) presented the experiences of three purchasing professionals and their preferred criteria when purchasing IT. Bowman et al (2000) examined the relative importance of factors that affect supplier selection and level of usage for global business services providers. Swift and Gruben (2000) examined the differences between the weightings applied to supplier selection criteria by male and female purchasing managers. Lee et al (2001) proposed a methodology, which identifies the managerial criteria using information derived from the supplier selection processes and makes use of them in the supplier management process. Akarte et al (2001) identified 18 criteria and grouped them into four categories. Krause et al (2001) aimed to develop a set of measures of purchasing's competitive priorities. Kannan and Tan (2002) described an empirical study of the importance of supplier selection and assessment criteria of American manufacturing companies for items to be used in products already in production. Yan and Wei (2002) used supplier selection criteria as an example to apply a proposed compromise weighting in a group decision making environment. Humphreys et al (2003a) attempted to integrate environmental factors into the supplier selection process. Humphreys et al (2003b) developed a decision support tool which should help companies to integrate environmental criteria into their supplier selection process. Sharland et al (2003) examined the impact of cycle time on supplier selection. Gonzalez et al (2004) looked at the variables and their relative importance in supplier selection from quality, cost and productivity perspectives. Katsikeas et al (2004) reported on a systematic examination of supplier performance in purchasing decision criteria of U.K. distributor firms of information technology (IT) products. Svensson (2004) investigated the models of

21 49 supplier segmentation and supplier selection criteria. Lin et al (2005) identified the factors affecting the supply chain quality management. The supplier selection attributes Quality, Delivery, Cost, Technical capability and Production facility were almost considered in the top five positions in the literature. This top five attributes and also other attributes are selected for this research study. Attributes and the reason for selection are depicted in the Chapter Review on the Works on Criteria Based on Geographical Region The supplier selection process has been widely researched across industries and nations in the last three decades (Chao et al 1994, Qu and Brocklehurst 2003, Hansen 2001, Preis 2003, Silva et al 2002 and Kannan and Tan 2003). As shown in Table 2.4, supplier selection criteria vary across regions and industries and hence are very context-based. Criteria that are general across regions and industries include price, quality, and delivery. Other criteria are industry specific, for example JIT capability is critical only in JIT companies. According to literature, yet priority based work has not been carried out in India.

22 50 Table 2.4 Summaries of supplier selection criteria across regions and industries Authors Industry Region Supplier selection criteria (top 6) General US and Europe Kannan and Tan (2003) Mummalaneni et al (1996) Abratt (1986) High-tech markets Hirakubo and Kublin (1998) Haydu and Hodges (2004) Bharadwaj (2003) Billesbach et al (1991) Silva et al (2002) Ability to meet delivery due dates Commitment to quality Technical expertise Price of materials Frequent communications Respond to unexpected demand General China Quality On-time delivery Responsiveness to customer needs Price/cost Quality of relationship with supplier Professionalism of salesperson Electronic and office equipment South Africa Technical service provided Product reliability After sales support Supplier s reputation Ease of maintenance Ease of operation Japan Price Delivery Quality Capability Technical Manufacturing Turfgrass-sod Japan Quality Price Availability Delivery Electronic components JIT companies Textile products (Source: Xiaoli Lin 2005) Multiple regions Multiple regions Multiple regions Product quality Conditions of products on arrival On-time delivery performance Accuracy in filling orders Order cycle time Ability to fill emergency orders Price Delivery reliability Quality conformance Response flexibility Price Technical support JIT capability Work quality Delivery time Cost Responsiveness to requests Good design Innovative ability

23 Motivation for the Research Work In the review of purchasing, its importance had been explored. Review on supplier selection methods and supplier selection attributes are discussed. Works on attributes, specifically prioritization of attributes was discussed more, as the prioritization is the first and foremost work in supplier selection. Among the variety of works, Verma and Pullman (1998) had made a significant analysis on the prioritization of the supplier selection attributes based on perceived and actual choice of suppliers. In previous works, supplier selection criteria are prioritized based on the perceived importance without considering the actual choice of suppliers. In this paper, behavioral analysis of purchase managers was analyzed to find out the actual choice of suppliers. To find out the perceived relative importance of supplier selection criteria, Verma and Pullman (1998) had used the likert type scale for the prioritization. Discrete Choice Analysis (DCA) had been used to find out the prioritization in the actual choice of suppliers. This has been carried out in manufacturing companies, specifically metal processing and producers of small machine tools and tooling in the western United States (Utah and Arizona). Contemporary to the literature, in India, this type of work has not been carried out yet. In this research work, an attempt has been made to find the perceived and actual choice of supplier in the automobile sector in Indian environment. Analytic Hierarchy Process (AHP) had been used for the prioritization to find out the perceived importance of supplier selection criteria from the purchase managers eye (where Verma et al used Likert type scale) and Discrete Choice Analysis (DCA) had been used for finding out the relative importance of supplier selection criteria when making the actual

24 52 choice of suppliers. Result findings show the gap between the perceived and actual relative importance. In following ways, this work is distinct from the previous works. 1. From the review of the supplier selection attributes, it was observed that prioritization had been carried out so far based on the perceived importance. It is evident that no work was found on the actual importance except the Verma et al (1998) work. This research work would be an attempt to distinguish the perceived and actual importance of supplier selection attributes in Indian automobile sector. 2. Perceived importance is found by AHP, as it is MADM and also it is best tool to find out the relative importance of attributes. 3. It is a first attempt in automobile sector. 4. As this sort of work is geographically significant one, in India this type of work has not been yet carried out. 5. Contemporary to the literature, DCA is not yet been used in India in any of the field so far. 6. It is an attempt to find out the gap between perceived and actual importance of supplier selection attributes. 2.4 SUMMARY This chapter had started with the review on the importance of purchasing and supplier selection from which the significances of those were

25 53 explored. Different methods in the supplier selection area were outlined and some methods were also described briefly. Varieties of works on the supplier selection attributes were summarized and chronological variations in the prioritization of supplier selection attribute were also summarized. From this summary, it was observed that Product quality and Delivery were prioritized among the top three positions in Dickson (1966), Weber et al (1991), and Zhang et al (2003) surveys. Price, Technical capability, and Production facility were positioned among the top seven priorities. Motivation of the research work was summarized. This research work would be the first attempt to prioritize the supplier selection attributes in automobile industry, Chennai, India, as this type of work is geographically a significant one.