THE USE OF AHP AND TOPSIS IN SUPPLIER SELECTION: SUPPLIERS OF VESSEL SERVICES IN TEPX AS A CASE STUDY

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1 THE USE OF AHP AND TOPSIS IN SUPPLIER SELECTION: SUPPLIERS OF VESSEL SERVICES IN TEPX AS A CASE STUDY Helmi Hendradi Cahyo 1) & Udi Subakti Ciptomulyono Master Program in Management of Technology Institut Teknologi Sepuluh Nopember Jl. Cokroaminoto 12A, Surabaya, 60264, Indonesia 1) helmi_hc@yahoo.com, helmi.h.cahyo@gmail.com ABSTRACT TEPX was impacted by today oil price crisis as indicated by the declining of the company s drilling activities which followed by the reduction of the number of rigs. Further, the declining of rig activities was followed by the declining of the related marine activities. Currently TEPX has six main suppliers for AHTS vessel services to support marine activities related to rig activities and due to the reduction of the number of rigs, the number of AHTS vessel contracts and suppliers should be reduced to suit with the current company s operational requirement. Therefore, it is necessary for selecting the best supplier who is capable of satisfying certain criteria. Supplier selection decisions are complicated by the fact that various criteria must be considered in the decision-making process and criteria included in the supplier selection process may frequently conflict each other. Major supplier selection criteria and sub criteria in this research were composed based on the literature studies in supplier selection topics and prevailing selection criteria in TEPX and evaluated trough survey and discussion with TEPX experts. In this research, AHP method is applied to obtain the pair-wise comparisons of the relative importance of the criteria and compute the priorities or weights of the criteria for choosing the best supplier. TOPSIS method is also applied to make rating and ranking of the existing suppliers in order to select the best supplier. The outcomes of this research are the development of the main criteria and sub criteria and its weight for the supplier selection process and provide the recommendation for the best supplier. From the calculation of the weight or relative importance of the criteria, HSE is considered as the first important criteria for supplier selection process with weight 40.3%, followed by delivery (20%), commercial and cost (12.3%), business overall perfor mance (11.7%), quality (5.9%), technical competences (5%) and service (4.8%). From the calculation of value of suppliers using TOPSIS method, Supplier A is considered as the best supplier with the value of the relative closeness to the ideal solution as follow: Supplier A (0.9719), supplier C (0.5567), supplier F (0.4099), supplier D (0.397), supplier B (0.2047), and supplier E (0.0853). Keywords: Supplier Selection, The Multi-Criteria Decision Making ( MCDM), Analytic Hierarchy Process (AHP), TOPSIS. INTRODUCTION 1.1 Background TEPX was impacted by today oil price crisis as indicated by the declining of the company s drilling activities which followed by the reduction of the number of rigs about 30% (Data as of September 2015). At the same time, TEPX productivity was stagnant due to mature oilfield while inflation and production cost remain high in view years. Further, the A-32-1

2 declining of rig activities was followed by the declining of the related marine activities. Currently TEPX has six main suppliers for AHTS vessel services to support marine activities related to rig activities and due to the reduction of the number of rigs, the number of AHTS vessel contracts and suppliers should be reduced to suit with the current company s operational requirement. Therefore, it is necessary for selecting the best supplier who is capable of satisfying certain criteria and later on to reduce the number of existing suppliers if the company has to do that. Based on the above said background, a case study of the selection of suppliers of vessel services in TEPX will be discussed in an attempt to develop the main criteria and sub criteria and its weight for the supplier selection process and provide the recommendation for the best supplier and later on to reduce the number of existing suppliers to suit with the current company s operational requirement. 1.2 Literature Review Managers must decide on the number of suppliers they will have for a particular activity. They must then identify the criteria along which suppliers will be evaluated and how they will be selected (Chopra and Meindll, 2007). Supplier selection decision is highly complex and most difficult task in procurement. First, such a decision involves more than one selection criterion when choosing among the available supplier. Second, criteria included in the supplier selection process may frequently contradict each other. Third, complication surrounding the supplier selection decision arises from internal policy constraints and externally imposed system constraints placed on the procurement process (Garfamy, 2005). Some enterprises employ simple procedures with few criteria for supplier selection, while others use complex procedures with many criteria divided into sub criteria. The complexity of the selection process depends on the size, business type and the total costs involved in procurement, and how often the purchase is to be repeated (Davidrajuh, 2000). Selection of suppliers is a typical multiple criteria decision making (MCDM) problem involving multiple criteria that can be both qualitative and quantitative. Hence, supplier selection process requires a formal, systematic and rational selection model. The analysis of criteria for selecting and measuring the performance of supplier has been the focus of many researchers and procurement practitioners as to provide a comprehensive view of the important criteria in the supplier selection decision (Sonmez, 2006). Multiple criteria decision making (MCDM) is a method of alternative selection process to obtain the optimal solution of some alternative decision by taking into account more than one criteria or objective which is in contrary (conflicting) situation (Ciptomulyono, 2010). In order to solve a MCDM problem, the AHP method could be utilized to derive priorities based on judgment of decision maker using wise comparison technique (Ciptomulyono, 2008). The findings of previous researches indicate that the importance of supplier selection criteria does vary based on the type of purchase and product or service and there is no common list of criteria used across supplier selection studies. To conclude, the supplier selection process should not only consider price, but also a wide range of factors with a view to decision making by considering the whole supplier capability in a long-term and strategic way. RESEARCH METHODOLOGY In this research, a very comprehensive application of Analytic Hierarchy Process (AHP) is applied. By using AHP, we obtain the pair-wise comparisons of the relative importance of the criteria and compute the priorities or weights of the criteria in choosing the best supplier. A-32-2

3 Technique for Order of Preference by Similarity to Ideal Solution (TOPSIS) is also applied in order to make ranking of the best supplier. Main supplier selection criteria and sub-criteria in this research were developed based on the literature studies in supplier selection topics and prevailing selection criteria in TEPX and then evaluated and selected trough survey/feedbacks /discussion (criteria arbitration) with TEPX experts. Table 1 summarizes the main supplier selection criteria and sub-criteria that used in this research. Table 1 Supplier Selection Criteria and Sub-Criteria for the Research Criterion Sub-Criterion Source 1. Quality 1.1 Product reliability Literature Studies 1.2 Quality system Prevailing Selection 2. Commercial & Cost 1.3 Proactive problem solving 1.4 Internal and external audits 1.5 Number of rejection 2.1 Terms and conditions acceptance 2.2 Competitive pricing 2.3 Number of claim 2.4 Total operating cost 2.5 Smooth invoicing and payment process Expert Feedback/Criteria Literature Studies Prevailing Selection Expert Feedback/Criteria 3. Technical 3.1 Technical support Literature Studies Competences 3.2 Personnel capabilities 3.3 Procedures Prevailing Selection 3.4 Technical know how Expert Feedback/Criteria 4. Delivery 4.1 On time delivery Literature Studies 4.2 Delivery commitment Prevailing Selection Expert Feedback/Criteria 5. Health Safety 5.1 Number of safety incident Literature Studies Environment (HSE) 5.2 Environment 5.3 Safety compliance & Prevailing Selection inspection 5.4 Safety training Expert Feedback/Criteria 6. Service 6.1 Attitude of handling of Literature Studies complaints 6.2 Responsiveness 6.3 Ability to maintain the service 6.4 Flexibility 6.5 Customer Base orientation 7. Business 7.1 Financial stability Literature Studies Overall Performance Expert Feedback/Criteria Expert Feedback/Criteria Further, the research process and methodology is described on the following figure 1. A-32-3

4 Figure 1 General Research Process Flow ANALYSIS AND DISCUSSION Development of the AHP hierarchy model is consisting of four levels, which are goal, criteria, sub criteria and alternatives. In this supplier selection problem, the goal which is to select the best supplier who has the highest rank is put in level 1 of hierarchy, while the six existing/available suppliers are put in level 4 of the hierarchy. Hierarchy model for this research can be seen in Figure 2. Figure 2 Hierarchy Model of Supplier Selection for This Research A-32-4

5 In the supplier selection model, the supplier selection criteria consist of seven criteria. The weight and consistency ratio of the criteria are calculated with the AHP questionnaire and calculation with the result as follow. Consistency ratio is 0.04 or below 0.10, meaning that the data is considered consistent. Figure 3 Graph of Overall Weight Criteria The highest criterion is Criteria 5 (HSE). It represents that the health, safety and environment criteria is the first criteria that should be satisfied by the suppliers during the performance of the services in any company s premises. Marine operation of oil and gas exploration and production activities is categorized as the high risk job. So it is important for all the parties involve including the suppliers and contractors to fully aware on HSE issues, put safety on the first priority, and have satisfactory HSE implementation within their organization, in order to prevent any unnecessary health, safety and environment incidents which may jeopardize the company s operations and put company s image in a bad reputation. The second rank is Criteria 4 (delivery). It represents th at the delivery criteria is the second criteria that should be satisfied by the suppliers during the performance of the services. On-time delivery of the mobilization of the vessels as per contractual commencement date is critical in order to support rigs moves and supplies. Company does not want to have the rig standby due to the late delivery or the unavailability of the vessel considering that the rig daily rate is very expensive. So it is important for the suppliers to satisfy the on-time delivery and delivery commitment requirement. The third rank is Criteria 2 (commercial and cost). It represents that the commercial and cost criteria are the third criteria that should be satisfied by the suppliers during the performance of the services. The cost incurred is driven by the vessel rate itself and fuel consumption cost. On today oil price crisis, it is important for the company to have the suppliers that willing to offer the price reduction and cost improvement according to the current global economical situation and according to the market price. Company has shared their profit during the sunrise period in the past so of course company wants to share the pain during the sunset period with the suppliers. In other point, acceptance of the company s contractual terms and conditions are also should be considered. The fourth rank is Criteria 7 (business overall performance). It represents that the business overall performance criteria is the fourth criteria that should be satisfied by the suppliers during the performance of the services. The business overall performance criteria consists of quality performance, performance history, management capabilities and the financial stability. Good business overall performance of the suppliers will ensure the capabilities of the suppliers in the performance of the services. The fifth rank is Criteria 1 (quality). It represents that the quality criteria is the fifth criteria that should be satisfied by the suppliers during the performance of the services. A-32-5

6 Quality over a given period of time, consistency and quality system implementation are some of the important factors that should be satisfied by the suppliers during the performance of the services. The sixth rank is Criteria 3 (technical competences). It represents that the technical competences criteria is the sixth criteria that should be satisfied by the suppliers during the performance of the services. Good technical competences of the suppliers will ensure the capabilities of the suppliers in the performance of the services. The seventh rank is Criteria 6 (service). It represents that the service criteria is the seventh criteria that should be satisfied by the suppliers during the performance of the services. Ability to maintain the services, customer orientation, flexibility, attitude of handling the complaint, and responsiveness are the important factors that should be satisfied by the suppliers during the performance of the services. The calculated weight of the importance of all criteria and sub criteria and assessment of suppliers against all the sub criteria are used as the input to perform TOPSIS calculation in order to get the final value as the value of the relative closeness to the ideal solution ( ) of each alternatives/suppliers, then the value is ranked begin with the bigger value as the best. Overall supplier ranking based on TOPSIS calculation is summarized in the following figure. Based on above TOPSIS calculation, it is concluded that Supplier A (PT.LSM) is considered as the best supplier for AHTS vessels service with the highest value of the relative closeness to the ideal solution, while Supplier E (PT.MAS) is considered as the lowest rank of supplier with the lowest value of the relative closeness to the ideal solution. This calculation is actually matched with the current performance of the suppliers. The sensitivity test has also shown that the criteria are considered not sensitive since the changing in the weight is not changing the order of ranking, meaning that the TOPSIS calculation result is valid. Figure 4 Graph of Overall Supplier Ranking and Sensitivity Test CONCLUSIONS AND RECOMMENDATION Implementation of the integration of AHP and TOPSIS is very useful in selection of priority of alternatives/suppliers. From the calculation of the weight or relative importance of the criteria and sub criteria, health safety and environment (HSE) is considered as the first important criteria for supplier selection process, followed by delivery, commercial and cost, business overall performance, quality, technical competences and service. The weight or relative importance of each criteria as follow: criteria 5 (HSE) with weight of or 40.3%, followed by criteria 4 (delivery) with weight of 0.2 or 20%, criteria 2 (commercial and cost) with wei ght of or 12.3%, criteria 7 (business overall performance) with weight of or 11.7%, criteria 1 (quality) with weight of or 5.9%, criteria 3 (technical competences) with weight of 0.05 or 5% and last is criteria 6 (service) with weight of or 4.8%. Consistency ratio is 0.04 or below 0.10, meaning that the data is considered consistent. From the calculation of value of suppliers using TOPSIS method, it is concluded that Supplier A (PT.LSM) is considered as the best supplier with the highest value of the relative A-32-6

7 closeness to the ideal solution, while Supplier E (PT.MAS) is considered as the lowest rank of supplier with the lowest value of the relative closeness to the ideal solution. The sensitivity test has also shown that the criteria are considered not sensitive since the changing in the weight is not changing the order of ranking, meaning that the TOPSIS calculation result is valid. Overall rank of the existing suppliers is as follow: first rank is supplier A (PT.LSM) with closeness value is or 97.17%, second rank is supplier C (PT.PKLP) with closeness value is or 55.67%, third rank is supplier F (PT.BS) with closeness value is or 40.99%, fourth rank is supplier D (PT.LMO) with closeness value is or 39.70% and fifth rank is supplier B (PT.PTK) with closeness value is or 20.47% and sixth rank is supplier E (PT.MAS) with closeness value is or 8.530%. Some recommendations are noted from this research as follow: Supplier A (PT.LSM) is considered as the best supplier for AHTS vessels service while Supplier E (PT.MAS) is considered as the lowest rank of supplier. Further, TEPX may consider and use this result as the basis in case that company has to select the best supplier to be maintained and reduce the number of contracts or the number of suppliers for AHTS vessel services to suit the current company s operational requirement in the near future. Future studies could compare some other MCDM method in determining the selection priority of the alternatives/suppliers. In addition further research can be developed with considering the concept of Benefit / Cost and Opportunity / Risk. REFERENCES Al-Rafati, Maher H. (2008), The Use of Analytic Hierarchy Process in Supplier Selection: Vendors of Photocopying Machines to Palestinian Ministry of Finance as a Case Study, MBA Thesis, Business Administration Department, The Islamic University- Gaza. Bayazit, O., and Karpak, B. (2005), An AHP application in vendor selection, ISAHP 2005, Honolulu, Hawaii, July 8-10, Belton, V., and Stewart, T.J. (2002), Multiple Criteria Decision Analysis : An Integrated Approach, Kluwer Academic Publishers. Choi, T.Y., and Hartley, J.L. (1996), An exploration of supplier selection practices across the supply chain, Journal of Operations Management 14, : Science Direct. Chopra, Sunil, and Meindl, Peter. (2007), "Supply chain management: strategy, planning, and operation 3rd ed, Pearson Education Inc., Upper Saddle River, New Jersey. Ciptomulyono, U. (2008), Fuz zy Goal Programming Approach for Deriving Priority Weights in the Analytical Hierarchy Proces (AHP) Method, Journal of Applied Sciences Research, 4(2), Ciptomulyono, U. (2010), Paradigma Pengambilan Keputusan Multikriteria Dalam Perspektif Projek dan Industri Yang Berwawasan Lingkungan, Pidato Pengukuhan untuk Jabatan Guru Besar ITS, ITS Surabaya Davidrajuh, R. (2000), Automating supplier selection procedures, Doctoral dissertation, Narvik Institute of Technology, Narvik, Norway. Garfamy R, M. (2005), Supplier Selection and Business Process Improvement, Doctoral Thesis Proposal, University of Autonoma De Barcelona. A-32-7

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