Supplier selection requires full transparency

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1 Sulier election reuire full tranarency Jan Telgen * Fredo Schotanu Univerity of Twente NEVI Profeor of Public Procurement Caitool 5 P.O. Box AE Enchede the Netherland j.telgen@utwente.nl tel.: +3 (0) ; fax +3 (0) Univerity of Twente Aitant Profeor of Purchaing Management and Management Science Caitool 5 P.O. Box AE Enchede the Netherland f.chotanu@utwente.nl tel.: +3 (0) ; fax +3 (0) Abtract In thi aer we highlight a number of roblem ariing with a commonly ued ulier election method: the weighted factor core method. We dicu the behavior of thi method with reect to weighting caling iue and relative coring. Aug that there i no convex doance we formally rove that with the ame ulier election method we can make any ulier win by judiciouly chooing the right arameter of the awarding mechanim. Thi mean that any ulier can win if certain arameter are not ublihed in a reuet for a rooal. Thi reult alie to both abolute and relative coring method. Alo we how that the buyer hould fully dicloe all detail of the awarding mechanim to ulier in order to get better bid. The ractical imlication of our reult are far reaching for (ublic) rocurement: full tranarency and dicloure of all detail of weight and awarding cheme i not only reuired to avoid ubjectivity in ulier election but it alo lead to better bid from ulier. Key word: Sulier election; tranarency; urchaing Introduction Sulier election ha attracted uite ome attention from academic. Poible reaon for thi are it erceived imortance it viibility (at leat in the ene that the ultimate outcome i identifiable) and it uitability for formal mathematical modeling. Many academic aer decribe variou formal deciion method deciion element ulier behavior in tendering and uantitative and ualitative deciion criteria for ulier election (e.g. Albano et al. 008; De Boer et al ; De Boer and Van der Wegen 003; Choi and Hartley 996; Munon and Roenblatt 997; Naraimhan 983; Weber and Current 993). In addition to thi academic attention uite ome attention ha been aid to ulier election by government and legal exert. For intance the Euroean Union (EU) directive tate that to enhance tranarency objectivity and non-dicriation tendering organization hould ublih () the deciion criteria and () their relative imortance (if alicable) in a Reuet for a Prooal (RfP). Deite thi amount of attention from academia ublic olicy maker and ractitioner the ractical ue of formal deciion method i not without roblem and miue. Thi can be exlained by the fact that many aect lay a role in ulier election and many deciion criteria and method can be conidered whilt the effect of thee method are not alway known. A a reult many organization eecially in the ublic ector when trying to identify an Economically Mot Advantageou Tender (EMAT) truggle with the reure to exlain * Correonding author.

2 their ulier election choice (De Boer et al. 006). Therefore we argue that it i imortant to gain a deeer undertanding of the ractical feature and dynamic of commonly ued ulier election method. Uing mathematical roof our reearch objective i to detere the coe of a number of roblem ariing with commonly ued ulier election method in the ublic ector to identify an EMAT. In articular we exlore when and what can haen if deciion criteria and their weight are ublihed but other arameter of the awarding mechanim that are not mentioned in the EU directive are not ublihed in an RfP. Under a rather mild aumtion we how that every ulier in a tender can win if ecific detail of the awarding mechanim can be detered after the fact. We alo how that it i theoretically otimal for the buyer to fully dicloe all detail of the awarding mechanim to ulier. The aer make a novel contribution in two way. Firt our aer extend beyond the exiting literature by roviding formal mathematical roof of the roblem that may occur in alying common ulier election method. We alo how what the effect of full tranarency can be. Baed on our firt contribution we rovide inight for (ublic) rocurement ractitioner eeking to aly a ulier election method. The aer i organized in the following way. Firt we ue an examle from ractice to introduce our main reearch uetion. Second we rovide our main analyi and roof on how we can make any ulier win a tender. Next we how and analyze ome extenion and ractical imlication of our roof. The lat ection dicu the limitation and ome concluion. A ulier election cae We introduce our ulier election model uing a imle examle. In thi examle there are two deciion criteria namely rice ( i for each ulier i) and uality ( i for each ulier i). In our examle we meaure uality in delivery time. Weight w j for each criterion j are choen to reflect the relative imortance of the criteria. Here uality i conidered to be more imortant than rice. Accordingly the detail of the awarding mechanim are ublihed in an RfP a hown in Table. Sulier i (weight w j ) Price i (40%) Quality (delivery time) i (60%) Table : A ulier election examle In thi aer we conider the well-known and widely ued Weighted Factor Score (WFS) method a a ulier election method. In WFS all ulier are awarded core on all criteria. Thee core are multilied (weighted) with the reective weight of the criteria and for each ulier i the total core i defined a WFS i. The ulier with the highet total core i awarded the contract. In the RfP it i ublihed that WFS i ued a a election method but the coring method are not ublihed. In Table the detail of the ulier bid are given.

3 Sulier i (weight w j ) Price i (40%) Quality (delivery time) i (60%) Sulier week Sulier week Sulier week Table : A ulier election examle with ulier data The core on the criteria can be calculated by the buyer by variou coring method. We claify thee method in abolute and relative method. The calculation in relative method deend on the bet wort and/or average ulier bid while the calculation in abolute method are indeendent of the other ulier bid. Both abolute and relative core can be detailed in variou way. For examle the arameter ued in their formula may be choen by the buyer a well a the form of the grah involved: linear or curved (and of coure alo what kind of curvature). In our examle the weighted core on rice range from 0 to 40 oint. Below we give a few examle of formula to calculate the core: AL An abolute linear core: i i An abolute curved core: AC A relative linear core: A relative curved core: 5000 i i RLi 75 3 RCi 40 i 3 The core on uality range from 0 to 60 oint. To imlify our examle we calculate the core on uality with the abolute linear coring method ALi 60 i. Thi method lead to the uality core 4 45 and 47 for reectively ulier and 3. The rice coring method above lead to the rice core and total WFS core (rice core + uality core) a hown in Table 3. It i clear from the table that a different coring method may lead to a different winner. i Sulier i AL i () WFS i AC i () WFS i RL i () WFS i RC i () WFS i Sulier Sulier Sulier Table 3: Price core and total core for the ulier election examle (winning total core are indicated in bold) Thi imle examle lead to our main reearch uetion: (how) can any ulier win by judiciouly managing certain detail uch a the gradient of a rice coring method of the awarding mechanim? In our analyi in the next ection we make the following baic aumtion. Aumtion. We aume that there i no convex doance.

4 Thi aumtion imlie that no bid i doated on all criteria by a convex combination of the other bid. Among other thing thi alo imlie that no bid i the bet bid on all criteria. Reult In thi ection we tate everal theorem and illutrate them uing our ulier election examle. The roof of the theorem can be found in the aendix of thi aer. Our firt theorem i a neceary theorem for the next theorem and i defined a follow. Theorem. In the WFS weight do not lay a role in the comarion of total core. While the formal roof of thi theorem i in the aendix it validity i eaily undertood by recognizing that the weight on the criteria are alway multilied by the core and coneuently by the cale of the coring method. Our econd theorem build on the firt one. It define and uantifie a roblem that may arie when a buyer trie to identify an EMAT and ha the intention of influencing the outcome of the tender. If the buyer doe not ublih certain coring method information in an RfP he can detere a coring method after receiving all the bid uch that the ulier of hi choice win the tender. Theorem. Under our aumtion we can make any ulier in a ublic tender win by a judiciou choice of the gradient g j of an abolute coring method. In our examle Theorem and imly that if the buyer want ulier to core higher than ulier he can do o by chooing the gradient of the rice coring method. Uing our 8 5 roof ulier win if g g and g. So for examle if g 0.0 in AL i 40 g i or in ALi 400 g i then ulier ha a higher total core than ulier. While Theorem alie to abolute coring method we have a imilar Theorem 3 that alie to relative coring method. Theorem 3. Under our aumtion we can make any ulier in a ublic tender win by a judiciou choice of the gradient g j of a relative coring method. In our examle Theorem 3 mean for intance that if the buyer want ulier to core higher than ulier he can do o by chooing the right gradient of the rice coring method 8 5 uch that and. So for examle if g 4 in g g RLi 40 g i or in RLi 400 g i then ulier ha a higher total core than ulier. Practical imlication One obviou way to avoid the difficulty of having a buyer judiciouly chooing the arameter of a coring method to make hi favorite ulier win i to ublih thee detail in

5 advance in an RfP. Thi i an adeuate meaure in cae of abolute coring method. However in the cae of relative coring method thi i not adeuate either a the ulier have another oibility to influence the outcome of the ulier election roce: aking other ulier (oibly in exchange for omething ele) to ubmit an additional bid. Thi i uually termed bid rigging. In our examle if the comlete relative coring method i ublihed in the RfP ulier could ue thi knowledge to it advantage by inviting another ulier to ubmit a bid with a very low rice even though that ulier may have dimal uality. Thi fourth ulier hould ubmit a bid uch that that we rewrite a 0. 0 and a Thu if the rice of ulier 4 i le than 3500 ulier win the tender in tead of ulier. Note that thi i jut one diadvantage of uing relative coring method. For more diadvantage of uch method we refer to De Boer et al. (006) and Albano et al. (008). The exlanation of Theorem and 3 already how that there are diadvantage connected to not ublihing all detail of the awarding mechanim to ulier. Firt the buyer can influence which ulier win. Second when a relative coring method i ued even the ulier can influence which ulier win. But there i another and oibly even more imortant ractical imlication of thee theorem: It i otimal for the buyer to fully dicloe all detail of the awarding mechanim to ulier. It i not only buyer that face choice in the ulier election roce. The ulier alo face choice in rearing their bid. They mut chooe whether or not to work in overtime and deliver fater at a higher rice or they can romie longer guarantee eriod at a higher rice et cetera. So the ulier have a bid election roblem before they hand in their bid. If the gradient of the coring method i not ublihed or if a relative coring method i ued then the ulier doe not know how many oint he will core on the criteria. So actually he doe not know what the buyer refer. The ulier will have to make an educated gue when electing hi bid. If the buyer doe ublih all detail a rational ulier can and will ue thi knowledge to otimize hi total core and thi can only lead to bid that better fit the need of the buyer (a they core higher). The ulier till ha to deal with cometition but if the ulier can offer two different bid that make the ame rofit he will ubmit the bid that lead to the highet total core. Note that it i only oible to ublih all detail of the coring method when an abolute coring method i ued. Relative coring method can be ublihed a abtract formula but a ulier can never calculate the core a they deend on other bid cog in a well. Relative coring method will never guarantee to fit the reference of the buyer a their exact form and oition deend on the bid cog in. A uch relative coring method relace the reference of a buyer by a lottery becaue the lowet rice i detered by the market and not by the buyer. Only abolute coring method can be ued to accurately rereent the value function of the buyer a the buyer can indicate what he believe to be a good rice and uality.

6 Limitation Our aumtion on the abence of convex doance i rather mild a the reence of convex doance baically imlie that there i alway a combination of other bid that doate the doated bid. Thi aumtion i neceary to rove the theorem for the linear coring function. We do believe however that there will be non-linear coring method (both abolute and relative) that do not need thi aumtion to obtain the ame reult. We exect the general form of thee method to deend on the bid involved. Our reult aly to all ulier election method that ue a weighted factor core. Thi mean that beide the Weighted Factor Score method our reult alo aly to common method uch a the Canadian method (De Boer et al. 006) the Lowet Accetable Price method (De Boer et al. 006) and the Lowet Corrected Price method (Drechler 009). All thee method can be ued for multile uantitative and/or ualitative criteria tender. However our reult may not aly to other method uch a Outranking or Value for Money. Concluion We how that the Weighted Factor Score (WFS) ulier election method i very enitive to coring method. If certain arameter are not ublihed in an RfP an informed buyer can make almot any ulier win the tender by judiciouly chooing ome coring method detail. Therefore it i wie to be comletely tranarent and ublih full detail of the coring method in the RfP. Not only doe it revent fraud but we alo rove that it yield better bid for the buying organization. The EU directive do not exlicitly tate that tendering organization hould ublih the coring method ued to calculate a core for a deciion criterion. Baed on our finding we recommend adjuting the EU regulation to incororate the reuirement to ublih all detail of the coring method to be ued. Alo we rove that relative coring method are ucetible to ome kind of influencing by ulier bidding trategie. Eecially it turn out that ome commonly ued coring mechanim may have detrimental effect on almot all method in the ene that they might yield rank reveral. We rovide mathematical roof of the oibility of rank reveral. A thorough undertanding of the henomena tudied in thi aer might revent the roblem oberved from occurring. The inight gained through thi analyi may hel (ublic) rocurement ractitioner elect the right ulier election method and aly them in uch a way that the ulier election method itelf doe not lead to roblem and dicuion. Reference Albano G.L. Dini F. Zao R. Sulier Behavior in Cometitive Tendering: Evidence from the Italian Minitry of Economy and Finance Acuiition of IT Service Proceeding of the 3th IPPC Conference Amterdam (The Netherland) Augut Boer L. de Labro E. Morlacchi P. A review of method uorting ulier election Euroean Journal of Purchaing and Suly Management Volume 7 Number (5) 00.

7 De Boer L. Linthort M.M. Schotanu F. Telgen J. An analyi of ome mitake miracle and myth in ulier election Proceeding of the 5th IPSERA Conference San Diego (United State) Aril Boer L. de van der Wegen L. Telgen J. Outranking method in uort of ulier election Euroean Journal of Purchaing and Suly Management Volume 4 Number. 09-8(0) 998. Boer L. de van der Wegen L. Practice and romie of formal ulier election: a tudy of four emirical cae Journal of Purchaing & Suly Management Volume 9 Number Choi T.Y. Hartley J.L. An exloration of ulier election ractice acro the uly chain Journal of Oeration Management Volume 4 Number () 996. Drechler M. Fair cometition Ph.D. diertation Delft (the Netherland): Delft Univerity of Technology 009. Munon C. L. Roenblatt M. J. The Imact Of Local Content Rule On Global Sourcing Deciion Production And Oeration Management Volume 6 Number (4) 997. Naraimhan R. An analytic aroach to ulier election Journal of Purchaing and Material Management Volume 9 Number Weber C.A Current J.R. A multiobjective aroach to vendor election Euroean Journal of Oerational Reearch Volume Aendix We define: a the vector containing the rice and delivery time of the winning bid; a the vector containing the total core of the winning bid; a the vector containing the rice and delivery time of the other bid; a the vector containing the total core of the other bid. Aumtion. and e for each. Proof of Theorem. If we aume there are two criteria (i.e. rice and uality) that are cored with an abolute linear coring method then the total core for each ulier i i WFSi w g i w g i. A our uetion i to find out whether and when each ulier in a ublic tender can win we need to comare the total core of all ulier to each other. If there are two ulier and we want the firt ulier to win then WFS WFS. We can rewrite thi a w g w g w g w g a g g g g a g g and a g g. A imilar line of reaoning can be alied to tender with three or more criteria and/or three or more ulier becaue in all cae the weight cancel each other out. Thu the weight of the criteria do not lay a role. Proof of Theorem. We rove Theorem uing a roof by contradiction. A abolute linear coring method are a ubet of abolute curved coring method we rove by contradiction that Theorem i correct for abolute linear coring method. By doing o we alo rove by contradiction that the theorem i correct for abolute curved coring method. We tart our roof a follow. A weight are irrelevant we aume them being 0 and leave them out of

8 our euation. Given our definition for and we have g and g. Now doe not win if there i an for which. We can rewrite thi a g g and a. Thi i in contradiction with Aumtion that tate that and e for each. Proof of Theorem 3. Similar to an abolute linear coring method a relative linear coring method i of the form. Following a imilar line of reaoning a in the roof of Theorem the variable a doe not lay a role. After all uing a the loe of the method we can write i b a w w w w and rewrite thi a. We can rewrite thi a a and a g g. Now we can ue the ame roof a we ued for Theorem to rove Theorem 3.