Application of Analytical Hierarchy Process in Supplier Selection: An Automobile Industry Case Study

Article excerpt

Companies are under intense pressure to find ways to reduce production and material costs to survive and sustain their competitive position in their respective markets due to increasing competitive and globalized world markets. Qualified supplier is a vital element and a good resource for a buyer in reducing such costs. Therefore, evaluation and selection of the potential suppliers have become important components of supply chain management, and development of an effective and rational supplier selection model has naturally become desirable. This paper developes a supplier selection process, which will be more effective for continual process improvement, and is based on a case study carried out in a leading automobile component manufacturing company. The Analytical Hierarchy Process (AHP) method is formulated and applied in this case study to develop the effective supplier selection. The Additive Normalization Method and Eigen Vector Method are used as the prioritization methods to determine the priority vector. The application of AHP indicates that it can be applied to enhance the decision-making process in the selection of suppliers. It is found that the proposed AHP model can reduce the time taken to select a supplier.

INTRODUCTION

The global competition has resulted in reduced costs, improved responsiveness, improved quality and customer service of any product manufactured. This competition has thrown a challenge on all manufacturing units to work on the above factors. In meeting this challenge, companies are forced to concentrate on their suppliers, distribution channels and all associated activities. Supplier selection is one of the vital purchasing activities for most firms. Fuh-Hwa et al. (2005) described that in each and every stage of the supply chain, decisions need to be integrated by trading off performances of different suppliers. In recent years, customers demand cheaper, high quality products, on-time delivery and excellent after-sale services. Hence, companies are under extreme pressure to reduce product and material costs while maintaining a high level of quality and after-sale services. Achieving this starts with supplier selection. An efficient supplier selection process needs to be in place and it is of supreme importance for successful supply chain management. This process begins with the realization of the need for a new supplier; determination and formulation of decision criteria; pre-qualification (initial screening and drawing up a shortlist of potential suppliers from a large list); final supplier selection; and monitoring of the suppliers selected (i.e., continuous evaluation and assessment).

Even though automobile companies are keen to spend considerable amount of time and money to select apt systems and suppliers, they may not include all the related criteria such as cost, quality, capacity of the supplier, etc. in evaluating suppliers. This exclusion of the related criteria will make the decision-making process unsystematic. These factors may result in changes in selection criteria, which would eventually affect the company.

Thus, there is a need for developing a systematic supplier selection process of identifying and prioritizing relevant criteria and evaluating the trade-offs between technical, economic and performance criteria. The method should also reduce time consumed in supplier selection and develop consensus decision-making. Narasimhan (1983), Nydick and Hill (1992), and Partovi et a. (1989) recommend the use of the Analytical Hierarchy Process (AHP) method for supplier selection problems. They suggested AHP primarily because of its intrinsic capability to handle qualitative and quantitative criteria used in supplier selection problems. Moreover, AHP can facilitate the decision-making process. The hierarchical structure used in formulating AHP model can enable the members of the evaluation team to visualize the problem systematically in terms of relevant criteria and sub-criteria. …