Supplier Evaluation and Rationalization Via Data Envelopment Analysis: An Empirical Examination

Article excerpt

Strategic evaluation of supplier performance assists firms in improving their operations across a variety of dimensions. Specifically, it aids in supplier process improvement, which in turn enhances firm performance, allows for optimal allocation of resources for supplier development programs, and assists managers in restructuring their supplier network based on performance. In order to address these issues, this article proposes a methodology for effective supplier performance evaluation based on data envelopment analysis (DEA), a multi-factor productivity analysis technique. The efficiencies derived from the DEA model are utilized in conjunction with managerial performance ratings in identifying supplier clusters, which are categorized into high performers and efficient (HE), high performers and inefficient (HI), low performers and efficient (LE), and low performers and inefficient (LI). Effective benchmarks from the HE cluster are identified for improving the operations of suppliers in the HI, LE, and LI c lusters. Finally, managerial insights and implications from the study are discussed.

INTRODUCTION

Supplier evaluation is an area that is continuing to receive significant attention in the literature. Effective evaluation and selection of suppliers is considered to be one of the critical responsibilities of purchasing managers. The evaluation process often involves the simultaneous consideration of several important supplier performance attributes that include price, delivery lead-times, and quality. The criticality of supplier selection is evident from its impact on firm performance and, more specifically, on final product attributes such as cost, design, manufacturability, quality, and so forth (Burt 1984; Burton 1988). Several researchers have emphasized the importance of the supplier evaluation process (Banker and Khosla 1995; Burt 1984; Burton 1988; Dickson 1966; Dobler et al. 1990). More recently, Banker and Khosla (1995) have identified the supplier evaluation issue as an important decision area in operations management.

The motivation for this research primarily stems from three critical issues associated with the supplier evaluation problem in industry. First, supplier evaluation techniques utilized in industry are mostly based on simple, weighted scoring methods that primarily rely on subjective judgments and opinions of purchasing managers or staff involved in the supplier evaluation process. While this approach has its advantages (e.g., the experience and contextual knowledge of purchasing staff is used in evaluating suppliers), one of its limitations is that the weights for various supplier performance attributes used in the weighted, additive scoring model are arbitrarily set. Thus, the final ranking of suppliers is heavily dependent on the assignment of these weights, which are often difficult to specify in an objective manner. Two problems are encountered in real settings. Supplier evaluations are usually done in a group setting. In group evaluations, although it is relatively easy to get concurrence on the importan ce rankings for the first few supplier performance attributes, it is difficult to reach consensus beyond the first few attributes of performance. The consensus decisions will have to be revisited as the group composition changes due to resignations and job reassignments. A more balanced approach that effectively integrates managerial judgments with objective methods can significantly improve the consistency of the decisionmaking process.

Second, in most firms, the evaluation process is based only on supplier performance outcomes such as price, quality, and delivery. While these outcome measures are important in evaluating supplier performance, they only deal with part of the supplier evaluation problem. For example, a supplier may be achieving high levels of performance by utilizing enormous amounts of resources and thus be an inefficient performer. From a strategic perspective, firms may be more inclined to develop long-term relationships with suppliers that are both high performers and highly efficient. …