Academic journal article Journal of Purchasing & Materials Management

Vendor Profile Analysis

Academic journal article Journal of Purchasing & Materials Management

Vendor Profile Analysis

Article excerpt

Vendor Profile Analysis

The industrial purchasing function is among the most critical activities for ensuring the long-term viability of a firm. An effective purchasing department can substantially help trim a firm's operating costs, thereby enhancing profitability. [1] Moreover, purchasing increasingly is becoming important to the marketing success of a firm, in that purchasing's policies and procedures have an impact, albeit indirect, on the firm's marketing mix and ultimate customer satisfaction. [2] It is, therefore, essential for an organization to have a decisionmaking mechanism which ensures that vendors are objectively appraised, with the goal of optimizing purchasing decisions.

This article examines a powerful, yet simple, technique for aiding industrial buyers with the prepurchase evaluation of vendors. This technique, referred to as vendor profile analysis (VPA), is designed for use with microcomputers using software, such as Lotus 1-2-3 and Symphony, capable of conducting Monte Carlo simulations. The technique is easy to understand because it is simply a modification of the "weighted point method." [3] The power of VPA stems from its use of Monte Carlo simulation for modeling decision makers' perceptions of uncertainty associated with predicting vendor performance. As will be shown, Monte Carlo simulation simplifies a decision maker's input to the evaluation model, and provides output that contains considerably more information upon which to base purchase decisions than do standard weighted point decision models. Some general background on current vendor analysis models is first presented. This is followed by a detailed discussion of the vendor profile analysis technique.

BACKGROUND ON VENDOR ANALYSIS MODELS

Suprisingly, there are few published models outlining normative techniques to assist industrial buyers engaged in prepurchase vendor evaluation. Traditionally, most published models have fallen into three categories: (1) categorical methods;(4) (2) weighted point methods; [5] and (3) cost-based techniques, such as the "cost-ratio" method. [6] Other models, not fitting these categories, include a model based on cluster analysis, [7] a sequential elimination procedure, [8] and a linear programming application. [9]These latter techniques, however, apparently are used only minimally. Timmerman provides an in-depth review of the mechanics, strengths, and weaknesses of the three traditional vendor evaluation techniques. [10] Because of space limitations and relevance to this discussion, only the weighted point method is reviewed here.

Basic Structure of the Weighted Point Method

Based on the number of published versions of the weighted point method, this is by far the most commonly used technique. Its basic structure is described by the following model:

[Mathematical Expression Omitted] where

[A.sub.j] = summated score representing the overall

performance anticipated from vendor j

[a.sub.i] = importance weight attached to evaluative

criterion i

[b.sub.ij] = performance rating on evaluative criterion i

for vendor j

n = number of evaluative criteria

A typical purchase decision employing the weighted point method is presented in Table I. The decision begins with the identification and weighting of key dimensions (evaluative or choice criteria) required for evaluating alternative vendors. Column 1 of Table I enumerates possible criteria for examining alternative vendors of industrial equipment. Evaluative criteria are assigned importance weights ([a.sub.i]s) to emphasize their differential contribution to the purchase decision. Table I uses a simple five-point scale for this purpose (column 2) - more important criteria are assigned heavier weights.

[Tabular Data Omitted]

Decision makers next rate the expected performance ([b. …

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