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Purchasing is among the most important activities in supply chain management, since it is the primary point of contact with most supply-chain partners. A major area in purchasing management is that of Supplier Selection Problem (sometimes called the Vendor Selection Problem). Research in this domain started in the early 1960s and over 175 studies have attempted to address this highly critical issue of procurement management. “Vendor selection criteria and methods” have reportedly been the highest area of interest in operations management research.
A wide variety of selection criteria have been used in different studies for the evaluation of suppliers which have varied due to the differences in requirements in different industries and also often had been purely firm specific. Typically the variety of supplier selection criteria that has been used has exceeded 50 criteria in over 65 research papers working on finding new criteria for evaluation of suppliers. These criteria have been enlisted in the matrix shown below.
Some of the most popular criteria in supplier selection which has been used in over 10 research papers and have also been widely cited are relative price, compliance with the delivery schedule, quality of the delivered goods to specifications, production capabilities of the supplier, geographic distance (of the warehouse), technical capability of the supplier, management capability of the supplier and financial position of the supplier. All these supplier evaluation criteria have found massive application in the studies in this domain and are marked by subtle differences in terms of relative importance, as perceived by senior procurement practitioners.
Similarly another area of keen interest is the models which has been used to provide decision support to the supplier selection problem. Over 35 different mathematical models have been used for providing decision support to this extremely critical issue of procurement management. A study by Ho, Xu and Dey (2010) reveals that the Analytic Hierarchy Process, Mathematical Programming and Data Envelopment Analysis are the top 3 modeling paradigms used to provide decision support in supplier selection problems. Many other novel techniques like multi-attribute-deterministic models; mixed mathematical programming, outranking techniques; weighted sum of products; interpretive structural modeling; fuzzy set theory, neural networks; intelligent agent based techniques; TOPSIS, fuzzy multi-attribute frameworks; rule based reasoning models and multi-objective programming models have also been used. Typically the evolution of supplier selection models have been as described pictorially below, due to the evolution of the nature of selection criteria, from quantitative to a mix of quantitative and qualitative criteria.
As the trend highlights, there is a paradigm shift in the nature of the mathematical models used for supplier selection with a change in the requirements in the nature of business, mostly in the manufacturing industries and the maturity of the discipline. No wonder the area has attracted so much of attention to the consulting practitioners and theory developers in academia alike.
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In this article, we take you on a tour on the very basic focus of supply chain management. While there are many articles, which talk about the intricacies, the sole focus of this article is to cover all the various aspect an opening class for a grad program is likely to address.
There are few issues which are of prime importance while studying the subject. Before, one can call oneself conversant with the discipline, one needs to ask himself, can he answer the questions in details regarding these aspects? This article is off course written more on lines of a strategic view point rather than an implementer ‘ s viewpoint.
- Distribution Network Configuration: This is related to the number and location of suppliers, production facilities, distribution centers, warehouses and customers.
- Distribution Strategy: This is related to the centralized versus decentralized issue, direct shipment, cross docking, pull or push strategies, and third party logistics.
- Information: This is related to integration of systems and processes through the supply chain to share valuable information, including demand signals, forecasts, inventory and transportation etc.
- Inventory Management: How should one manage stored quantity and decide the location of inventory including raw materials, work-in-process and finished goods.
- Cash-Flow: Arranging the payment terms and the methodologies for exchanging funds across entities within the supply chain.
Focus: Customer, cost saving, value adding, time from cash to cash, percentage of fill rate against customer specifications and total response times
The extension of the supply chain definition is to provide a context for measurement or to operationalize theoretical concepts. Existing definitions may not always explicitly provide a basis for measurement. The development of new measures and the development of new benchmarks, based on these measures; in developing the new measurement format, various aspects of the supply chain definition can be expected to affect the specific mix of measures used.
It is important to understand that the position of players in the chain (supplier, manufacturer, wholesaler, service supplier) affects their contribution and relevant measures, the level of integration and the strategic approach may affect the relevance of measures needs to be scrutinized. Creating benchmarks based on the new measurement systems may contribute to directing management effort in optimizing the supply chain. Thus this is of prime importance to a supply chain manager.
Also, the development of tools that can help support the implementation of the new measurement approach may be a crucial final step leading to the actual application of new measurement approaches. The tools cannot be limited to the measurement system itself; they also need to include strategic trade-off and planning frameworks in order to assure executive “buy-in” and commitment and initiate actual improvement processes in the supply chain.
Finally some finer aspects to ponder for supply chain managers while attempting to operationalize theoretical models.
- Whether the models are qualitative or quantitative will affect the plans.
- What they measure is of paramount importance: cost and non-cost; quality, cost, delivery, resource utilization, flexibility, visibility, trust and innovativeness
- Collaboration efficiency and coordination efficiency and configuration and input, output and composite measures.
- Their strategic, operational or tactical focus.
- The process in the supply chain they relate to.
These are some of the basics that a supply chain manager is expected to plan about while going about his job. By the way, did you read our article on Supply Chain Value Management
No doubt that the efficient management of the Supply Chain is crucial for any business, but the grasping question always comes is how does it create value for the firm? More still, how can that value be better managed so as to create competitive advantage for the firm?
While the Value Chain analysis as developed by Michael Porter in 1985 argues as being efficient for creating a sustainable platform for value generation for firms so that they may achieve competitive advantage in the industry, the proposition is not without major limitations, like all other popular frameworks in strategic management literature.
Theory of Economics is one of many possible ways to define and measure value.
While operationalizing the definition of value, it is crucial to note whether the exchange that creates this economic value is between business entities i.e. Business to Business (B2B) – or between a firm and a consumer – i.e., Business to Consumer (B2C).
Since Supply Chain is intrinsic to creation of economic value between business entities only, we focus on B2B value creation. There are 3 forms of value that is created in B2B type economic transactions that is widely accepted in strategic management literature focusing on Supply Chains.
- Technical value, which is intrinsic to the resource being provided and occurs in almost every economic exchanges.
- Organizational value, which is built upon the context of the exchange, and may derive from a range of factors such as ethical standards, prestige, reliability, and association. This may help the organization get more than the normal economic value from the transactional point of view, in terms of helping the same to achieve some degree of competitive advantage.
- Personal value, which is derived from the personal experiences and relationships involved in the exchange of resources and the benefits provided to the entities associated with the firms bounded by the economic exchange.
Value in supply chain gets created through the following processes:
- Supply chain modeling must be done quantitatively and objectively. Understanding of the goals objectively is crucial for its success.
- The major challenge in an excellent supply chain network is not to build a model but to model the sensitivity of one variable against others optimally. A simple model can work fine in many cases. However, supply chain experts (OR & Analytics Professionals) should be involved immediately when doing multi-layered inventory strategies, industrial engineers and operations.
- The fundamental building blocks of work are the methods and standards for the tasks. Value creation occurs when the changing business dynamics can be effectively modeled regularly to drive maximum benefits. (remember the Theories of Constraints?)
So creating value from supply chain should be a major focus for all manufacturing companies.
This is crucial to improve the effectiveness and efficiency of not only the supply chain in particular, but for the overall firm productivity.
By the way, did you read the following articles?
- Complexity and Adaptivity of Buyer-Supplier Networks
- Information sharing in Buyer Supplier Relationships
- How to manage a Lean Supply Chain
These are few of our highly popular articles