ISL455U-SUPPLY CHAIN MANAGEMENT
Chapter 6: Procurement and Supplier Selection
Procurement Process
The process of obtaining some products or services from other companies is called the procurement process. Companies that ensure products or services are called suppliers. While some companies supply only a few products or small services from their suppliers, others may choose to hand over an entire primary process such as logistics management and warehouse management. Whether small or large purchases are made from suppliers, the procurement process is a critical process for all companies.
Procurement accounts for spending an organization’s revenue on acquiring products and services. It has a direct impact on cost savings. Apart from achieving cost savings, an effective procurement process helps an organization enhance supplier performance, compliance, risk management, contract utilization, and sourcing cycle time.
An effective procurement process helps an organization to save costs, improve its suppliers’ performance, manage risk successfully, fulfill its contractual requirements, and shorten the lead time.
A procurement cycle is the transition of tasks and processes that need to be performed throughout the procurement process. A successful and well thought out procurement and supply cycle can be the difference between success and failure. The procurement cycle steps and procedures in place may vary depending on each company’s requirements and objectives.
Nine steps of a procurement cycle are:
• Step 1: Identify the need • Step 2: Outline a procurement plan • Step 3: Select suppliers • Step 4: Issue a Request for Quotation (RFQ) • Step 5: Tender evaluation process • Step 6: Contract terms and conditions • Step 7: Supply chain management • Step 8: Warehouse management • Step 9: Asset management
One of the most critical steps of the procurement cycle is supplier selection. In this step, a list of potential vendors who may supply the products or services is created. The objective of this step is to determine proper suppliers. Criteria of supplier selection include pricing, quality of service, industrial reputation and recognitions, warranty and guarantee provisions, and customer service.
Supply chain management is the management of the flow of goods and services and includes all processes that transform raw materials into final products. It involves the active streamlining of a company’s supply-side activities to maximize customer value and gain a competitive advantage in the marketplace.
Supplier Selection
The main aim of the supplier selection process is to determine the proper suppliers that can meet the needs of a company. However, this process does not end with the determination of suppliers, on the contrary, it is a continuous process that aims to monitor and develop the existing suppliers, and if they are not successful, to replace them with new suppliers that can benefit more.
Companies use some criteria to select their suppliers and monitor their performance. The criteria depend on the product or service to be supplied and the purpose and should be defined accordingly. Some of the criteria that can be used for supplier selection and monitoring are cost, quality, design capability, manufacturing capability, technical capability, technological capability, performance history, management capability, degree of cooperation, financial performance, and proximity degree.
Supplier Relationship Management (SRM) deals with all interactions between the companies and the organizations that supply goods or services. It basically aims to improve the processes and interactions between buyers and suppliers to maximize the value of those interactions. For a successful supply chain management, each supply chain member needs to develop a mutually beneficial relationship with its suppliers, especially with the ones that are seen to be most strategic to the company, in order to improve efficiency, quality, responsiveness and other benefits.
Tools and Techniques in the Supplier Selection Process
Decision-making techniques that can be used for supplier selection can be divided into three streams, namely, multi- criteria decision making (MCDM), artificial intelligence (AI), and mathematical programming (MP). Among these streams, MCDM, which is used to determine the most suitable one among the alternatives by considering many criteria, stands out.
TOPSIS Method
An ideal solution for multi-criteria decision problems, the hypothetical option with the best values that can be reached in all criteria; the anti ideal solution is defined as the hypothetical option with the worst values in all criteria. The option chosen with TOPSIS should be both the closest to the ideal solution and the farthest to the anti- ideal solution.
TOPSIS is one of the most preferred MSDM methods because of its features, such as its simple process, ease of use, the fact that the number of steps does not increase regardless of the number of criteria, and use of Euclidean Distance. The advantage of its simplicity and its ability to maintain the same amount of steps regardless of problem size has allowed it to be utilized quickly to review other methods or to stand on its own as a decisionmaking tool.
Six steps of TOPSIS Method are:
• Step 1: Creating the standard decision matrix. • Step 2: Creating the weighted standard decision matrix. • Step 3: Determination of ideal and anti-ideal solutions. • Step 4: Calculation of the separation measure. • Step 5: Calculating the relative closeness to the ideal solution. • Step 6: Sorting options.
The ideal solution (A+) and anti-ideal solution (A–), are defined as follows. A+ is the hypothetical option that takes ‘best’ values in each criterion. A– is another hypothetical option that takes ‘worst’ values in each criterion. The best values of each column of the matrix Vmxn constitute the best values, A+ and the worst values are A–.
As an option approaches the ideal solution, the relative proximity value to the ideal solution (Gi ) approaches 1. If Gi = 1, the option is equal to the ideal solution.