A Supplier Selection Methodology using AHP-Project Presentation

A Supplier Selection Methodology using Analytic Hierarchy Process

Presented By:Faizan Ahmed IM-05023Muhammad Umair Khanzada IM-05027Hassan Hameed IM-05029Wali ul Islam Hashmi IM-05042

Department of Industrial & Manufacturing Engineering

NED University of Engineering & Technology

Final Year Project Presentation

Internal Advisor: Mr. Sayed Muhammad IrfanAssociate Professor

External Advisor: Mr. Fahham Hasan QaiserAM BuyingCrescent Steel And Allied Products Limited

Batch: 2005-2006

Project Industry: Crescent Steel and Allied Products Limited

Problem Background To select the best supplier of Hot Rolled Steel Coils for Crescent Steel &

Allied Products Limited using the multi criteria approach of Analytic Hierarchy Process.

The suppliers to be evaluated are: Shanghai Baosteel Group Corporation Saudi Iron & Steel Company (Hadeed) Taiyuan Iron & Steel (Group) Co., Ltd. (TISCO)

The existing supplier selection method uses nine criteria, having an equal weight. Suppliers are rated using a 1-5 scale and an average score is calculated

A Supplier Selection Methodology Using Analytic Hierarchy Process 2 of 21

The Supplier Selection Problem It is a comparison of suppliers using a common set of criteria and

measures, to identify suppliers with the highest potential for meeting the needs of the firm consistently

Selecting the right supplier significantly reduces the purchasing cost and improve corporate competitiveness

Commonly adopted Supplier Selection Techniques are: Categorical Weighted Point Cost Ratio Analytic Hierarchy Process (AHP)

Supplier selection problems are often: Multi criteria Unstructured Involve both quantitative and qualitative factors

3 of 21A Supplier Selection Methodology Using Analytic Hierarchy Process

What is AHP? AHP was developed by Thomas L. Saaty in the 1970s, it is designed to solve

complex multi-criteria decision problems.

It is based on the human ability to make sound judgments about small problems

It breaks down a problem into its smaller constituent parts and brings in simple pair wise comparison judgment to obtain the priorities in the hierarchy

Advantages of AHP: AHP can deal with complex and unstructured problem Its simple to use and understand Can handle subjective judgements of individuals

Used by: Xerox, IBM, British Airways, Ford Motor Company, American Army etc


Steps in Implementing AHP Decomposition: Identify Supplier Selection criteria and sub criteria

and structure them into a hierarchy

Comparative judgment: Compare two criteria in a cluster at a time and state their relationship using a numerical score

Synthesis: Derive relative weights of supplier selection criteria from the pair wise comparisons

Evaluate Alternatives (Suppliers) on basis of each lowest level criteria using pair wise comparisons or quantitative values and synthesize relative performance

Perform Sensitivity Analysis

Make a decision


Decomposition: The Supplier Selection Hierarchy


Baosteel Hadeed TISCO

Level 1:Objective

Level 2:Primary Criteria

Level 3:Secondary Criteria

Level 4:Alternatives

Comparative Judgment A judgment or comparison is the numerical representation of relationship

between two elements The set of all such judgments for all elements of a cluster is called a

comparison matrix

1/3

31 1/5 1/7 1/2 1/3

1 1/5 5 1

1/5 5 1

5 41/5

5 17 5 5

2 1/5 1/5 1/5

3 1 1 1/4 5

11

11

1

Verbal statement of preference Rating

Equally preferred 1

Weak or slight 2

Moderately preferred 3

Moderate plus 4

Strongly 5

Strong plus 6

Very Strongly 7

Very, very strong 8

Extremely 9

Reciprocals of above If activity i has one of the above non zero numbers assigned to it when compared with activity j, then j has the reciprocal value when compared with I

Quality Technical Capability

The Fundamental Scale of AHP:

Is strongly more preferred than


Verbal statement of preference Rating

Equally preferred 1

Moderately preferred 3

Strongly 5

Very Strongly 7

Extremely 9

Reciprocals of above If activity i has one of the above non zero numbers assigned to it when compared with activity j, then j has the reciprocal value when compared with i

Synthesis: Deriving prioritiesTo extract numerical values of importance out of the

comparisons

Normalization converts ratio scale into absolute scale

The weights can be determined by : Normalizing the Comparison Matrix

By dividing each element in a column by the sum of that column for whole matrix.

Determine the relative weightsTake average of each row of the Normalized Matrix which gives the priorities of the corresponding elements in the form of a priority vector.


Synthesis: Deriving priorities (Contd..)

1/3

31 1/5 1/7 1/2 1/3

1 1/5 5 1

1/5 5 1

5 41/5

5 17 5 5

2 1/5 1/5 1/5

3 1 1 1/4 5

11

11

1

20 8.533 8.4 2.017 21.5 7.533

0.039

0.150

0.050 0.024 0.083 0.023 0.044

0.119 0.099 0.233 0.133

0.099 0.233 0.133

0.233 0.531

0.027

0.250 0.117

0.300 0.586 0.595

0.100 0.023 0.024 0.099

0.150 0.117 0.119 0.124 0.233

0.117

0.119

0.496

0.047

0.133

Priority Vector4.384%

14.179%

15.845%

45.676%

5.325%

14.592%


Consistency of Judgments Human judgment is inevitably inconsistent, approximate and intransitive. Forcing perfect consistency can reduce accuracy. Given that w1, w2 … wn are weights of the criteria, we can recover the scale w using

the following equation:

Or, Aw = nw This is analogous to the Eigen value problem: Ax = λx Thus the Eigen vector is equal to the priority vector and the Eigen value is equal to

the order of the matrix

A1 A2 ….. An

A1 1 w1/w2 ….. w1/wn

A2 w2/w1 1 ….. w2/wn

.….

..… ..… ..… ..…An wn/w1 wn/w2 ..... 1

w1

w2

..…

wn

=

nw1

nw2

..…

nwn

x


Consistency of Judgments (Contd..) For slightly inconsistent comparison matrix, the value of maximum

positive Eigen value will deviate from the order of the matrix

Mathematically, the consistency of a comparison matrix is its Consistency Ratio (C.R.)

C.I. is the consistency index of the comparison matrix

R.I. is the Random Consistency Index

Values of C.R. less than or equal to 0.1 are acceptable


Consistency of Judgments (Contd..)


1 1/3 1/5 1/7 1/2 1/3

3 1 1 1/5 5 1

5 1 1 1/5 5 1

7 5 5 1 5 4

2 1/5 1/5 1/5 1 1/5

3 1 1 1/4 5 1

0.2741

0.9352

1.0229

3.0708

0.3215

0.9580

x

Comparison MatrixPriority Vector

=

0.0438

0.1418

0.1584

0.4568

0.0532

0.1459

max = 6.5828

1164.016

65828.6..

IC

32.16

)26(98.1..

IR

0883.032.1

1164.0.. RC Since CR<0.1,

Therefore Comparisons are consistent

Development of MS Excel Spread Sheets MS Excel spread sheets were developed to facilitate decision

maker for performing pair wise comparisons

Consistency Ratio for each comparison matrix is calculated using real time inputs

Pair Wise Comparison Form-Level 2.xlsxPair Wise Comparison Form-Level 3.xlsx


Result of comparisons: Relative Weights of Criteria


Supplier Evaluation It is the process in which each supplier is accessed and

evaluated on the basis of each lowest level criteria

Different evaluation techniques are used, based on the nature of each criteria: Pair wise Comparisons Pair wise Comparisons using Equivalent Scale Direct Input of Quantitative Data

Supplier Evaluation forms were developed and data and comparisons were provided by the CSAPL buying personnel

Supplier Evaluation Form.xlsx


Result of Supplier Evaluation


Sensitivity Analysis Identifies the impact of changes in the priority of criteria on the suppliers'

performance.

Decision maker might want to know the consequences of variation in weights of criteria, because:

Some influence could have been underestimated

A slight variation in one criteria weight could lead to a different decision

Increase in the weight of one criterion n the cluster results in a proportional decrease in all other criteria of the cluster

Excel spread sheets were developed to perform the sensitivity Analysis

Two sensitivity analysis techniques were used:

Performance Sensitivity

Gradient Sensitivity

Sensitivity Analysis.xlsm


RecommendationSupplier evaluation and sensitivity analysis showed

that Shanghai Baosteel Group Corporation was the best supplier out of the three suppliers of Hot Rolled Coils and should be selected


Visual Basic Application for Supplier Selection

Visual Basic Application designed to provide a flexible and structured solution to the supplier selection problem

24216 pure lines of coding using Visual Basic 6 User can define Hierarchies, perform comparisons and

evaluate suppliers. Following software were used in the development of the

application Microsoft Visual Basic 6 Microsoft Excel 2007 IcoFX 1.6.4 Inno Setup Compiler


Contd..Some of the features are:

Up to four different Hierarchies can be defined and edited Each Hierarchy can be structured into three levels of

criteria. Altogether a hierarchy can have up to 360 criteria Calculation of Consistency Ratio, most inconsistent

judgments and proposed modifications in those judgments Each hierarchy can have up to 10 alternatives (suppliers). Different supplier evaluation methods can be used for

supplier evaluation (Pair wise, Quantitative, Factor rating) Generation of an automated MS EXCEL spread sheet

containing summary of Vendor Ranking


Conclusion The Supplier Selection Model using AHP improves Supplier

Selection Process:

Both tangible and intangible factors can be included in the process

Using pair wise comparisons reduced dependency of the system on human judgment

The organizational preferences and policies are reflected in the relative weights of the criteria

Analysis of several “what-if” scenarios is possible using the sensitivity analysis techniques

The Visual Basic application, designed specifically for the supplier selection problem using AHP approach, provides flexibility and ease in model formulation for future purchasing requirements and to accommodate varying needs and requirements


Documents

A Supplier Selection Methodology using AHP-Project Presentation