OUTSOURCING AND SUPPLIER SELECTION BY USING MULTIPLE ATTRIBUTE UTILITY THEORY.
TAMPERE UNIVERSITY OF TECHNOLOGYTampere School of Business and TechnologyGROUP 6OUTSOURCING AND SUPPLIER SELECTION BY USING MULTIPLEATTRIBUTE UTILITY THEORY.Seminar Report
ABSTRACTOutsourcing is one of the most useful technique that firms follow to reduce theirmanufacturing costs and to increase overall product quality which bringscompetitive advantage in the market. Outsourcing simply refers to handing overplanning, management and operation of some functions to a third party company.Either goods or services can be outsourced by global firms. It becomes more andmore crucial for the firms to choose from which company they would like topurchase these outsourced goods or services. Supplier selection is a complex issuewith long term effects on the companies. In order to provide best quality productsto their customers, proper evaluation of the supplier with appropriate criteriaselection is an important process.Multiple Attribute Utility Theorem is a tool that can be used to solve this issue. Itbasically assigns a weighted percentage to each attribute that depends on whichaspects are valued more by the firm. Then suppliers are graded individually by theirpower on the certain aspects in a scale. When the overall grade is calculated forevery supplier, it now becomes an easier task to choose which supplier is morefavorable.This paper explains the application method of using MAUT in supplier selectioncriteria. Key finding is MAUT is only a tool to guide purchasing manager.Furthermore, the result may or may not be the final one since the accuracy andprecision of the method is always questionable.
PREFACEGlobalization and economic crisis have greatly affected the manufacturingstrategies of the industries. Industries these days are thinking of mostly ‘make orbuy strategy’ which means the things they should make on their own and noncritical functions which they can buy from outside. One such phenomenon that hasstimulated over the years is outsourcing and one of the most interesting aspects ofoutsourcing is supplier selection and evaluation. So, being the students of theInternational Masters program in Business and Technology motivated us to selectthis topic related to outsourcing and supplier selection. More specifically in thispaper we have tried to discuss about outsourcing history, current practices andfuture trends and based on that we tried to establish the relation that how supplierselection is one of the most key aspect of outsourcing. Similarly in the end we havetried to use a specific theory (MAUT) to evaluate the supplier selection.Throughout this paper we got a clear understanding of Outsourcing and supplierselection which is a very important topic for research these days. We would like tothank Ms. Erika Kallionpää, course instructor for LIKU-8306 Logistics strategiesand outsourcing, for her help and guidance during this process to make this reportpossible.Group 6,Saad Jamil.Hassan Aman .Seyfi Can Babacan.Tampere, April 2012.
TABLE OF CONTENTSABSTRACT _______________________________________________________ iiPREFACE________________________________________________________ iii1 INTRODUCTION _____________________________________________ 11.1 Background-A Concise Portrayal _________________________________ 11.2 Objective of the Paper___________________________________________ 12 INTRODUCTION TO OUTSOURCING AND SUPPLIER SELECTION2.1 What is Outsourcing? ___________________________________________ 32.2 Outsourcing Model and Some Key Terms __________________________ 42.3 Evolution of Outsourcing and Future Models _______________________ 52.4 Suppliers Selection Criteria’s_____________________________________ 73 INTRODUCTION TO MAUT (MULTIPLE ATTRIBUTE UTILITYTHEORY) _________________________________________________________ 93.1 What is MAUT?________________________________________________ 93.2 Practical Examples-Theoretical & Numerical ______________________ 103.2.1 Evaluation of a Simple Electronic Product-A Digital Camera ___ 113.2.2 Multiple Objectives-An Example ___________________________ 113.2.3 Another Example Using MAUT ____________________________ 124 UTILIZATION OF MAUT IN SUPPLIER SELECTION ___________ 144.1 Possible Selection Criteria Applicable ____________________________ 144.2 An Example of Supplier Selection Using MAUT____________________ 155 CONCLUSIONS______________________________________________ 18REFERENCES____________________________________________________ 19
Jamil, S. Babacan, S. Aman, H.11 INTRODUCTION1.1 BACKGROUND-A CONCISE PORTRAYALMost businessmen, especially entrepreneurs have thought of outsourcing as acertain strategy that is exclusively associated with big businesses, but that is surelynot the case in reality. Development in technology has also enabled smallbusinesses to utilize outsourcing to its fullest potential. Businesses and firms of allsizes have substantially grown in productivity and function due to the powerfulimpact of outsourcing.More and more small and medium sized businesses are outsourcing their taskstoday, since development in technology has advanced to a milestone that now let’steams to coordinate and work from any part of the world. This is aided with theaccessibility and availability of highly qualified professionals in all levels ofmanagement to take care of the tasks. These teams come on board often as sub-contractors and they save the business owners the great burdens associated to thecompletion of different modular tasks and costly overheads which they (owners)would have paid, had they not outsourced. Additionally, outsourcing also savesspace constrictions which a rapidly growing business most probably would face.Though outsourcing makes a business process more convenient but taking theinitial steps towards it can be quite tricky and time consuming. Evaluating how abusiness can be constructed with support from external professionals ultimatelyhelps improve both, economies of scale and efficiencies. Businessmen andentrepreneurs have realized that outsourcing offers unstoppable power to controldifferent aspects of business, which are vital and yet not feasible enough completein-house. Businesses, regardless of their size and experience, if augmented by apool made of globally spread human capital, can enter and compete with thestrongest players in fierce arenas, and prosper.1.2 OBJECTIVE OF THE PAPERThere are several methods to understand and to find out preferences of individualsor groups concerned with different products or services, one such technique isMulti-Attribute Utility Theory (MAUT). MAUT cannot only be used for evaluatingobjects for individuals with interests but it can also be ascribed as a completeevaluation approach by a decision maker in a firm when extrapolating andevaluating different participants for a supply chain within a vast supply network.The core objective of this paper is:
Jamil, S. Babacan, S. Aman, H.2“......analyzing the applicability of Multiple Attribute Utility Theory(MAUT) to evaluate supplier criteria and choosing most adequate supplier for abusiness in its supply chain.”Problems related to real-time decision-making are quite often ill-structured as wellas complex to be considered for analysis using a sole attribute, perception orcriterion to conclude a suitable decision. The reality is totally different, since a uni-dimensional approach is not more than an over-simplification of the real problemthat actually exists. Frankly speaking, such an approach will only lead decisionmakers to unrealistic decisions. This paper will suggest a relatively more appealingapproach that will simultaneously emphasize on all the pertinent factors that arerelated to a certain decision making process, in this case it is about using MAUT todecide/select suppliers.This paper will be structured in the following way. First, introduction and objectivewill be defined. Second, detailed overview of outsourcing will be presented withsome future trends and more specifically in the end focus will be on supplierselection in outsourcing. Third, an introduction to MAUT will be presented withsome practical examples. Fourth, MAUT will be used to evaluate and selectsuppliers. In the end conclusion will be provided based on the study of MAU.
Jamil, S. Babacan, S. Aman, H.32 INTRODUCTION TO OUTSOURCING AND SUPPLIERSELECTION2.1 WHAT IS OUTSOURCING?Globalization, technological advancements and economic crisis have forced theindustries to move from the traditional strategy of manufacturing all the parts andproducts by itself (Higuchi & Troutt, 2008). Running a company is similar torunning a home. When the family grows there are more things to manage so thequestion is whether to hire an expert to solve the problems or rely on owncapabilities (Rogers & Stephen, 2009). Similar question is being faced by themanagement in various companies as industries are becoming more complex interms of logistics and supply chain. So, in order to gain competitive advantage,minimize costs and focus on core competencies organizations today areoutsourcing there non critical functions to some other expert and specializedsolution providers. This phenomenon has given rise to the term ‘Outsourcing’. Itoriginates from the words ‘out’ meaning exterior and ‘source’ referring to resource(Teng et al., 1995). So, in simple business terms it means to buy goods and servicesfrom external resources instead of making within the firm (Bhatnagar & Ashish,2009).Before anything else, it is important to mention that the term ‘outsourcing’ will befurther understood as an interchangeable substitute of the terms “make or buy”,“integration/disintegration of activities” (Bolat & Yilmaz, 2009). Following tablelists the definitions of outsourcing by various scholars (Table 1).Table 1. Outsourcing definitions.Source DefinitionEllram and Billington,(2001)Transfer of activities and processes previouslyconducted internally to an external partyNeale, (1995) Outsourcing is the practice of handing over theplanning, management and operation of certainfunctions to an independent third party.Kraker, (1995) Outsourcing is deciding to obtain selected goods andservices from outside your company, finding newsuppliers and new ways to secure the delivery of rawmaterials, goods, components and services, byutilizing the knowledge, experience and creativity ofnew suppliers not used previously.First two simpler definitions do not tell anything about the process itself. Howeverthe third definition gives a hint that outsourcing is done through selecting a proper
Jamil, S. Babacan, S. Aman, H.4supplier and utilizing its knowledge. Supplier selection in itself is quiet achallenging task so for the purpose of this paper it is important to understand thefew basic terms used in outsourcing here as it will lay foundations for the comingchapters in which the core research will be about supplier selection using someparticular theoretical framework.2.2 OUTSOURCING MODEL AND SOME KEY TERMSAn outsourcing process involves two main players. First the ‘outsourced’ refers tothe customer who outsources its process and second ‘outsourcer’ means anenterprise, typically known as a supplier or vendor, which delivers the services tothe customer (Franceschini et al, 2003). According to Hätönen & Eriksson, (2009)outsourcing currently has been done internationally as well as locally. The termoffshore outsourcing is used when dealing with international outsourcing whichmeans to transfer activities across borders to other countries. The highlycompetitive environment prevalent in industries is often related to an ‘outsourcingeconomy’ (Hätönen & Eriksson, 2009). This competition has changed the focus ofindustries towards outsourcing in which long term relationship with key supplier isgaining much importance (Kakabadse and Kakabadse, 2002). So, with the help ofoutsourcing industries are focusing on new product development which crates lotsof opportunities for different firms involved in the process.Any organization has to do some benchmark analysis before moving towardsoutsourcing in order to select the best possible option. One such model is illustratedin Figure 1. According to Franceschini et al, (2003) it has four major parts asshown in the bottom of Figure 1: internal benchmarking analysis, externalbenchmarking analysis, contract negotiation and outsourcing management. First,internal benchmarking involves analyzing organizations own core competenciesand the processed that needs to be outsourced. Second, external benchmarkingdeals with all the interactions between an organization and the supplier. It includessupplier selection as well as relationship management with the supplier andorganization. Third, contract negotiation is basically the logical extension of theprevious steps. Last, outsourcing management is basically the management of theplanned outsourcing process and how to practically make it possible.
Jamil, S. Babacan, S. Aman, H.5Figure 1. Outsourcing Model.After having a clear idea about outsourcing it is important to have a general ideaabout how outsourcing has evolved in recent years and what are the future trends inthis area. This will be discussed in next section.2.3 EVOLUTION OF OUTSOURCING AND FUTURE MODELSOutsourcing is a global phenomenon which has been going around for years butrecently it has emerged as one of the most important aspect in business. Industrieswere used to be vertically integrated and they used to consider every manufacturingprocess as a part of its own internal value chain. But the things have changed nowas more and more industries are thinking about the concept of core competencies.This change has evolved in different eras and it is important to understand howoutsourcing began and gained momentum in the recent years. According toHätönen & Eriksson, (2009) three distinct eras can be classified while looking intothe evolution of outsourcing; Big bang era, bandwagon era and barrier less era asillustrated in Table 2.Table 2. Evolution of Outsourcing (Adapted from Hätönen & Eriksson, 2009).According to Hätönen & Eriksson, (2009) the early stages of outsourcing arereferred to as big bang era Outsourcing was going around even before that but itwas during this period that it came as a buzz word and the companies started tooutsource their non-critical activities in order to be cost efficient and profitmaximization. Outsourcing was mainly done domestically with the help of formalcontracts or transactions. The second period of outsourcing is referred to as
Jamil, S. Babacan, S. Aman, H.6Bandwagon as more companies adapted this approach based on the previoussuccess of other companies. A new management approach called Strategic businessunit thinking changed the approach towards outsourcing completely. Now the mainpurpose of outsourcing was not only cost reduction but to gain knowledge andexternal skills as well (Hätönen & Eriksson, 2009). Strategic outsourcing emergedas a key concept and the companies started to outsource even more strategicimportant processes which resulted in building long term relationships with thesuppliers. During the last decade outsourcing has become a tradition andglobalization has made the boundaries of organizations indistinct. So, thesedevelopments led to barrier less organization era. Transformational outsourcing hasreplaced the previous strategic outsourcing and now the focus is to transform anorganization to be more flexible and to gain competitive edge by cooperating andcollaborating with the suppliers to become knowledge intensive organization(Hätönen & Eriksson, 2009).The above paragraph illustrated how outsourcing evolved but it is always uncertainto predict about the future. In this paragraph discussion will be about in whatpossible ways outsourcing can evolve and the future trends of outsourcing. Figure 2illustrates the summary of historical evolution of outsourcing and gives an ideaabout some future insights.Figure 2. Future trend of Outsourcing (Adapted from Hätönen & Eriksson, 2009,p. 152)..According to Hätönen & Eriksson, (2009) a new question has emerged known as‘when to outsource; which highlights the importance of outsourcing timing indecision making. Secondly, no new theory has emerged so far which can replacethe previous outsourcing theories but in future portfolio management is one of theresearch areas which will be included in outsourcing theories as the companiescurrently are facing lots of troubles to manage the ever increasing outsourcing
Jamil, S. Babacan, S. Aman, H.7vendor/suppliers portfolios. Apart from that in future the trend will move towardsanalyzing the impact of offshore outsourcing on global economies and how theyare shaoing organizations into more flexible entities Hätönen & Eriksson, (2009).Now after understanding outsourcing from historical and future point of view it istime to focus on supplier selection criteria which is one of the most key areas ofoutsourcing.2.4 SUPPLIERS SELECTION CRITERIA’SSelecting a particular supplier is one of the most important parts of the outsourcingprocess. It depends on the number of factors which must be taken into accountbefore finalizing the decision. This selection process and criteria has gainedstrategic importance over the years and a lot of research has been going around inevaluating and selecting the best possible supplier/vendor. Different scholars haveused different selection criteria’s and vendor evaluation methods over the years.According to Dickson, (1966) there are three most important criteria’s for selectinga supplier; cost, quality and delivery performance. Cardozo and Cagley (1971)termed the relative importance of a vendor in selection process to the risk involvedin purchasing process. Although these studies were applicable for a certain periodof time, but as the organizations began to expand eventually the number of suppliernetwork also became complicated so the industries required a new and differentapproach. Ellram & Lisa (1990) as a result of the case studies conducted withdifferent industries identified various important issues related to supplier selectionand they were grouped into four categories. The detailed categories are mentionedin Table 2.Table 3. Supplier Evaluation and Selection Criteria’s (Ellram, 1990).Category Supplier Selection Criteria’sFinancial Issues Economic performanceFinancial stabilityOrganizationalculture & StrategyIssuesTrustManagement attitudeStrategic fitTop managementCompatibilityOrganization structure of supplierTechnology Issues Assessment of current manufacturing capabilities.Assessment of future manufacturing capabilities.Suppliers design capabilities.Supplier’s development speed.Other Issues Safety record of supplierBusiness references.Supplier’s customer’s base.
Jamil, S. Babacan, S. Aman, H.8Although this was a major step forward in terms of supplier selection criteria’s butprevious work by Dickson was not rejected by this theory but in fact this theorywas more focused on how to build a long term relationship with supplier by findingunique characteristics. Similarly Weber, (1991) ranked the three importantcriteria’s for supplier selection:1. Quality.2. Delivery performance.3. Cost.Although there are lots of approaches in selecting a supplier written by variousscholars but it is impossible to choose which one is the best as they cannot beevaluated as right or wrong. Every theory is applicable in some specific scenarioand it’s up to the decision maker which theory to use for the best purpose. Theliterature review of the different supplier selection criteria’s mentioned above justform the basis for the analytical vendor evaluation models which will be discussedin the below paragraphs.According to Talluri & Narasimhan, (2003) analytical models for evaluatingsuppliers range from simple weighted techniques to various programming modelsfocusing on mathematical concepts. Various models according to differentresearchers are illustrated in Table 3.Table 4. Vendor evaluation techniques (Talluri & Narasimhan, 2003).As it can be seen from the table above that there are lots of approaches but thispaper will try to avoid exploring all of these models in detail. The trend is movingtowards multiple attribute theories and for that purpose MAUT (Multiple attributeutility theory) will be discussed in detail in the coming chapter and how it can beused in supplier selection criteria mentioned here.
Jamil, S. Babacan, S. Aman, H.93 INTRODUCTION TO MAUT (MULTIPLE ATTRIBUTEUTILITY THEORY)3.1 WHAT IS MAUT?People face different types of decisions in day to day life-from home to work.These decisions are made at homes, communities and organizations. Every singlestep is taken after answering several questions.Where should a new assembly plant, shopping center, power productionhouse, airport or a hospital be located?Which school is good, which organization has better growth potential?Which vendor, supplier or contractor should be hired for the tasks?These are some of the many decisions that include the comparison of alternativeswhich have certain strengths as well as weaknesses with respect to severalobjectives that are of interest to the one who makes the decision. Then comes thequestion of neutralizing the threats and exploiting all possible opportunities. Yes!A decision maker or an evaluator cannot reject Strengths, Weaknesses,Opportunities and Threats before making the final decision. So, practicallySWOT Analysis becomes a mandatory study during the decision making process.Since this particular theory under consideration is significantly influenced byfactors that form various preferences for individuals, and these preferences resultfrom strengths and weaknesses.According to Bosworth and Gingiss et al. 1999 the Multi-Attribute Utility Theory(MAUT) methods produce criteria weights that reflect the relative importancewhen scores are from a common dimensionless scale. MAUT models rely onweighting criteria and creating utility functions across the levels of each criterion.The Multiple Attribute Utility Theory (MAUT) is method that is especiallydesigned to handle and control various tradeoffs that exist among differentobjectives. Several factors are considered when applying MAUT, according toHalpern, 2006 preparing a MAUT Decision-making Worksheet should include1. Frame the Decision. Make a precise statement of the problem that will help tonarrow it.2. Generate Alternatives. Think of all the possible alternatives that could solve theproblem. Be realistic, but do not evaluate the alternatives at this step.3. List the Considerations (Aspects). Write down all the variables (considerations)that affect the decision. It is very important to give careful thought to theconsiderations; you may wish to seek additional input from others.
Jamil, S. Babacan, S. Aman, H.104. Weight the Considerations. Give each consideration an importance score thatreflects its relative importance to you. Use a 5-point scale ranging from 1 = ofslight importance to me and 5 = of great importance to me.5. Weight the Alternatives. Take the alternatives one at a time. For eachalternative, decide how well it satisfies each consideration. Rate the alternativeon each consideration, using a scale of -2, -1, 0, +1, +2. Positive numbersindicate the alternative is favorable or compatible6. Calculate the Decision. Multiply the assigned weight for each consideration (1to 5) by the satisfaction weighting for the alternative (-2 to +2).(Helpern, 2006)Furthermore, we can define the overall evaluation according to MAUT for anobject as a weighted estimation/evaluation according to certain value dimensionsthat are specific for the object category. There should be a common denominatorfor all the dimensions; this is the utility which an evaluator uses. Take for instancea digital camcorder; the value dimensions that would most probably used forevaluating it may include quality of video recording, night-vision, recording time,video storage and transfer form.It is a great systematic approach that simply quantifies the preferences of anindividual for an object or a service. What basically done is that rescaling ofnumerical value(s) on a certain measure of interest is made where ‘0’ representsworst preference(s) and ’1’ represents best preferences. The most outstandingfeature of MAUT is that it allows the evaluator to make direct comparison ofseveral miscellaneous measures. In other words, if proper tools are used, one canactually compare oranges to apples. In the end, a rank order evaluation of differentalternatives is obtained as a result. This result reflects the preferences of thedecision maker.3.2 PRACTICAL EXAMPLES-THEORETICAL & NUMERICALEstimation of an individual’s or a group’s interests holds great significanceespecially in recommender systems. The primary quoted reason for this isimportance of interests that form the basis of system’s recommendations. One mayfind several approaches for evaluating the interests of user(s) in user modeling, andone such approach is to assign the use of MAUT. Some theoretical and numericalexamples in this section will try to answer the following questions related toMultiple Attribute Utility Theory:
Jamil, S. Babacan, S. Aman, H.11Can one use MAUT as common denominator?Can an evaluator possibly define rules to describe how to apply MAUT forestimating the user’s interests?3.2.1 Evaluation of a Simple Electronic Product-A Digital CameraA digital camera will most likely be evaluated on the basis of mega pixels (Imagequality), flash, operating time, viewfinder and camera handling. Considering that aCamera to be compared with respect to multiple attributes as mentioned previously,these values for preferences are from two different persons (A = Studiophotographer, B = Landscape Photographer) After the calculation of the utilities ofall the mentioned preferences, the MAUT table for the cameras with hypotheticalvalues would look like this.Table 5. MAUT table for a hypothetical camera.Dimensions Preferences (A) Preferences (B)Image Quality 0.4 0.8Flash 0.04 0.00Operating time 0.4 0.05View Finder 0.1 0.1Handling 0.06 0.05As it can be clearly seen from the above example that despite being the sameproduct, the preferences vary from individual to individual based on the objectiveof interest.3.2.2 Multiple Objectives-An ExampleConsidering the issue related to deciding the treatment for an esophageal cancerpatient. A doctor can schematically model the problem as follows.
Jamil, S. Babacan, S. Aman, H.12Figure 3. Schematic presentation of esophageal cancer patient problem (Renooij,2009).As seen in the schematic diagram, whenever there is a problem related to decisionmaking related to multiple objectives is present that are captured byseveral/multiple attributes, the end results or the consequences are somewhatcomplicated, as seen in the consequence matrix above.3.2.3 Another Example Using MAUTTake for instance a city plans to build a new power generation station. Theauthorities have 4 sites in mind for the new project. The preferences of the decisionmakers are to minimize the costs and overheads associated with the construction ofthe station and not to exceed space constrictions beyond their financial andenvironmental limits. With these preferences upfront, following factors willinfluence the objectives; type of land at different locations, Construction Companyand architects to be hired, material and machine costs, weather and so on. Let’s saythe estimated cost fall in a range of 15 million and 60 million Euros, between landof 200 and 600 acres.So, in this case the consequences related to decision alternatives are reflected by 2attributes, costs and acres of land. In order to evaluate this, the evaluator needs todetermine a 2-attribute utility function:U(Cost, Acres)Since the main objectives are to minimize the costs and acres of land, the worstconsequence utility function will look like: (60, 600) with a utility of 0.Comparatively, the best consequence with Utility 1 will be (15, 200).
Jamil, S. Babacan, S. Aman, H.13Figure 4. Utility (Cost, Acres).This chapter focused on the theoretical concepts of MAUT with some practicalexamples as well. The idea of this chapter is to lay a solid foundation about MAUTfor the next chapter in which MAUT theoretical concepts will be used to evaluateand select a particular supplier.
Jamil, S. Babacan, S. Aman, H.144 UTILIZATION OF MAUT IN SUPPLIER SELECTION4.1 POSSIBLE SELECTION CRITERIA APPLICABLEThe selection of suppliers abroad is a rather complex and important process thatmay have long lasting effects on the outsourcer’s performance. If the selection isnot made properly, some of the possible outcomes would be:Transport delaysDecreasing product qualityIncreased material costsProduction bottlenecks…etc.These are just a few examples of the difficulties that a firm may encounter. Intoday’s world, there are lots of choices for a firm in terms of suppliers to outsourceeither a product or a service. Therefore, correct evaluation of the suppliers and aproper selection is a crucial part. According to Min (1994), there are three differenthierarchical levels within a firm that values certain criteria more than others. Theselevels are: (1) Top level, (2) Middle Level, (3) Low Level. In general Min (1994)classifies them in 7 different classes of selection criteria that are applicable to alllevels:Financial TermsQuality AssurancePerceived RisksService PerformanceBuyer-Supplier PartnershipsCultural and Communication BarriersTrade Restrictions (Min, 1994).First; financial terms is rather a quantitative criteria which is reasonably easier tomeasure when compared to other qualitative items. The main attributes related withthis group would be cost, payment terms and freight terms. As a rule of thumbfirms would tend to choose lower price suppliers that give more favorable paymentterms as well as handling the freight with insurance.Second; quality assurance is somehow more of a quantitative method. It tries tomeasure how strict the supplier is with the quality of the products or services thatthey are offering. Obviously it is more preferable for the outsourcer to choose thefirm that assures a higher quality on the products that they are supplying.
Jamil, S. Babacan, S. Aman, H.15Third; the perceived risks by the firm is also an important aspect to consider.Various types of risks include, political instability, currency inconvertibility…etc.As a fourth aspect; service performance is a very qualitative aspect that makes ithard to evaluate as well as dependent on the evaluating person. To give a fewexamples on-time delivery and technical assistance would be a very good start. On-time delivery is one of the most valued aspects in today’s outsourcing world thatputs great pressure on the suppliers. Technical assistance defines the after purchaseservices offered by the supplier to the outsourcer.Fifth; buyer-supplier partnerships are something very important for the health ofprocurement. Since the mid 1980s organizations have started developing strategicpartnerships with their suppliers. Higher the level of partnership, the more valuableit would be for the selection.Sixth; cultural and communication barriers is still an important thing that has to beconsidered by the selecting firm. Best explanation consists of a Finnish firm and aSpanish firm that have very distinct organizational culture in terms of doingbusiness. Finns prefer a more direct approach whereas Spaniards tend to develop asocial and emotional link before getting down to business.As a final aspect, trade restrictions are factors that have a big effect on the supplierselection process. Tariffs and customs duties are something that sometimes may bea huge burden for importing firms as well as the exporting ones (Min, 1994).4.2 AN EXAMPLE OF SUPPLIER SELECTION USING MAUTMultiple Attribute Utility Theory enables users to decide on which supplier is moresuitable or favorable for them in terms of some certain criteria, mostly describedabove. First thing that should be done is deciding on the weights of these attributesso that user knows what is more important than the others. Min (1994), suggests apractical table for the attributes of a supplier with their weights for a certain firm:Table 6. Weighted Attribute Table (Min 1994).Attribute WeightQuality Control 15.0On-time delivery 13.9Quality team visits 8.6Tariffs and customs duties 7.7Cost 7.3Payment Terms 6.2Freight Terms 6.1
Jamil, S. Babacan, S. Aman, H.16Financial Stability 5.5Foreign Exchange Rate 4.9Countertrade 4.1Labour disputes 3.5Technical assistance 3.5Local price control 3.2Political stability 2.4Negotiability 2.4EDI capability 2.1Legal claims 1.8Ethical standards 1.0Cultural similarity 0.8Total 100Table 6 shows the distribution of the importance of the supplier’s criteria. Itbasically reflects what is valued more on the outsourcer’s side. For example, in thiscase on-time delivery is valued more than cost. Hence it can be easily said that asupplier who offers a better on time delivery will be working with the firm mostlikely.After determining the weights of each attribute, all the decider has to do is give agrade out of a number (5, 10, 100…etc.) to these attributes individually that wouldtell them which firm is more beneficial for them to work with. As mentioned beforethe algorithm behind is multiplying each grade with its corresponding weight andsumming these up to a final grade of the supplier. Table 7 below shows thecomparison of two different suppliers with the weights taken from Table 6.Table 7. Comparison of two supplier using MAUTAttribute Weight Supplier A Supplier BQuality Control 15.0 8 7On-time delivery 13.9 6 6Quality team visits 8.6 7 6Tariffs and customsduties7.7 3 5Cost 7.3 7 6Payment Terms 6.2 4 5Freight Terms 6.1 3 7Financial Stability 5.5 5 5Foreign ExchangeRate4.9 7 5Countertrade 4.1 9 6Labour disputes 3.5 8 6Technicalassistance3.5 7 10Local price control 3.2 6 7Political stability 2.4 5 5Negotiability 2.4 3 8EDI capability 2.1 8 6
Jamil, S. Babacan, S. Aman, H.17Legal claims 1.8 9 6Ethical standards 1.0 5 7Cultural similarity 0.8 3 5Total 100 0.6109 0.6166According to the Table 7 supplier B is a more favorable choice for this firm since itscored slightly higher in the comparison. It should be noted that for some attributes(i.e. cost) higher value means lower price; therefore one should be careful whiledetermining the grades. In addition, this comparison may be spread to as manysuppliers as required. Furthermore, to make the comparison more detailed one canincrease the grading scale from 1-10 to 1-100 or even more.
Jamil, S. Babacan, S. Aman, H.185 CONCLUSIONSNowadays companies are focusing on their core competencies which means thatthey manufacture those things which they consider important and rest of them theytend to buy from external resources. This concept led to outsourcing phenomenonwhich is quiet common in industries these days. One of the most important aspectsof outsourcing is to evaluate and select the appropriate supplier. But due tocomplexity of supply chains and logistics networks this evaluation and selectioncriteria has become very difficult. Number of theories has been proposed byvarious authors and researchers for the evaluation and selection criteria. Multiplecriteria/attributes really focus on adapting to the needs of the company and findingthe right supplier as per requirements.The objective of this paper was to analyze the applicability of Multiple AttributeUtility Theory (MAUT) to evaluate supplier criteria and choosing most adequatesupplier for a business in its supply chain. Multiple Attribute Utility Theory(MAUT) is a powerful tool to evaluate suppliers and choose which supplier is morefavorable compared to others. Decision makers should make their weightedattribute tables properly and update them regularly due to changing trends. In thispaper the definition of outsourcing and a brief introduction to MAUT is madefollowed by a detailed study of MAUT applied to supplier selection. Stayingshallow in terms of mathematical equations, the main logic behind MAUT isexplained and an example is given.Based on this research further study could be carried with more complexalgorithms that can give more precise results while choosing the better supplier.However the actual selection may differ from the results of MAUT in some certainsituations. As mentioned before it is just a helpful tool to make the decision makingprocess of purchasing managers easier.
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