OUTSOURCING AND SUPPLIER SELECTION BY USING MULTIPLE ATTRIBUTE UTILITY THEORY.

TAMPERE UNIVERSITY OF TECHNOLOGY
Tampere School of Business and Technology
GROUP 6
OUTSOURCING AND SUPPLIER SELECTION BY USING MULTIPLE
ATTRIBUTE UTILITY THEORY.
Seminar Report

ABSTRACT
Outsourcing is one of the most useful technique that firms follow to reduce their
manufacturing costs and to increase overall product quality which brings
competitive advantage in the market. Outsourcing simply refers to handing over
planning, management and operation of some functions to a third party company.
Either goods or services can be outsourced by global firms. It becomes more and
more crucial for the firms to choose from which company they would like to
purchase these outsourced goods or services. Supplier selection is a complex issue
with long term effects on the companies. In order to provide best quality products
to their customers, proper evaluation of the supplier with appropriate criteria
selection is an important process.
Multiple Attribute Utility Theorem is a tool that can be used to solve this issue. It
basically assigns a weighted percentage to each attribute that depends on which
aspects are valued more by the firm. Then suppliers are graded individually by their
power on the certain aspects in a scale. When the overall grade is calculated for
every supplier, it now becomes an easier task to choose which supplier is more
favorable.
This paper explains the application method of using MAUT in supplier selection
criteria. 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 and
precision of the method is always questionable.

PREFACE
Globalization and economic crisis have greatly affected the manufacturing
strategies of the industries. Industries these days are thinking of mostly ‘make or
buy strategy’ which means the things they should make on their own and non
critical functions which they can buy from outside. One such phenomenon that has
stimulated over the years is outsourcing and one of the most interesting aspects of
outsourcing is supplier selection and evaluation. So, being the students of the
International Masters program in Business and Technology motivated us to select
this topic related to outsourcing and supplier selection. More specifically in this
paper we have tried to discuss about outsourcing history, current practices and
future trends and based on that we tried to establish the relation that how supplier
selection is one of the most key aspect of outsourcing. Similarly in the end we have
tried to use a specific theory (MAUT) to evaluate the supplier selection.
Throughout this paper we got a clear understanding of Outsourcing and supplier
selection which is a very important topic for research these days. We would like to
thank Ms. Erika Kallionpää, course instructor for LIKU-8306 Logistics strategies
and outsourcing, for her help and guidance during this process to make this report
possible.
Group 6,
Saad Jamil.
Hassan Aman .
Seyfi Can Babacan.
Tampere, April 2012.

TABLE OF CONTENTS
ABSTRACT _______________________________________________________ ii
PREFACE________________________________________________________ iii
1 INTRODUCTION _____________________________________________ 1
1.1 Background-A Concise Portrayal _________________________________ 1
1.2 Objective of the Paper___________________________________________ 1
2 INTRODUCTION TO OUTSOURCING AND SUPPLIER SELECTION
2.1 What is Outsourcing? ___________________________________________ 3
2.2 Outsourcing Model and Some Key Terms __________________________ 4
2.3 Evolution of Outsourcing and Future Models _______________________ 5
2.4 Suppliers Selection Criteria’s_____________________________________ 7
3 INTRODUCTION TO MAUT (MULTIPLE ATTRIBUTE UTILITY
THEORY) _________________________________________________________ 9
3.1 What is MAUT?________________________________________________ 9
3.2 Practical Examples-Theoretical & Numerical ______________________ 10
3.2.1 Evaluation of a Simple Electronic Product-A Digital Camera ___ 11
3.2.2 Multiple Objectives-An Example ___________________________ 11
3.2.3 Another Example Using MAUT ____________________________ 12
4 UTILIZATION OF MAUT IN SUPPLIER SELECTION ___________ 14
4.1 Possible Selection Criteria Applicable ____________________________ 14
4.2 An Example of Supplier Selection Using MAUT____________________ 15
5 CONCLUSIONS______________________________________________ 18
REFERENCES____________________________________________________ 19

Jamil, S. Babacan, S. Aman, H.
1
1 INTRODUCTION
1.1 BACKGROUND-A CONCISE PORTRAYAL
Most businessmen, especially entrepreneurs have thought of outsourcing as a
certain strategy that is exclusively associated with big businesses, but that is surely
not the case in reality. Development in technology has also enabled small
businesses to utilize outsourcing to its fullest potential. Businesses and firms of all
sizes have substantially grown in productivity and function due to the powerful
impact of outsourcing.
More and more small and medium sized businesses are outsourcing their tasks
today, since development in technology has advanced to a milestone that now let’s
teams to coordinate and work from any part of the world. This is aided with the
accessibility and availability of highly qualified professionals in all levels of
management 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 the
completion of different modular tasks and costly overheads which they (owners)
would have paid, had they not outsourced. Additionally, outsourcing also saves
space constrictions which a rapidly growing business most probably would face.
Though outsourcing makes a business process more convenient but taking the
initial steps towards it can be quite tricky and time consuming. Evaluating how a
business can be constructed with support from external professionals ultimately
helps improve both, economies of scale and efficiencies. Businessmen and
entrepreneurs have realized that outsourcing offers unstoppable power to control
different aspects of business, which are vital and yet not feasible enough complete
in-house. Businesses, regardless of their size and experience, if augmented by a
pool made of globally spread human capital, can enter and compete with the
strongest players in fierce arenas, and prosper.
1.2 OBJECTIVE OF THE PAPER
There are several methods to understand and to find out preferences of individuals
or groups concerned with different products or services, one such technique is
Multi-Attribute Utility Theory (MAUT). MAUT cannot only be used for evaluating
objects for individuals with interests but it can also be ascribed as a complete
evaluation approach by a decision maker in a firm when extrapolating and
evaluating different participants for a supply chain within a vast supply network.
The core objective of this paper is:

2
“......analyzing the applicability of Multiple Attribute Utility Theory
(MAUT) to evaluate supplier criteria and choosing most adequate supplier for a
business in its supply chain.”
Problems related to real-time decision-making are quite often ill-structured as well
as complex to be considered for analysis using a sole attribute, perception or
criterion 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 problem
that actually exists. Frankly speaking, such an approach will only lead decision
makers to unrealistic decisions. This paper will suggest a relatively more appealing
approach that will simultaneously emphasize on all the pertinent factors that are
related to a certain decision making process, in this case it is about using MAUT to
decide/select suppliers.
This paper will be structured in the following way. First, introduction and objective
will be defined. Second, detailed overview of outsourcing will be presented with
some future trends and more specifically in the end focus will be on supplier
selection in outsourcing. Third, an introduction to MAUT will be presented with
some practical examples. Fourth, MAUT will be used to evaluate and select
suppliers. In the end conclusion will be provided based on the study of MAU.

3
2 INTRODUCTION TO OUTSOURCING AND SUPPLIER
SELECTION
2.1 WHAT IS OUTSOURCING?
Globalization, technological advancements and economic crisis have forced the
industries to move from the traditional strategy of manufacturing all the parts and
products by itself (Higuchi & Troutt, 2008). Running a company is similar to
running a home. When the family grows there are more things to manage so the
question is whether to hire an expert to solve the problems or rely on own
capabilities (Rogers & Stephen, 2009). Similar question is being faced by the
management in various companies as industries are becoming more complex in
terms of logistics and supply chain. So, in order to gain competitive advantage,
minimize costs and focus on core competencies organizations today are
outsourcing there non critical functions to some other expert and specialized
solution providers. This phenomenon has given rise to the term ‘Outsourcing’. It
originates 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 services
from external resources instead of making within the firm (Bhatnagar & Ashish,
2009).
Before anything else, it is important to mention that the term ‘outsourcing’ will be
further understood as an interchangeable substitute of the terms “make or buy”,
“integration/disintegration of activities” (Bolat & Yilmaz, 2009). Following table
lists the definitions of outsourcing by various scholars (Table 1).
Table 1. Outsourcing definitions.
Source Definition
Ellram and Billington,
(2001)
Transfer of activities and processes previously
conducted internally to an external party
Neale, (1995) Outsourcing is the practice of handing over the
planning, management and operation of certain
functions to an independent third party.
Kraker, (1995) Outsourcing is deciding to obtain selected goods and
services from outside your company, finding new
suppliers and new ways to secure the delivery of raw
materials, goods, components and services, by
utilizing the knowledge, experience and creativity of
new suppliers not used previously.
First two simpler definitions do not tell anything about the process itself. However
the third definition gives a hint that outsourcing is done through selecting a proper

4
supplier and utilizing its knowledge. Supplier selection in itself is quiet a
challenging task so for the purpose of this paper it is important to understand the
few basic terms used in outsourcing here as it will lay foundations for the coming
chapters in which the core research will be about supplier selection using some
particular theoretical framework.
2.2 OUTSOURCING MODEL AND SOME KEY TERMS
An outsourcing process involves two main players. First the ‘outsourced’ refers to
the customer who outsources its process and second ‘outsourcer’ means an
enterprise, typically known as a supplier or vendor, which delivers the services to
the customer (Franceschini et al, 2003). According to Hätönen & Eriksson, (2009)
outsourcing currently has been done internationally as well as locally. The term
offshore outsourcing is used when dealing with international outsourcing which
means to transfer activities across borders to other countries. The highly
competitive environment prevalent in industries is often related to an ‘outsourcing
economy’ (Hätönen & Eriksson, 2009). This competition has changed the focus of
industries towards outsourcing in which long term relationship with key supplier is
gaining much importance (Kakabadse and Kakabadse, 2002). So, with the help of
outsourcing industries are focusing on new product development which crates lots
of opportunities for different firms involved in the process.
Any organization has to do some benchmark analysis before moving towards
outsourcing in order to select the best possible option. One such model is illustrated
in Figure 1. According to Franceschini et al, (2003) it has four major parts as
shown in the bottom of Figure 1: internal benchmarking analysis, external
benchmarking analysis, contract negotiation and outsourcing management. First,
internal benchmarking involves analyzing organizations own core competencies
and the processed that needs to be outsourced. Second, external benchmarking
deals with all the interactions between an organization and the supplier. It includes
supplier selection as well as relationship management with the supplier and
organization. Third, contract negotiation is basically the logical extension of the
previous steps. Last, outsourcing management is basically the management of the
planned outsourcing process and how to practically make it possible.

5
Figure 1. Outsourcing Model.
After having a clear idea about outsourcing it is important to have a general idea
about how outsourcing has evolved in recent years and what are the future trends in
this area. This will be discussed in next section.
2.3 EVOLUTION OF OUTSOURCING AND FUTURE MODELS
Outsourcing is a global phenomenon which has been going around for years but
recently it has emerged as one of the most important aspect in business. Industries
were used to be vertically integrated and they used to consider every manufacturing
process as a part of its own internal value chain. But the things have changed now
as 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 how
outsourcing began and gained momentum in the recent years. According to
Hätönen & Eriksson, (2009) three distinct eras can be classified while looking into
the evolution of outsourcing; Big bang era, bandwagon era and barrier less era as
illustrated in Table 2.
Table 2. Evolution of Outsourcing (Adapted from Hätönen & Eriksson, 2009).
According to Hätönen & Eriksson, (2009) the early stages of outsourcing are
referred to as big bang era Outsourcing was going around even before that but it
was during this period that it came as a buzz word and the companies started to
outsource their non-critical activities in order to be cost efficient and profit
maximization. Outsourcing was mainly done domestically with the help of formal
contracts or transactions. The second period of outsourcing is referred to as

6
Bandwagon as more companies adapted this approach based on the previous
success of other companies. A new management approach called Strategic business
unit thinking changed the approach towards outsourcing completely. Now the main
purpose of outsourcing was not only cost reduction but to gain knowledge and
external skills as well (Hätönen & Eriksson, 2009). Strategic outsourcing emerged
as a key concept and the companies started to outsource even more strategic
important processes which resulted in building long term relationships with the
suppliers. During the last decade outsourcing has become a tradition and
globalization has made the boundaries of organizations indistinct. So, these
developments led to barrier less organization era. Transformational outsourcing has
replaced the previous strategic outsourcing and now the focus is to transform an
organization to be more flexible and to gain competitive edge by cooperating and
collaborating with the suppliers to become knowledge intensive organization
(Hätönen & Eriksson, 2009).
The above paragraph illustrated how outsourcing evolved but it is always uncertain
to predict about the future. In this paragraph discussion will be about in what
possible ways outsourcing can evolve and the future trends of outsourcing. Figure 2
illustrates the summary of historical evolution of outsourcing and gives an idea
about 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 in
decision making. Secondly, no new theory has emerged so far which can replace
the previous outsourcing theories but in future portfolio management is one of the
research areas which will be included in outsourcing theories as the companies
currently are facing lots of troubles to manage the ever increasing outsourcing

7
vendor/suppliers portfolios. Apart from that in future the trend will move towards
analyzing the impact of offshore outsourcing on global economies and how they
are shaoing organizations into more flexible entities Hätönen & Eriksson, (2009).
Now after understanding outsourcing from historical and future point of view it is
time to focus on supplier selection criteria which is one of the most key areas of
outsourcing.
2.4 SUPPLIERS SELECTION CRITERIA’S
Selecting a particular supplier is one of the most important parts of the outsourcing
process. It depends on the number of factors which must be taken into account
before finalizing the decision. This selection process and criteria has gained
strategic importance over the years and a lot of research has been going around in
evaluating and selecting the best possible supplier/vendor. Different scholars have
used different selection criteria’s and vendor evaluation methods over the years.
According to Dickson, (1966) there are three most important criteria’s for selecting
a supplier; cost, quality and delivery performance. Cardozo and Cagley (1971)
termed the relative importance of a vendor in selection process to the risk involved
in purchasing process. Although these studies were applicable for a certain period
of time, but as the organizations began to expand eventually the number of supplier
network also became complicated so the industries required a new and different
approach. Ellram & Lisa (1990) as a result of the case studies conducted with
different industries identified various important issues related to supplier selection
and they were grouped into four categories. The detailed categories are mentioned
in Table 2.
Table 3. Supplier Evaluation and Selection Criteria’s (Ellram, 1990).
Category Supplier Selection Criteria’s
Financial Issues Economic performance
Financial stability
Organizational
culture & Strategy
Issues
Trust
Management attitude
Strategic fit
Top management
Compatibility
Organization structure of supplier
Technology Issues Assessment of current manufacturing capabilities.
Assessment of future manufacturing capabilities.
Suppliers design capabilities.
Supplier’s development speed.
Other Issues Safety record of supplier
Business references.
Supplier’s customer’s base.

8
Although this was a major step forward in terms of supplier selection criteria’s but
previous work by Dickson was not rejected by this theory but in fact this theory
was more focused on how to build a long term relationship with supplier by finding
unique characteristics. Similarly Weber, (1991) ranked the three important
criteria’s for supplier selection:
1. Quality.
2. Delivery performance.
3. Cost.
Although there are lots of approaches in selecting a supplier written by various
scholars but it is impossible to choose which one is the best as they cannot be
evaluated as right or wrong. Every theory is applicable in some specific scenario
and it’s up to the decision maker which theory to use for the best purpose. The
literature review of the different supplier selection criteria’s mentioned above just
form the basis for the analytical vendor evaluation models which will be discussed
in the below paragraphs.
According to Talluri & Narasimhan, (2003) analytical models for evaluating
suppliers range from simple weighted techniques to various programming models
focusing on mathematical concepts. Various models according to different
researchers 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 this
paper will try to avoid exploring all of these models in detail. The trend is moving
towards multiple attribute theories and for that purpose MAUT (Multiple attribute
utility theory) will be discussed in detail in the coming chapter and how it can be
used in supplier selection criteria mentioned here.

9
3 INTRODUCTION TO MAUT (MULTIPLE ATTRIBUTE
UTILITY 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 single
step is taken after answering several questions.
Where should a new assembly plant, shopping center, power production
house, 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 alternatives
which have certain strengths as well as weaknesses with respect to several
objectives that are of interest to the one who makes the decision. Then comes the
question 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, practically
SWOT Analysis becomes a mandatory study during the decision making process.
Since this particular theory under consideration is significantly influenced by
factors that form various preferences for individuals, and these preferences result
from 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 importance
when scores are from a common dimensionless scale. MAUT models rely on
weighting criteria and creating utility functions across the levels of each criterion.
The Multiple Attribute Utility Theory (MAUT) is method that is especially
designed to handle and control various tradeoffs that exist among different
objectives. Several factors are considered when applying MAUT, according to
Halpern, 2006 preparing a MAUT Decision-making Worksheet should include
1. Frame the Decision. Make a precise statement of the problem that will help to
narrow it.
2. Generate Alternatives. Think of all the possible alternatives that could solve the
problem. 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 the
considerations; you may wish to seek additional input from others.

10
4. Weight the Considerations. Give each consideration an importance score that
reflects its relative importance to you. Use a 5-point scale ranging from 1 = of
slight importance to me and 5 = of great importance to me.
5. Weight the Alternatives. Take the alternatives one at a time. For each
alternative, decide how well it satisfies each consideration. Rate the alternative
on each consideration, using a scale of -2, -1, 0, +1, +2. Positive numbers
indicate the alternative is favorable or compatible
6. Calculate the Decision. Multiply the assigned weight for each consideration (1
to 5) by the satisfaction weighting for the alternative (-2 to +2).
(Helpern, 2006)
Furthermore, we can define the overall evaluation according to MAUT for an
object as a weighted estimation/evaluation according to certain value dimensions
that are specific for the object category. There should be a common denominator
for all the dimensions; this is the utility which an evaluator uses. Take for instance
a digital camcorder; the value dimensions that would most probably used for
evaluating 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 an
individual for an object or a service. What basically done is that rescaling of
numerical value(s) on a certain measure of interest is made where ‘0’ represents
worst preference(s) and ’1’ represents best preferences. The most outstanding
feature of MAUT is that it allows the evaluator to make direct comparison of
several miscellaneous measures. In other words, if proper tools are used, one can
actually compare oranges to apples. In the end, a rank order evaluation of different
alternatives is obtained as a result. This result reflects the preferences of the
decision maker.
3.2 PRACTICAL EXAMPLES-THEORETICAL & NUMERICAL
Estimation of an individual’s or a group’s interests holds great significance
especially in recommender systems. The primary quoted reason for this is
importance of interests that form the basis of system’s recommendations. One may
find several approaches for evaluating the interests of user(s) in user modeling, and
one such approach is to assign the use of MAUT. Some theoretical and numerical
examples in this section will try to answer the following questions related to
Multiple Attribute Utility Theory:

11
Can one use MAUT as common denominator?
Can an evaluator possibly define rules to describe how to apply MAUT for
estimating the user’s interests?
3.2.1 Evaluation of a Simple Electronic Product-A Digital Camera
A digital camera will most likely be evaluated on the basis of mega pixels (Image
quality), flash, operating time, viewfinder and camera handling. Considering that a
Camera to be compared with respect to multiple attributes as mentioned previously,
these values for preferences are from two different persons (A = Studio
photographer, B = Landscape Photographer) After the calculation of the utilities of
all the mentioned preferences, the MAUT table for the cameras with hypothetical
values would look like this.
Table 5. MAUT table for a hypothetical camera.
Dimensions Preferences (A) Preferences (B)
Image Quality 0.4 0.8
Flash 0.04 0.00
Operating time 0.4 0.05
View Finder 0.1 0.1
Handling 0.06 0.05
As it can be clearly seen from the above example that despite being the same
product, the preferences vary from individual to individual based on the objective
of interest.
3.2.2 Multiple Objectives-An Example
Considering the issue related to deciding the treatment for an esophageal cancer
patient. A doctor can schematically model the problem as follows.

12
Figure 3. Schematic presentation of esophageal cancer patient problem (Renooij,
2009).
As seen in the schematic diagram, whenever there is a problem related to decision
making related to multiple objectives is present that are captured by
several/multiple attributes, the end results or the consequences are somewhat
complicated, as seen in the consequence matrix above.
3.2.3 Another Example Using MAUT
Take for instance a city plans to build a new power generation station. The
authorities have 4 sites in mind for the new project. The preferences of the decision
makers are to minimize the costs and overheads associated with the construction of
the station and not to exceed space constrictions beyond their financial and
environmental limits. With these preferences upfront, following factors will
influence the objectives; type of land at different locations, Construction Company
and architects to be hired, material and machine costs, weather and so on. Let’s say
the estimated cost fall in a range of 15 million and 60 million Euros, between land
of 200 and 600 acres.
So, in this case the consequences related to decision alternatives are reflected by 2
attributes, costs and acres of land. In order to evaluate this, the evaluator needs to
determine a 2-attribute utility function:
U(Cost, Acres)
Since the main objectives are to minimize the costs and acres of land, the worst
consequence utility function will look like: (60, 600) with a utility of 0.
Comparatively, the best consequence with Utility 1 will be (15, 200).

13
Figure 4. Utility (Cost, Acres).
This chapter focused on the theoretical concepts of MAUT with some practical
examples as well. The idea of this chapter is to lay a solid foundation about MAUT
for the next chapter in which MAUT theoretical concepts will be used to evaluate
and select a particular supplier.

14
4 UTILIZATION OF MAUT IN SUPPLIER SELECTION
4.1 POSSIBLE SELECTION CRITERIA APPLICABLE
The selection of suppliers abroad is a rather complex and important process that
may have long lasting effects on the outsourcer’s performance. If the selection is
not made properly, some of the possible outcomes would be:
Transport delays
Decreasing product quality
Increased material costs
Production bottlenecks…etc.
These are just a few examples of the difficulties that a firm may encounter. In
today’s world, there are lots of choices for a firm in terms of suppliers to outsource
either a product or a service. Therefore, correct evaluation of the suppliers and a
proper selection is a crucial part. According to Min (1994), there are three different
hierarchical levels within a firm that values certain criteria more than others. These
levels 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 all
levels:
Financial Terms
Quality Assurance
Perceived Risks
Service Performance
Buyer-Supplier Partnerships
Cultural and Communication Barriers
Trade Restrictions (Min, 1994).
First; financial terms is rather a quantitative criteria which is reasonably easier to
measure when compared to other qualitative items. The main attributes related with
this group would be cost, payment terms and freight terms. As a rule of thumb
firms would tend to choose lower price suppliers that give more favorable payment
terms as well as handling the freight with insurance.
Second; quality assurance is somehow more of a quantitative method. It tries to
measure how strict the supplier is with the quality of the products or services that
they are offering. Obviously it is more preferable for the outsourcer to choose the
firm that assures a higher quality on the products that they are supplying.

15
Third; 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 it
hard to evaluate as well as dependent on the evaluating person. To give a few
examples 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 that
puts great pressure on the suppliers. Technical assistance defines the after purchase
services offered by the supplier to the outsourcer.
Fifth; buyer-supplier partnerships are something very important for the health of
procurement. Since the mid 1980s organizations have started developing strategic
partnerships with their suppliers. Higher the level of partnership, the more valuable
it would be for the selection.
Sixth; cultural and communication barriers is still an important thing that has to be
considered by the selecting firm. Best explanation consists of a Finnish firm and a
Spanish firm that have very distinct organizational culture in terms of doing
business. Finns prefer a more direct approach whereas Spaniards tend to develop a
social and emotional link before getting down to business.
As a final aspect, trade restrictions are factors that have a big effect on the supplier
selection process. Tariffs and customs duties are something that sometimes may be
a huge burden for importing firms as well as the exporting ones (Min, 1994).
4.2 AN EXAMPLE OF SUPPLIER SELECTION USING MAUT
Multiple Attribute Utility Theory enables users to decide on which supplier is more
suitable or favorable for them in terms of some certain criteria, mostly described
above. First thing that should be done is deciding on the weights of these attributes
so that user knows what is more important than the others. Min (1994), suggests a
practical table for the attributes of a supplier with their weights for a certain firm:
Table 6. Weighted Attribute Table (Min 1994).
Attribute Weight
Quality Control 15.0
On-time delivery 13.9
Quality team visits 8.6
Tariffs and customs duties 7.7
Cost 7.3
Payment Terms 6.2
Freight Terms 6.1

16
Financial Stability 5.5
Foreign Exchange Rate 4.9
Countertrade 4.1
Labour disputes 3.5
Technical assistance 3.5
Local price control 3.2
Political stability 2.4
Negotiability 2.4
EDI capability 2.1
Legal claims 1.8
Ethical standards 1.0
Cultural similarity 0.8
Total 100
Table 6 shows the distribution of the importance of the supplier’s criteria. It
basically reflects what is valued more on the outsourcer’s side. For example, in this
case on-time delivery is valued more than cost. Hence it can be easily said that a
supplier who offers a better on time delivery will be working with the firm most
likely.
After determining the weights of each attribute, all the decider has to do is give a
grade out of a number (5, 10, 100…etc.) to these attributes individually that would
tell them which firm is more beneficial for them to work with. As mentioned before
the algorithm behind is multiplying each grade with its corresponding weight and
summing these up to a final grade of the supplier. Table 7 below shows the
comparison of two different suppliers with the weights taken from Table 6.
Table 7. Comparison of two supplier using MAUT
Attribute Weight Supplier A Supplier B
Quality Control 15.0 8 7
On-time delivery 13.9 6 6
Quality team visits 8.6 7 6
Tariffs and customs
duties
7.7 3 5
Cost 7.3 7 6
Payment Terms 6.2 4 5
Freight Terms 6.1 3 7
Financial Stability 5.5 5 5
Foreign Exchange
Rate
4.9 7 5
Countertrade 4.1 9 6
Labour disputes 3.5 8 6
Technical
assistance
3.5 7 10
Local price control 3.2 6 7
Political stability 2.4 5 5
Negotiability 2.4 3 8
EDI capability 2.1 8 6

17
Legal claims 1.8 9 6
Ethical standards 1.0 5 7
Cultural similarity 0.8 3 5
Total 100 0.6109 0.6166
According to the Table 7 supplier B is a more favorable choice for this firm since it
scored 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 while
determining the grades. In addition, this comparison may be spread to as many
suppliers as required. Furthermore, to make the comparison more detailed one can
increase the grading scale from 1-10 to 1-100 or even more.

18
5 CONCLUSIONS
Nowadays companies are focusing on their core competencies which means that
they manufacture those things which they consider important and rest of them they
tend to buy from external resources. This concept led to outsourcing phenomenon
which is quiet common in industries these days. One of the most important aspects
of outsourcing is to evaluate and select the appropriate supplier. But due to
complexity of supply chains and logistics networks this evaluation and selection
criteria has become very difficult. Number of theories has been proposed by
various authors and researchers for the evaluation and selection criteria. Multiple
criteria/attributes really focus on adapting to the needs of the company and finding
the right supplier as per requirements.
The objective of this paper was to analyze the applicability of Multiple Attribute
Utility Theory (MAUT) to evaluate supplier criteria and choosing most adequate
supplier for a business in its supply chain. Multiple Attribute Utility Theory
(MAUT) is a powerful tool to evaluate suppliers and choose which supplier is more
favorable compared to others. Decision makers should make their weighted
attribute tables properly and update them regularly due to changing trends. In this
paper the definition of outsourcing and a brief introduction to MAUT is made
followed by a detailed study of MAUT applied to supplier selection. Staying
shallow in terms of mathematical equations, the main logic behind MAUT is
explained and an example is given.
Based on this research further study could be carried with more complex
algorithms that can give more precise results while choosing the better supplier.
However the actual selection may differ from the results of MAUT in some certain
situations. As mentioned before it is just a helpful tool to make the decision making
process of purchasing managers easier.

19
REFERENCES
Higuchi, Troutt, T. Marvin. (2008), Life Cycle Management in Supply Chains:
Emerging Technologies and Techniques, IGI Global Hershey, PA, USA,
Pages: 362.
Rogers, Stephen C. (2009) Supply-Based Advantage: How to Link Suppliers to
Your Organization's Corporate Strategy, AMACOM Books, Saranac Lake,
NY, USA, Pages: 369.
Teng, J., Cheon, J., Grover, V. (1995), "Decisions to outsource information
systems functions: testing a strategy-theoretic discrepancy model",
Decision Sciences, Vol. 26 No.1, pp.75-103.
Bhatnagar & Ashish (2009), Textbook of Supply Chain Management, Global
Media Lucknow, IND, Pages: 195.
Tamer Bolat, Özgür Yilmaz, (2009) "The relationship between outsourcing and
organizational performance: Is it myth or reality for the hotel sector?",
International Journal of Contemporary Hospitality Management, Vol. 21
Iss: 1, pp.7 – 23.
Ellram, L., Billington, C., (2001). Purchasing leverage considerations in the
outsourcing decision. European Journal of Purchasing & Supply
Management 7 (1), 15–27.
Kraker, F. (1995), in Brian Roherty and Ian Robertson (Eds),The Truth About
Outsourcing, Gower,, Aldershot, .
Neale P. (1995), "The truth about outsourcing", Brian Roherty and Ian Robertson,
Gower, Aldershot, .
F. Franceschini, M. Galetto, A. Pignatelli, M. Varetto, (2003) "Outsourcing:
guidelines for a structured approach", Benchmarking: An International
Journal, Vol. 10 Iss: 3, pp.246 – 260
Hätönen & Eriksson, (2009), 30+ years of research and practice of outsourcing –
Exploring the past and anticipating the future. Journal of International
Management Vol. 15 pp.142–155
Kakabadse, A., Kakabadse, N., (2002). Trends in outsourcing: contrasting USA and
Europe. European Management Journal 20 (2), 189–198.
Dickson, (1966), An analysis of vendor selection systems and decisions, Journal of
Purchasing, (2), pp. 28–41.
Cardozo and Cagley, (1971), Experimental study of industrial buyer behavior,
Journal of Marketing Research, 8 (1971), pp. 329–334.
Ellram, Lisa (1990). "The Supplier Selection Decision in Strategic Partnerships".
Journal of Purchasing and Materials Management. pp. 8-14.
Weber et al., (1991), Vendor selection criteria and methods, European Journal of
Operational Research, 50 (1), pp. 2–18.

20
Talluri. S, Narasimhan. R, (2003), Vendor evaluation with performance variability:
A max–min approach, European Journal of Operational Research, Volume
146, Issue 3, 1, Pages 543-552,
Bosworth, K., P. M. Gingiss, et al. (1999). "A Bayesian model to predict the
success of the implementation of health and education innovations in
school-centered programs." Evaluation and Program Planning 22(1): 1-11.
Halpern, B. S., H. M. Regan, et al. (2006) “Accounting for uncertainty in marine
reserve design”. Ecology Letters 9(1): 2-11.
Dr. Silja Renooij, 2009 “ Multi-Attribute Utility Theory, Very Superficial in Text”,
Multiple Objectives- An Example
http://www.cs.uu.nl/docs/vakken/bk/slides-3.pdf. /Retreived 6th April
2012.
Min, H. (1994). International supplier selection: A multi-attribute utility approach.
International Journal of Physical Distribution & Logistics Management, 24(5),
24.

OUTSOURCING AND SUPPLIER SELECTION BY USING MULTIPLE ATTRIBUTE UTILITY THEORY.

More Related Content

What's hot

Viewers also liked

Similar to OUTSOURCING AND SUPPLIER SELECTION BY USING MULTIPLE ATTRIBUTE UTILITY THEORY.

Recently uploaded

OUTSOURCING AND SUPPLIER SELECTION BY USING MULTIPLE ATTRIBUTE UTILITY THEORY.