Embed Size (px)
Citation preview
2009:050 CIV
M A S T E R ' S T H E S I S
A Model for Supplier Selection& Total Cost of Purchasing
Henrik Olsson
Luleå University of Technology
MSc Programmes in Engineering Industrial Business Administration
Department of Business Administration and Social SciencesDivision of Industrial Logistics
2009:050 CIV - ISSN: 1402-1617 - ISRN: LTU-EX--09/050--SE
LULEÅ UNIVERSITY OF TECHNOLOGY
A model for Supplier Selection & Total Cost of
Purchasing A case study at Emhart Glass Sweden
Henrik Olsson
23 January 2009
MASTER’S PROGRAMME
Industrial Engineering and Management
Department of Business Administration and Social Sciences
Division of Industrial logistics
Preface This thesis is the last assignment of my education at Luleå University of Technology leading to a
Master’s degree in Industrial engineering and management. The subject of the thesis and the range
of the problem embraced my interest in logistics and purchasing. I believe the knowledge of strategic
purchasing and the focus on total cost is valuable for future opportunities, both for me and for
Emhart Glass.
The winter semester at Emhart Glass entailed contacts within the entire organization. I would
thereby like to thank those who provided me with information and ideas during this work. I would
especially like to express gratitude towards my mentor at Emhart Glass, Ann-Charlotte Gustafsson
and the manager of the purchasing department, Håkan Nilsson, for all their support. I would also like
to take this opportunity to thank my mentor at the university, Anders Segerstedt.
Sundsvall,
22 January 2009
Henrik Olsson
Abstract The role of purchasing and its importance within organizations has grown during the past decades
along with the development of strategic purchasing. In the financial area, science has also tended to
focus on strategy, which has resulted in drawbacks when exploring the complexity of financial
measurement systems.
The purchasing department at Emhart Glass Sweden strives towards more strategic assignments and
more value adding activities. One part of this development is to focus on the total cost of purchasing
to show what aspects and how these aspects influences the total cost of purchasing. In the current
purchasing situation at Emhart Glass, the purchaser generally selects the supplier that offers the
lowest price mainly because it is hard to motivate another decision. Thereby, the purpose is to create
a model that calculates the total cost of purchasing from the best available supplier. The total cost
perspective aims to take focus away from price and to motivate strategic decision-making
conforming to the corporate mission. The delimitations were to keep the present sourcing strategy
with single sourcing and to use existing data from the present supplier base.
After studying financial literature, including activity-based costing and total cost of ownership as well
as science related to strategic purchasing and supplier selection problems the literature was
complemented with interviews and a questionnaire. This resulted in a suggested total cost model in
two parts. The first part uses the analytical hierarchy process for evaluation and selection of the best
supplier. The foundation of the process is pair wise comparisons between the main criterion of
quality, delivery, agility, environmental performance and its sub-criterion. The latter part is
calculation of the total cost of purchasing including the estimated costs of poor quality and inventory
costs.
The total cost model was tested on three sets of suppliers for separate commodities. The results
showed that agility is by far the most valued supplier feature and reflects the present characteristics
of Emhart Glass’ business. The process for supplier selection was easily conducted with decision-
making software ExpertChoice and the resulting charts provided possibilities to observe strengths
and weaknesses among the evaluated suppliers. The result from the calculations of the total cost of
purchasing was difficult to relate to since the total purchasing price differed among the suppliers.
Therefore, an indicator was calculated which shows the relationship between the purchasing price
and the other elements in the model.
By implementing the suggested model for supplier selection and calculation of the total cost of
purchasing, the purchaser can motivate the selection of a certain supplier based on the criteria in the
analytical hierarchy process. The total cost of purchasing motivates the selection further and takes
focus away from price and towards total cost.
Emhart Glass is recommended to use the analytical hierarchy process to form a future purchasing
strategy. By weighting the criteria in the analytical hierarchy process at different departments, the
strategy can be based on the expectations of all internal customers. Finally, the new indicator is
preferably implemented as a KPI in addition to purchasing price variance. The indicator evaluates the
purchasing department and the relationship between the supplier and Emhart Glass Sweden.
Sammanfattning Inköpsfunktionens roll har blivit allt viktigare inom moderna organisationer och dess aktiviteter
tenderar att bli allt mer strategiskt inriktade. Samtidigt har forskningen inom redovisning följt samma
väg vilket varit till nackdel för forskning om komplexa finansiella mätsystem.
Inköpsavdelningen på Emhart Glass Sweden strävar mot mer strategiska uppgifter och mer
värdeskapande aktiviteter. En del i denna utveckling är att fokusera på den totala kostnaden för
inköp. Genom att visa vilka faktorer, samt hur dessa faktorer påverkar den totala inköpskostnaden
kan beslut rörande leverantörsval göras utifrån detta. I dagsläget fattas beslutet på Emhart Glass
generellt sett genom att den leverantör som är villig att leverera till lägst pris väljs. Anledning är att
det är svårt för inköparen att motivera ett annorlunda beslut. Med detta som grund är syftet att
skapa en modell som beräknar den totala inköpskostnaden av inköp från den bästa tillgängliga
leverantören. Genom att fokusera på totalkostnad snarare än pris kan beslutsfattandet göras mer
strategiskt och i enlighet med företagets mission. Förutsättningarna är att behålla single-sourcing och
att använda data från befintlig leverantörsbas.
Litteraturstudier av finansiella teorier, som activity based costing och total cost of ownership, samt
studier av forskning inom strategiskt inköp och problemställningar för leverantörsval har genomförts.
Litteraturstudierna har kompletterats med intervjuer och frågeformulär. Detta har resulterat i ett
förslag till totalkostnadsmodell uppdelad i två delar. Den första delen använder analytical hierarchy
process för att utvärdera och välja den bästa leverantören. Processen baseras på parvis jämförelser
mellan huvudkategorierna kvalitet, leverans, totalflexibilitet, miljöprestanda och dess
underkategorier. Den andra delen består av beräkningar av kostnader som innefattas av
kvalitetsbristkostnader och lagerhållningskostnader.
Totalkostnadsmodellen är testad på tre uppsättningar leverantörer från skilda produktgrupper.
Resultatet visar att totalflexibilitet är den mest värdefulla egenskapen hos en leverantör vilket
speglar verksamheten på Emhart Glass i dagsläget. Processen för leverantörsval var enkel att
genomföra med programvaran ExpertChoice. Programmet generade grafer över resultaten där de
utvärderade leverantörernas styrkor och svagheter kunde jämföras. Resultaten från
totalkostnadsberäkningarna var svårrelaterade eftersom det totala inköpspriset skiljer sig åt mellan
leverantörerna. Därför beräknades en indikator som visar relationen mellan inköpspris och övriga
kostnader i modellen.
Genom att implementera den föreslagna modellen för leverantörsval och total inköpskostnad kan
inköparen basera beslutet om leverantör utifrån faktorerna i analytical hierarchy process. Den totala
inköpskostnaden motiverar valet ytterligare och för fokus från pris till totalkostnad.
Emhart Glass rekommenderas att använda analytical hierarchy process till att forma sin framtida
inköpsstrategi. Genom att faktorerna viktas på olika avdelningar inom organisationen kan strategin
baseras på förväntningar från samtliga interna kunder. Slutligen föreslås att den nya indikatorn
implementeras som en KPI för att utvärdera inköpsavdelningens arbete och relationen mellan
leverantör och Emhart Glass Sweden.
Table of Contents
1 Introduction ..................................................................................................................................... 1
1.1 Problem background ............................................................................................................... 1
1.2 Research problem ................................................................................................................... 2
1.3 Purpose .................................................................................................................................... 2
1.4 Delimitations ........................................................................................................................... 2
2 Emhart Glass .................................................................................................................................... 3
2.1 History ..................................................................................................................................... 3
2.2 The product ............................................................................................................................. 4
3 Frame of reference .......................................................................................................................... 7
3.1 Managing costs ........................................................................................................................ 7
3.1.1 Activity based costing ...................................................................................................... 7
3.1.2 Total cost of ownership ................................................................................................... 8
3.2 The role of purchasing ............................................................................................................. 9
3.2.1 Strategic purchasing ...................................................................................................... 10
3.2.2 Strategic purchasing and supply chain management .................................................... 11
3.3 Methods for evaluation and selection of suppliers ............................................................... 14
3.3.1 Evaluating environmental performance........................................................................ 17
3.3.2 Selection criteria ............................................................................................................ 18
3.3.3 The analytical hierarchy process ................................................................................... 19
4 Methodology & Tools .................................................................................................................... 25
4.1 Course of action .................................................................................................................... 25
4.2 Tools ...................................................................................................................................... 26
4.2.1 Interviews ...................................................................................................................... 26
4.2.2 Questionnaire ................................................................................................................ 26
4.2.3 Analytical hierarchy process .......................................................................................... 26
5 Present situation & problems........................................................................................................ 27
5.1 Production and purchasing ................................................................................................... 27
5.2 Sales & planning .................................................................................................................... 29
5.3 Evaluation .............................................................................................................................. 30
5.3.1 Evaluation of the purchasing department .................................................................... 30
5.3.2 Evaluation of suppliers .................................................................................................. 30
6 A suggested total cost model ........................................................................................................ 35
6.1 The AHP ................................................................................................................................. 35
6.1.1 Selection criteria ............................................................................................................ 35
6.1.2 The weighted AHP ......................................................................................................... 38
6.1.3 Selecting a supplier ........................................................................................................ 39
6.2 Calculating the total cost of purchasing ................................................................................ 40
7 Conclusions .................................................................................................................................... 43
7.1 The AHP ................................................................................................................................. 43
7.2 Conclusions from the TCP...................................................................................................... 43
7.3 Final conclusions .................................................................................................................... 43
8 Discussion & Suggestions for further studies ................................................................................ 45
8.1 The AHP ................................................................................................................................. 45
8.2 The total cost of purchasing .................................................................................................. 45
8.3 Suggestions for further studies ............................................................................................. 46
9 Bibliography ................................................................................................................................... 47
List of abbreviations
ABC Activity Based Costing
AHP Analytical Hierarchy Process
BPCS Business Planning and Control System (ERP system)
CPI Cost Performance Indicator
EMS Environmental Management System
MRB Material Review Board
OTD On Time Delivery
PPV Purchasing Price Variance
SCM Supply Chain Management TCO Total Cost of Ownership
TCP Total Cost of Purchasing
TVP Total Value of Purchasing
TQ Technical Quality
QFS Quality Feedback System
Supplier qualification status
UC Unqualified
CQ Conditionally Qualified
CQ-PI Conditionally Qualified – Phase In
CQ-PO Conditionally Qualified – Phase Out
Q Qualified
DQ Disqualified
1
1 Introduction This first chapter contains a presentation of the subject and a description of the problem. This is
followed by the purpose and delimitations of the thesis.
1.1 Problem background
“It is unwise to pay too much, as it is unwise to pay too little. When you pay too much, you lose a little
money, that’s all. When you pay to little, you sometimes lose everything, because the thing you
bought was incapable of doing the thing you bought it to do.
The common law of business balance prohibits paying little and getting a lot. If you deal with the
lowest bidder, it’s well to add something for the risk you run. And if you do that, you will have enough
to pay for something better.” (Anonymous, from van Weele, 2005, p. 84)
The quotation captures the basis of this thesis, the balance between spending the least amount of
money and yet achieving high quality products at the right time.
Traditionally, the general firm was divided into departments and each department’s performance
was evaluated separately. Accounting practices were developed to measure departmental
performance such as cost per unit for manufacturing. Cost measurement for cross-functional
activities, was generally limited to common costs such as overhead, labor, utilities and so on.
(Bowersox, Closs, & Cooper, 2007, p. 7) Financial performance indicators tend to focus on short-term
results. Tseng, Chiu & Chen (2009) show that several studies support the introduction of non-
financial indicators and claims that manufacturing capability, human resource management and
supply-chain relations provide a more relevant picture of performance. Bowersox, Closs & Cooper
(2007) state that it is no longer certain that functions, individually performed best in class generate
an effective process or low total cost. To be able to manage the total cost of the entire process
numerous theoretical methods, such as activity based costing, total cost analysis, process
engineering and total cost of ownership, have been developed that aiming to quantify different
aspects of this issue.
Cooperation with the right supplier is of extreme importance in keeping the total cost under control.
However, the problem is finding the right supplier. Ellram (1995) wrote that supplier selection and
supplier evaluation are closely related activities. The first aims to select a supplier for the right
reasons, the latter to maintain a relationship as partners in business over time and to help the
supplier identify opportunities for improvement. Nollet, Calvi, Audet & Côté (2008) state that
purchasing decisions could impact favorably on the actual financial result of other departments but it
is difficult to measure the specific impact of a decision on the bottom line. The mentioned authors
were surprised that despite its importance, few recent papers explored the complexity of financial
measurement systems. Instead a trend towards strategic management was seen. The change of
focus towards strategy also emerged in purchasing ((Martinsons, 2008);(Rodney, Denis, Henderson,
& Hazlett, 2008);(Lai, Gunasekaran, & Edwin Cheng, 2008)) and has raised the purchasing function to
a higher level in the organization. The development is natural since purchasing is the function
through which up to 80% of the organizations costs pass through. Additionally, continuous contact
with large numbers of suppliers offers the possibility of generating many more strategically
2
significant, cost-reducing innovations than any firm could hope to achieve from its internal resources
alone. (Ramsey & Croom, 2008)
Consequently, purchasing is no longer only a matter of acquiring goods and services but now involves
an engagement in the proactive management of supplier relations, seeking opportunities to add
value throughout the supply chain. Juran & Godfrey (1998) imply that value is the relative cost of
acquiring quality and that quality, or fitness for use, is assessed only on a thorough understanding of
the relevant customers and their needs. Therefore, the supply chain that manages to provide a given
level of quality at the lowest total cost of ownership generates most value.
1.2 Research problem
Emhart Glass is a supplier of equipment, controls and parts to the glass container industry. The
company is a contract manufacturer owned by Bucher Industries AG with headquarters in
Switzerland. All major sales activities are located at the headquarters and the purchasing function is
centralized and located in Sundsvall. The purchasing department works according to an annual
budget and is evaluated based on predetermined prices. This is a problem for the purchasing
department at Emhart Glass since the selection of supplier is based merely on lowest price. The
management at the purchasing department strives towards a strategic position within the company
where more aspects than price are taken into consideration. This is also a way to adapt to the newly
introduced line assembly which makes quality, flexibility and delivery dependability more important.
One step towards strategic purchasing is to show that the role of purchasing includes more
responsibilities than merely buying. According to Yeung (2008) the purchasing activities should be
considered as a strategic part of the supply chain. This is not the case in the present situation where
a major part of the working day is spent tracing goods and pushing suppliers to deliver fast.
1.3 Purpose
The purpose of this thesis was to create a model that calculates the total cost of buying direct
material from the best available supplier. The model should be able to evaluate the presumptive
suppliers and to calculate the total cost of purchasing. By evaluating suppliers from a total cost
perspective, the intention is to take focus away from price and to motivate strategic decision-making
conforming to the corporate mission.
In order to make the model useful the number of aspects for selection and cost calculation is a
balance between the amount of evaluation criteria and usability.
1.4 Delimitations
The model assumes single sourcing where a single supplier provides each product. Single sourcing is
the present sourcing strategy and Emhart Glass does not intend to change this strategy. The
calculations are based on available data which delimits the calculations to suppliers already
established as business partners. This however does not prevent the model being applied to new
products as long as a registered supplier provides the product. The model has not been implemented
during the timeframe of this thesis since implementation requires investments in decision-making
software or mathematical programming.
3
2 Emhart Glass In this second chapter the development of Emhart Glass is described followed by a presentation of the
product manufactured in Sundsvall.
Emhart Glass is the world leading international supplier of equipment, controls and parts to glass
container industry. With broad-based expertise in glass container forming, glass conditioning, gob
forming, ware handling, cold end inspection, refractory parts and quality assurance, the company's
machines and systems are established and considered as standard products worldwide. Emhart Glass
also provides installation, training, production assistance, and maintenance related services and has
facilities in America, Europe and Asia. (Our company: Emhartglass)
The company has changed and developed throughout the over 250 years of business and has now
emerged to hold about 40 % of the world market of glass forming machines. (Emhart Glass Sweden
AB, 2006) The facility in Sundsvall employs about 350 people whereof twelve in the purchasing
department.
2.1 History
This chapter is retrieved from the 250-year anniversary book of Emhart Glass Sweden. (Emhart Glass
Sweden AB, 2006)
The business in Sundsvall started 1756 with Linderbergs Klockgjuteri, a foundry manufacturing
church bells and chandeliers. During the years, Linderbergs verkstäder produced various products
such as bolts, nails, brass products and fire pumps. The end of this era came after the great fire that
ruined most of Sundsvall in 1888.
As the industrialism conquered Europe, N.P Linderbergs Metallfabriks Aktiebolag was founded in
1894. Among the products where details for electric fittings, equipment for water, gas and steam,
bells, fittings for wagons and trains, clothes hangers, fire pumps and chandeliers.
In 1904, the company was sold to Aktiebolaget Sundsvalls förenade verkstäder (SFV) due to
economic difficulties. Initially, SFV mainly produced machines for sawmills and the pulp industry.
During the 1940s, the most profitable products were hydraulic products such as pumps and presses.
In 1952 the Emhart Manufacturing Company, situated in the USA with roots from 1912, bought the
Swedish company. The Hartford-Fairmont Company was united with Empire Machine Company to
become the Hartford-Empire Company in 1922. In 1951, the name was changed to Emhart
Manufacturing Company where the “Em” came from Empire and “Hart” from Hartford. Since 1912
their business was glass container machines and now, in 1952, the brand was introduced on the
European market. In 1959, Örebro motorfabrik was purchased and the production of hydraulic
products continued until 1969 when total focus on glass container machines became necessary.
The glass industry business continued to develop and in 1989 Black & Decker took over ownership of
the Emhart Corporation. The business was restructured in 1994 and Emhart Sweden AB was created
bringing together the plants in Sundsvall and Örebro. In 1998, the Bucher Group purchased the entire
Emhart Glass Group and the two Swedish facilities formed Emhart Glass Sweden AB.
2.2 The products
The glass container manufacturing process
Figure 2-1, gob forming, forming machine, ware handling and inspection
provides gob forming and forming machine
Figure 2-1 Glass container manufacturing process
The machines are built in sections
machines, Individual section (IS) and New
mechanism for blowing the container
controlled by servomotors. Figure
and produces over 1 million containers a day.
Figure 2-2 10-section IS Machine & conveyer
4
The glass container manufacturing process provided by Emhart Glass includes the red sections in
, gob forming, forming machine, ware handling and inspection. Emhart Glass Sweden
gob forming and forming machine, Figure 2-2.
Glass container manufacturing process
The machines are built in sections, each section on an individual frame. There are two basic
IS) and New Individual Section (NIS). The major difference is
mechanism for blowing the containers where IS uses air cylinders and the NIS is pneumatic and
Figure 2-2 illustrates an IS machine with 10 sections.
and produces over 1 million containers a day.
& conveyer
Weight:
Height:
With:
Length:
Items: Part numbers:
42,000 kg
4.1 m
3.5 m
6.7 m
46,2,
the red sections in
. Emhart Glass Sweden
There are two basic
difference is the
where IS uses air cylinders and the NIS is pneumatic and
It weighs 42,000 kg
000 kg
4.1 m
3.5 m
6.7 m
,000 ,000
In the process, melted glass comes from the furnace and
each section in the machine. In Figure
right shape and volume. The containers
and moved to the conveyer at the back of the machine.
Figure 2-3 Gobs placed into press
5
ss comes from the furnace and is molded into gobs that are separated to
Figure 2-3 gobs are placed in the press and are then blown to the
containers are lifted from the press and in Figure 2-
eyer at the back of the machine. Note the press with gobs
Figure 2-4 Bottles on conveyer
molded into gobs that are separated to
gobs are placed in the press and are then blown to the
4 they are cooled
with gobs at the rear.
6
7
3 Frame of reference Since this thesis aims to allocate total cost the theoretical framework the definition of cost and how
to manage costs in modern accounting first discussed. The role of purchasing and its relation to costs
is explained. Finally, some evaluation methods common in purchasing related science are presented.
3.1 Managing costs
The official terminology of the Chartered Institute of Management Accountants (1991) defines cost in
the following terms (Innes & Mitchell, 1993):
• (as a noun) The amount of expenditure (actual or notional) incurred on, or attributable to, a
specific thing or activity.
• (as a verb) To ascertain the cost of a specified thing or activity.
The definition defines that costs are related to things or activities. In order to allocate the total cost
of purchasing both things and activities, or material and immaterial aspects, ought to be considered.
3.1.1 Activity based costing
According to Kaplan and Cooper (1997) companies need cost systems to perform three primary
functions:
• Valuation of inventory and measurement of the cost of goods sold for financial reporting.
• Estimation of the costs of activities, products, services and customers.
• Providing economic feedback to managers and operators about process efficiency.
The first function aims to handle all of the organization’s external needs regarding investors,
regulators, tax authorities and so on. The second and third functions fulfill the needs of internal
management and contribute to understanding the internal operations. Internal operations have
become more important since the basis for competition shifted from efficient use of direct labor and
machines towards more accurate information about the cost of processes, products and customers
(Kaplan & Cooper, 1997). Activity based costing (ABC) suggests that costs should first be traced to
performed activities and then activities should be related to specific products or customer segments.
(Bowersox, Closs, & Cooper, 2007)
Drury (2000) writes that activities are related to many different tasks that can be described by verbs
associated with objects. Typical support activities include schedule production, set-up machines,
move material, purchase material, inspect items, process supplier records, expedite and process
customer orders. The activities are sometimes identical to cost centers used by traditional cost
systems. The second step is to allocate costs from cost centers to products or other chosen cost
objects. These objects are in ABC more related to non-volume based drivers such as the number of
production runs for production scheduling or the number of purchase orders for the purchasing
activity. ABC-systems can more accurately measure the resources consumed by cost objects since
they are based on a greater number of cost centers and cost drivers. Kaplan & Atkinson (1998) state
that ABC-systems establish a causal relationship between expenses and add a cause-and-effect
function that is a valuable source of information in inter-organizational decision situations. The
cause-and-effect function distinguishes the ABC-systems as more accurate since regular systems use
cost drivers where no cause-and-effect relationships exist. However, this can be discussed. Alnestig &
8
Segerstedt (1996) present that e.g. in Sweden since long a “proportionality theorem” has been
propagated for cost allocations. Their study of cost accounting in different companies shows that
traditional costing (in Sweden) resembles ABC, accurate costing systems may exist even if the users
do not call them ABC.
A relevant example of a cost driver is the administrative ordering cost, the costs for administrating an
order. According to Mattson (2004) the administrative ordering cost contains the cost for handling
suggested orders, selection of supplier, negotiation, registering and order planning, delivery control,
quantity and quality control and receiving activities.
3.1.2 Total cost of ownership
Total cost of ownership (TCO) can be seen as an application of ABC that quantifies the costs involved
in acquiring and using purchased goods or services, states Wouters, Anderson & Wynstra (2005).
Concerning purchasing they mean that TCO can be used by decision-makers since the method
quantifies both value and price. TCO is different from ABC systems since costs need to be captured at
a level that is more detailed. It might also facilitate companies dealing with pressure in their
customer markets and making the purchasing function more value oriented. According to Juran &
Godfrey (1998, p. 21.4) TCO is also known as life-cycle cost or total system cost noted as “the sum of
all costs associated with the acquisition, installation, operations, maintenance, and retirement of a
good or service”. Ellram (1995) divides TCO into two approaches:
• Dollar-based approach based on actual cost data for each relevant element. This makes the
result derived from this method easy to understand since it possible to trace it back to each
individual cost element. However, it can be complicated to know what elements to include.
One modification of this is ABC. The dollar-based approach is excellent for repetitive
decisions where costs for key factors can be determined.
• Value-based approach combines the actual cost data with qualitative data that makes the
value-based approach more complicated to understand. The qualitative data are
transformed into quantitative and requires explanations of each cost element. This approach
gives an approximation of the TCO based on the weights and points for each element. Ellram
denotes that the value-based approach tends to be complicated and is often limited to three
or four major cost issues.
The administrative ordering cost in the example above is a part of the total ordering cost. The
difference between ABC and TCO can be described by the total ordering cost which includes costs
not directly related to activities. Such costs are obsolescence and deterioration of inventory as well
as stockouts. Stockouts are shown as lost sales and lost customer goodwill (Viale, 1996). Another
ordering cost is lost capacity (for manufacturing companies). Lost capacity occurs as a cost if the
company is producing inventory and holding the machine busy instead of producing customer orders.
(MGI Management institute Inc., 1999)
Transaction costs
Ellram (1995) shows that TCO is closely related to transaction costs (TC) and denotes that TCO is a
development from TC in economics literature. Transaction specific investments may involve human
recourses that are costly to replace. In purchasing, those might be suppliers’ employees with special
knowledge and involvement in the supplier-buyer relationship. This is relevant to TCO in terms of
costs related to the actual relationship in terms of reduced costs for soliciting and evaluating bids
9
from numerous suppliers. It is also relevant when searching for and evaluating potential new
suppliers.
3.2 The role of purchasing
Modern purchasing has emerged from being considered a non value-added function towards being
recognized as a strategic function, an opportunity for process management and an improvement tool
for achieving competitive advantage. The most fundamental change is to base the decisions
regarding purchasing on a total process approach with the knowledge of TCO. The main differences
between the traditional and the strategic view of purchasing are presented in Table 3-1 (Juran &
Godfrey, 1998, p. 21.6).
Table 3-1 Traditional versus strategic view of the purchasing process (Juran & Godfrey, 1998, p. 21.6)
Aspect in the purchasing
process
Traditional view Strategic view
Supplier/buyer relationship Adversarial, competitive,
distrusting
Cooperative, partnership, based
on trust
Length of relationship Short term Long term, indefinite
Criteria for quality Conformance to specifications Fitness for use
Quality assurance Inspection upon receipt No incoming inspection necessary
Communications with
suppliers
Infrequent, formal, focus on
purchase orders, contracts,
legal issues
Frequent, focus on the exchange
of plans, ideas, and problem
solving opportunities
Inventory valuation An asset A liability
Supplier base Many suppliers, managed in
aggregate
Few suppliers, carefully selected
and managed
Interface between suppliers
and end users
Discouraged Required
Purchasing strategy Manage transactions, troubleshoot
Manage processes and relationships
Purchasing business plans Independent of end-user
organization business plans
Integrated with end-user
organization business plans
Geographic coverage of
suppliers
As required to facilitate
leverage
As required to facilitate problem
solving and continuous
improvement
Focus of Purchasing decisions Price Total cost of ownership
Key for Purchasing success Ability to negotiate Ability to identify opportunities
and collaborate on solutions
Another way of illustrating strategic thinking in the supply chain that occurred as a direct impact of
information technology is the change towards a responsive process. The traditional manufacturing
industry based their business on what the customer will demand in the future, see Figure 3-1.
Information concerning purchasing behavior was not readily available and firms were loosely linked
together. The typical manufacturer produced products based on forecasts and wholesalers,
distributors and retailers purchased upon their own unique forecasts. This usually ended up in
unplanned inventory and lead to a need to protect individual company interests, meaning the
relationships between business partners was adversarial. (Bowersox, Closs, & Cooper, 2007)
10
In the responsive business model (Figure 3-2) the forecast reliance is reduced or eliminated by joint
planning and rapid information exchange between business partners. When all members of the
supply chain synchronize their operations, opportunities exist to reduce overall inventory and
eliminate costly duplicate practices. There are fewer steps to complete in the responsive process,
which makes it faster and less costly. Possibilities occur for the customer to order customized
products and for the manufacturer to deliver specialized products manufactured in small
batches.(Bowersox, Closs, & Cooper, 2007)
Figure 3-1 Anticipatory business model (Bowersox, Closs, & Cooper, 2007, p. 11)
Figure 3-2 Responsive business model(Bowersox, Closs, & Cooper, 2007, p. 12)
3.2.1 Strategic purchasing
“The main failure of the purchasing function is its concentration on negotiation and market price, and
in emphasizing short-term opportunistic decision-making. Such an emphasis ignores a strategic
holistic approach to purchasing and falls well short of any long-range planning horizons.”(Davis,
1985)
Davis quoted the above in 1985 but there are still companies with this approach to purchasing. Van
Weele (2005, p. 232) divides purchasing into three levels of tasks, responsibilities and authority. This
is a way of locating the function in the organization and a way to raise the awareness of the present
approach.
• Operational level includes all activities related to the ordering and expediting functions such
as:
o Order release of already concluded agreements with suppliers.
o Solving daily-based problems of quality, supply and payment.
o Monitoring and evaluating supplier performance.
• Tactical level includes tasks that involve how the purchasing function affects product, process
and supplier selection. A decision on this level requires coordination and cooperation with
other functions in the company such as engineering, manufacturing, logistics and quality
assurance and has an impact on one to three years. Some of the responsibilities are to:
o Prepare and develop value analysis programs aimed at design review and product
standardization.
o It includes adopting and conducting certification programs for suppliers aiming to
improve the quality of incoming goods.
o It also encompasses selection and contracting of suppliers in general and reduction
of the supply base in particular.
ForecastBuy
components and materials
Manufacture Warehouse Sell Deliver
SellBuy
components and materials
Manufacture Deliver
11
• Strategic level includes long-term decisions that influence the future market position of the
company. Decisions on this level have a long-term strategic impact on purchasing and supply
functions and effect the company’s competitive position. It includes:
o Development of procedure and task description for the purchasing department.
o Develop programs for improvement of purchasing operations and performance.
o Decisions to make or buy/outsource.
o Establishing and maintaining contact and long-term contracts with
certified/preferred suppliers.
o Decisions on supplier strategy based on single/multiple sourcing.
o Major investment decisions (buildings, equipment, computers).
o Decisions to participate financially in supplier organizations to secure the future
supply of critical materials.
o Decisions related to policies on transfer-pricing, intercompany supplies, reciprocal
arrangements and barter deals.
A definition of strategic purchasing is:
“The process of planning, implementing, evaluating and controlling strategic and operating
purchasing decisions for directing all activities of the purchasing function toward opportunities
consistent with the firm’s capabilities to achieve its long term goals.” (Carr & Smeltzer, 1997)
3.2.2 Strategic purchasing and supply chain management
Moving purchasing towards the definition above the organization has to develop its capabilities with
regard to quality, delivery and price. However, in order to successfully develop long-term plans with
respect to these matters, associates from all functions such as design and production from more than
the managerial levels ought to be involved. Saunders (1997, p. 182) presents a few different
dimensions of capabilities that interact within supply chain management (SCM). Saunders denotes
that these are interrelated and a total strategic plan has to be developed. The dimensions are
strategic management of quality, material flow, cost and added value, supplier relationships and
human resources in the supply chain. Consider the correlation with Juran in Table 3-1.
Quality
Saunders (1997, p. 189) presents two meanings of quality related to purchasing. First, it involves
setting up specifications that establish the features of requirements that are desired. Second, there is
a need to ensure that the produced products and services have a high degree of conformance to the
specified requirements. The requirements do not only refer to the product but also include such
aspects as service and delivery time.
There is a trend in quality management involving a shift from methods of detecting quality problems
towards methods to prevent problems of quality. Based on quality programs with suppliers, quality is
assured at the source and no testing is necessary at the buyers’ location. Bergman & Klefsjö (2001, p.
64) write that the actual cost of quality is the lack of quality. It is more expensive to manufacture
defect products than to put effort into preventing faults. On this basis Bergman & Klefsjö (2001)
along with Harrington (1999) suggest a denotation from “cost of quality” to “cost of poor quality”. In
many companies, a considerable number of working hours are spent on the inspection of incoming
goods. Van Weele (2005, p. 193) implies that many companies have no idea about how much the
lack of quality is costing them. The main cost categories concerning total cost of quality are
illustrated in Table 3-2.
Table 3-2 Total cost of quality (Saunders, 1997)
Cost category Description
Appraisal costs Include costs of inspection processes Prevention costs Includes costs of personnel and the application of methods to prevent
problems occurring etc.
Failure costs – internal Costs of process
the problem right, etc.
Failure costs – external Warranty costs and loss of reputation
Material flow
Van Weele (2005, p. 207) makes a di
incoming flow covers all activities
point of consumption in the company itself and
products are distributed from the company to the customer. The incoming flow is commonly
denoted as materials management and has developed along with the strategic thinking. Some
companies not only optimize the flow from supplier and company but also between supplier and
their suppliers.
To understand the total logistics van Weele
• The impact of design, engineering and developme
determine the structure of the future product. The specifications can be of such detail that
only a few suppliers can
standardization is important to keep
• The production department influences the
effectiveness and efficiency of the flow of
materials. Production usually aims for high
utilization of its assets without disruptiona lack of material. To prevent this, the department
usually builds up stocks that even out fluctuations.
What actually happens is that the problems are
hidden under a high level of inventory. The boat is
floating unaware of the problems below.
the problems the water
lowered and the problems will be
• The sales organization must have the customer in focus. It is not beneficial to
sales promise a delivery time within the internal production lead
order. This will probably end up
leads to a situation where purchasing has to put extra press
ahead of time and often at considerable extra cost
In order to identify and respond to the demands of the customer the modern supply chain has to be
responsive, known as agile manufacturing.
their products to the market quickly.
12
(Saunders, 1997)
Description
Include costs of inspection processes – labor, equipment, training, etc.Includes costs of personnel and the application of methods to prevent
problems occurring etc.
Costs of processing faulty goods, rectification areas, delays, scrap, putting
the problem right, etc.
Warranty costs and loss of reputation and sales because of delays etc.
makes a distinction between the outgoing and incoming material flow. The
incoming flow covers all activities required to optimize the flow of material from suppliers to the
point of consumption in the company itself and, as follows, the outgoing flow is how finished
products are distributed from the company to the customer. The incoming flow is commonly
denoted as materials management and has developed along with the strategic thinking. Some
e flow from supplier and company but also between supplier and
To understand the total logistics van Weele (2005) denotes a few key areas in this matter
The impact of design, engineering and development is serious since these activities
determine the structure of the future product. The specifications can be of such detail that
can act as presumptive alternatives. During design, striving for
standardization is important to keep down the number of items.
The production department influences the
effectiveness and efficiency of the flow of
materials. Production usually aims for high
utilization of its assets without disruptions due to lack of material. To prevent this, the department
usually builds up stocks that even out fluctuations.
What actually happens is that the problems are
hidden under a high level of inventory. The boat is
floating unaware of the problems below. To find
level slowly has to be
and the problems will become visible.
Figure 3-3 The Japanese
river(Grebener, 2004)
The sales organization must have the customer in focus. It is not beneficial to
sales promise a delivery time within the internal production lead-time in order
order. This will probably end up with a rushed work in planning, purchasing and assembly
leads to a situation where purchasing has to put extra pressure on the suppliers to deliver
ten at considerable extra cost.
In order to identify and respond to the demands of the customer the modern supply chain has to be
responsive, known as agile manufacturing. The agile manufacturer can respond to changes and get
their products to the market quickly. One of the contributing factors to becoming
labor, equipment, training, etc. Includes costs of personnel and the application of methods to prevent
ing faulty goods, rectification areas, delays, scrap, putting
sales because of delays etc.
outgoing and incoming material flow. The
to optimize the flow of material from suppliers to the
as follows, the outgoing flow is how finished
products are distributed from the company to the customer. The incoming flow is commonly
denoted as materials management and has developed along with the strategic thinking. Some
e flow from supplier and company but also between supplier and
in this matter:
since these activities
determine the structure of the future product. The specifications can be of such detail that
. During design, striving for
The Japanese
(Grebener, 2004)
The sales organization must have the customer in focus. It is not beneficial to the customer if
time in order to land an
purchasing and assembly. It
ure on the suppliers to deliver
In order to identify and respond to the demands of the customer the modern supply chain has to be
The agile manufacturer can respond to changes and get
e contributing factors to becoming an agile
13
manufacturer is the ability to share information within all levels in the company, particularly where
small initial problems may have larger downstream effects. (Parkinson, 1999)
Cost and added value
According to Saunders (1997, p. 237) traditional buying practices have tended to focus on purchasing
price alone and managerial control systems have reinforced such approaches. Methods of managing
costs lead us back to chapter 3.1. Saunders presents numerous different ways of how to use the
information of costs related to purchasing and supply management. Some examples are: in
negotiations with suppliers, make or buy decisions, in development of existing and new products,
analysis of purchasing and logistics plans, analysis of internal transfer prices within organizations,
construction of material and departmental budgets, analysis of suppliers’ costs, performance
measurement in purchasing and supply management. Nevertheless, the key issues for management
are to carefully develop strategic plans with cost implications along with other aspects of value such
as quality and delivery.
To cover all costs related to purchasing involves numerous relevant costs. One of the more important
is inventory cost that according to the MGI Management Institute Inc. (1999) covers five categories:
• Item costs includes all costs to get the item into the plant such as product cost,
transportation cost, customs duties, insurance, direct material, direct labor and factory
overhead.
• Carrying costs includes costs caused by the amount of inventory carried including capital
costs from money tied up in inventory, storage costs like space, personnel and equipment
and risk costs present as obsolescence, damage, pilferage, insurance and deterioration.
• Ordering costs consists of production control costs, setup and teardown costs, lost capacity
costs and purchase order costs. Production control costs occur in manufacturing companies
since placing an order does not always mean buying something and there are the costs for
building inventory and setting inventory control planners to work. Lost capacity costs are
explained in 3.1.2.
• Stockout costs occur if demand during lead-time exceeds the forecast and available
inventory. Stockout costs include backorder costs, lost sales cost and lost customer costs.
Stockout cost can be explained by an example where a customer wants something and the
company cannot sell it immediately. The company has only lost money for not having the
item and a cost for going back to get it occur. If the product is available from other
companies the customer would most likely buy it somewhere else and not wait for the
backorder, a cost of lost sales. If the competing company fulfils the customer’s need it will
probably go to the competitor first the next time meaning, a cost of a lost customer.
• Capacity related costs are those of changing production levels and include
overtime/undertime, hiring, layoff, training and shift premiums. Layoffs are a cost mostly due
to loss of skills and lost credibility with other people in the industry. Hiring and training are
major costs but they pay off considering the alternative, ignorance.
Supplier relationships
It is sometimes said that you get the suppliers you deserve. This implies that supplier performance is,
at least partly, built upon reflections both on the way companies treat their suppliers and the
expectations companies have of them (Saunders, 1997, p. 252). As seen in 3.2.1, relationships on the
14
strategic level are contracted on a long-term basis that helps both participants in developing. In
logistics, by giving the supplier insight into the supply needs and the production plan, they can
improve the level of service and lower logistics costs for both parties. Early mutual agreement on
quality requirements enables zero defect deliveries and lowered costs of poor quality for the
company. By introducing product and process engineering knowledge and experience of the supplier
early into the development process, the time to market and start-up costs may be reduced. By
involving the supplier in a close partnership, ideas for improvement can be brought up by both sides.
Often the supplier is blamed for any perceived problem with little consideration of the root of it. The
cause is often outside the control of a single supplier and may in fact either stem from the contractor
itself, or the actual relationship between the two parties ((van Weele, 2005) (Johnsen, Johnsen, &
Lamming, 2008)).
Intervening in a close relationship in a single sourcing scenario is not always preferred since it is
associated with risks. Shields (2005) denotes that it is more difficult for the buyer to be sure of an
appropriate level of competitive advantage in its own business in single sourcing. In periods of tight
supply, the buyer may be at a disadvantage in being able to ask other suppliers to accept orders.
There is a risk that other suppliers may lose interest in trying to compete for the business if they see
that a sole source situation is likely to persist. It is also a substantial risk if the single source has a
catastrophic event for example, is bought by a competitor or has financial problems.
Human resources
Human resources are often considered the firms most important asset. All the strategies and
techniques related to SCM are bound up with issues of how to develop and use human recourses.
Managing relations is important in order to be strategic, both inter-functional and inter-
organizational. One problem is the fact that organizations are divided into smaller, more manageable
fields of activity, long before any strategic objectives are identified. If every section has its own goals
and objectives the buck passing and “not my problem” syndrome might occur. (Saunders, 1997)
3.3 Methods for evaluation and selection of suppliers
As companies develop various overall strategies, the role of purchasing will be different. However,
the purchasing strategy has to be developed to support the overall strategy. At first, the decision
whether to make or buy arises and has to be based on the degree of competitive advantage
generated by the strategy. The second step is to develop a clear picture of purchasing spending
related to commodity. A commodity strategy should be developed with guidelines governing
whether or not to pursue product standardization and reduce the product variety, whether or not to
reduce the number of suppliers or what type of relationship should be developed. The next step is to
develop a supply base management strategy. It covers how many suppliers will be dealt with for a
certain commodity, what conditions and qualifications the suppliers should meet and how the best
suppliers will be selected. The last step is to develop supplier relationships with suppliers divided into
groups such as commercial suppliers, preferred suppliers and supplier partners. (van Weele, 2005)
The purchasing portfolio management analysis is suited for the development of commodity
strategies. The purchase portfolio (Figure 3-4) originally developed by Kraljic (1983) is used by many
of companies all over the world.
15
For each commodity, a different strategy is feasible. Examples of strategies for suppliers and its
characteristics are illustrated in Table 3-3.
Table 3-3 Basic characteristics of the four supplier strategies (van Weele, 2005, p. 153)
Strategies:
Partnership Competitive
bidding
Secure supply Category
management and
e-procurement
solutions Characteristics:
Objective Create mutual
commitment in
long-term
relationship
Obtain best deal for
short term
Secure short- and long-
term supply risk
Reduce logistic
complexity
Improve
operational
efficiency
Reduce number of
suppliers
Suitable for Strategic
products
(gearboxes,
axles, engines)
Leverage products
(commodities, steel
plate, wire)
Bottleneck products
(natural flavors,
vitamins, pigments)
Routine products
(consumables,
supplies)
Leverage products
Alternative sources of
supply available
Substitution possible
→ Competitive
bidding
Routine products
Large product variety
High logistics complexity
Labor intensive
→ Category
management +
e-procurement
soulutions
Strategic products
Critical for products cost
price
Dependence on supplier
→ Performance
based
partnership
Bottleneck products
Monopolistic market
Large entry barriers
→ Secure supply +
search for
alternatives
Pu
rch
asi
ng
’s i
mp
act
on
fin
an
cia
l re
sult
s
Supply risk High Low
Low
H
igh
Leverage suppliers
Many competitors
Commodity products
→ Buyer
dominated
segment
Routine suppliers
Large supply
Many suppliers with
dependent position
→ Reduce number
of suppliers
Strategic suppliers
Market leaders
Specific know-how
→ Balance of
power may
differ among
buyer-supplier
Bottleneck suppliers
Technology leaders
Few, if any, alternative
suppliers
→ Supplier
dominated
segment S
up
pli
er
imp
act
on
fin
an
cia
l re
sult
s
Supply risk High Low
Low
H
igh
Figure 3-4 Purchasing product portfolio and supplier portfolio(van Weele, 2005, p. 150)
16
Activities Accurate
forecast of
future
requirements
Supply-risk
analysis
Careful supplier
selection
Should cost
analysis
Rolling materials
schedules
Effective change-
order procedure
Vendor rating
Improve
product/market
knowledge
Search for alternative
products/suppliers
Reallocate purchasing
volumes over
suppliers
Optimize order
quantities
Target-pricing
Accurate forecast of
future requirements
Supply-risk analysis
Determine ranking in
suppliers client list
Develop preventive
measures (buffer stock,
consigned stock,
transportation)
Search for alternative
products/suppliers
Subcontract per
product
group/family
Standardize
product
assortment
Design effective
internal order
delivery and
invoicing
procedures
Delegate order
handling to internal
user
Decision level Board level
Cross-functional
approach
Board level
Purchasing
Purchasing
Cross-functional
approach
Purchasing
Cross-functional
approach
According to the given situation or strategy, different criteria are important when a model for
supplier selection is to be built. Several dimensions are mentioned that are important to multiple
objective supplier selection such as net price, quality, delivery, performance history, capacity,
communications system, service, geographical location, etc. Some authors propose linear weighting
in which suppliers are rated upon several criteria and in which these ratings are combined into a
single score. Others propose mathematical programming in which quantifiable criterion are taken
into account. (Degreave, Labro, & Roodhoft, 2000)
There are basically two different kinds of supplier selection problems depending on single sourcing or
multiple sourcing scenarios. In single sourcing there is only one decision; which supplier is the best. In
a multiple sourcing scenario, management wants to split order quantities among suppliers. There are
varieties of reasons including creating a constant environment of competitiveness. For single
sourcing scenarios linear weighting methods, analytic hierarchy process (AHP), analytic network
process (ANP), total cost approaches and mathematical programming (MP) techniques have been
used (Demirtas & Üstün, 2008). TCO and AHP are considered to be the more practical approaches.
Bhutta and Huq (2002) compared the two approaches regarding supplier selection. The conclusion
was that both approaches could help optimizing and concentrate recourses where they are needed.
However, AHP can help evaluate and compare suppliers on different evaluation criteria and, if cost
data are included as in TCO, AHP can provide a more robust tool for supplier selection based on both
qualitative and quantitative criteria. The AHP is described further in section 3.3.3.
Ghodsypour & O'Brien (1998) use the AHP for supplier selection in combination with linear
programming. The following steps are suggested:
1. Define the criteria for supplier selection.
2. Calculate the weights of the criteria.
3. Rate the alternative suppliers.
4. Compute the overall score of each supplier.
5. Build the linear model and maximize the total value of purchasing (TVP).
17
Figure 3-5 Supplier selection algorithm (Ghodsypour & O'Brien, 1998)
In the model above, single sourcing is present when there are no constraints, meaning all suppliers
can satisfy the buyers’ requirements of demand, quality, delivery, etc. More recent research using
AHP, applies non-linear integer programming. Kokangul & Susuz (2009) present a model developed
from the above. The model contains Max (TVP) but simultaneously the minimum total cost of
purchase (TCP). TCP consist of purchase, transportation, order/setup, and holding cost. Note that the
TCP in the total cost model suggested in this thesis is developed and contains more elements than
Kokangul & Susuz.
3.3.1 Evaluating environmental performance
Along with the strategic development, managers and policy makers have begun to see the impact on
environmental performance from purchasing activities since purchased goods can affect the level of
waste and pollution generated. The impact is direct in that the products acquired increase waste and
pollution during storage, transportation, processing use or disposal. The impact can also be
considered indirect not only in terms of monetary costs but rather in terms of the waste streams
generated producing them. (Handfield, Walton, Stroufe, & Melnyk, 2002) The monetary savings
concerning environmental performance are due to a reduction in resource usage including raw
materials and supply, reduction in waste, water and energy use, and transport, travel and packaging.
This will to an extent also lead to more efficient processes and increased sales due to improved
reputation among customers. (Department for Environment Food and Rural affairs, 2006)
For the individual, environment also include the work environment. According to the Swedish Work
Environment Authority, the workplace should be adjusted to fit the physical and psychical
circumstances of the employee and the environment should be developing and motivating
(Arbetsmiljöverket, 2008). A satisfying work environment can be measured in terms of absence due
18
to illness. Absence due to illness correlates with work environment, employee satisfaction,
motivation and productivity. (Hanson, 2004)
3.3.2 Selection criteria
In 1966 Dickson presented a list of 23 criterions for supplier selection, the ranking of these criterions
may be dependent upon the specific circumstances but Dickson suggested criteria and ranking
according to Table 3-4. These criteria do still cover most of the important factors up to present time.
Traditionally the four criteria cost, quality, delivery and service are assumed to be an appropriate set
and includes most of the criteria in Table 3-4.
Table 3-4 23 supplier selection criteria (Dickson, 1966)
1. Quality
2. Delivery 3. Performance history
4. Warranties and claim policies
5. Production facilities and capacity
6. Price
7. Technical capability
8. Financial status
9. Procedural compliance
10. Communications system
11. Reputation and position in industry
12. Desire for business
13. Management and organization
14. Operating control 15. Repair service
16. Attitude
17. Impression
18. Packing ability
19. Labor relations record
20. Geographical location
21. Amount of past business
22. Training aids
23. Reciprocal arrangements
Çelebi & Bayraktar (2008) describes the four criteria as follows:
• Cost (or price) performance refers to the direct monetary terms associated with suppliers. It
can be measured by comparison with other suppliers of the same commodity or by changes
in price provided by the supplier. It includes direct purchasing costs such as unit price,
transportation and ordering costs, as well as integration and cooperation costs.
• Quality refers to the level of achieved excellence of supplied goods to meet or exceed
buyer’s expectations. The criteria grouped under this category might have various
dimensions. Not only direct statistical measures, but also monetary issues related to quality
problems (i.e. cost of line failures), and quality assurance efforts like quality certification and
standards may be taken into account as well.
• Delivery evaluates the suppliers’ logistical capabilities and critical activities performed during
the time from which the products are ordered until arrival. It is an important issue that
influences costs, speed to market and value perception by the end user. It also includes
inaccurate, missed, or delayed deliveries that can disrupt operational efficiency.
• Service is defined in four main sub-performance measures as responsiveness, flexibility,
dependability and technology. Responsiveness refers to the degree of cooperation shown by
the supplier, while flexibility is the suppliers’ ability to support changes. Dependability is the
suppliers overall ability to make constant improvements in quality, cost and delivery as well
as loyalty during difficult times. Finally, technology defines the suppliers’ ability to advance
the state-of-the-art in its product.
19
Concerning environmental evaluation Handfield, Walton, Stroufe & Melnyk (2002) suggest six
environmental performance attributes as results from three case studies. The attributes are product
attributes, waste management, labeling/certification, packaging/reverse logistics, compliance with
government regulations and environmental programs at the supplier’s facilities. The attributes are
used in an AHP for the environmental dimensions of purchasing as in Figure 3-6.
Figure 3-6 Framework for environmental performance attributes used in AHP model (Handfield, Walton, Stroufe, &
Melnyk, 2002)
Other studies suggest performance measurement indicators for environmental evaluation. In a study
of environmental performance in construction Tam, Tam, Zeng & Chan (2006) concluded that
regulatory compliance (including non-compliance records of inspection, complaints/warnings),
auditing activities (non-conformance reports and reports of marginal cases put under observation)
and resource consumption (energy, timber, paper and water consumption) as main areas.
3.3.3 The analytical hierarchy process
The analytical hierarchy process (AHP) is a multi-criteria decision-making method for determining a
single alternative (Figure 3-7). The AHP is used when the rank order of decision alternatives is to be
decided or in cases when an alternative from a set of variables is selected while considering
priorities. In developing an AHP model, first the decision-maker provides weighted preferences for
the criteria used to determine the preferences for the decision alternatives. Second, the model rates
each alternative using each sub-criterion. Finally, the AHP develops a prioritized ranking of the
20
decision alternatives based on the relative importance placed on each criterion. (Stevenson & Ozgur,
2007).
Figure 3-7 Graphic presentation of the hierarchies for the supplier selection problem
Paired comparison is the foundation of AHP. The first step is to compare the criteria two by two using
the liker-type preference scale in Table 3-5. The statements “equally preferred” to “extremely
preferred” are represented by integers 1-9 where the italic statements function as separators.
(Stevenson & Ozgur, 2007)
Table 3-5 Preference scale for the pair wise comparisons (Stevenson & Ozgur, 2007, p. 495)
Verbal statement of the preference Numerical value
Equally preferred 1
Equally to moderately preferred 2 Moderately preferred 3
Moderately to strongly preferred 4 Strongly preferred 5
Strongly to very strongly preferred 6 Very strongly preferred 7
Very strongly to extremely preferred 8 Extremely preferred 9
The relative importance between criteria is then used to construct a preference matrix from which
weights for each criterion will be extracted. These subjective estimates of relative importance are
used to generate the weights assigned to each of the criteria. A paired comparison is then performed
on the sub-criteria under each criterion. The values are normalized and a consistency test is
performed where the normalized value matrixes are multiplied by the averages column of the
criteria. Calculating the average of the product gives us the eigenvalue (λA). The consistency index (CI)
is calculated, �� = ������ , where (n) is the number of criteria being compared. Using CI the consistency
ratio can be calculated, � = �� �, where RI is given in Table 3-6. The criteria are considered consistent
if CR < 0.10 (Handfield, Walton, Stroufe, & Melnyk, 2002).
21
Table 3-6 Random index values (RI) for the comparison of n items (Stevenson & Ozgur, 2007, p. 497)
n 2 3 4 5 6 7 8 9 10
RI 0 0.58 0.90 1.12 1.24 1.32 1.41 1.45 1.51
Application of AHP for stereo system selection
To explain the process further an example from Stevenson & Ozgur(2007) where the process is used
for selecting a new stereo system. The choices are narrowed down to three products illustrated in
Figure 3-8.
Figure 3-8 Graphical representation of the hierarchies for the stereo system-selection problem (Stevenson & Ozgur, 2007,
p. 494)
The selection criteria are compared in pairs with respect to the importance to the decision-maker
and the matrix in Table 3-7 is formed.
Table 3-7 Pair wise comparison table for the stereo system selection problem(Stevenson & Ozgur, 2007, p. 495)
Criterion Price Sound Options
Price 1 3 4
Sound 1/3 1 3
Options 1/4 1/3 1
∑ 1 4/7 4 1/3 8
The matrix shows that options are moderately to strongly preferred to price and moderately
preferred to sound. Dividing each value by its column total normalizes provides the normalized
paired comparison matrix. The row average, to the far right, represents the priority for each
criterion. Thus, price is most important and options least important.
22
Table 3-8 Normalized pair wise comparison table for the stereo system selection problem(Stevenson & Ozgur, 2007, p.
496)
Normalized values Price Sound Options Avg. weight
Price .631579 .692308 .5 .608
Sound .210526 .230769 .375 .2721
Options .157895 .076923 .125 .1199
∑ 1 1 1 1
Since the AHP depends on input provided by the decision maker and since the comparisons are
subjective, the comparison has to be consistent with a different but related pair wise comparison.
That is why the consistency ratio (CR) is calculated as described above. Multiplying the pair wise
comparison matrix (Table 3-7) by the Avg. weights from Table 3-8 provides a weighted sum priority.
Table 3-9 Calculation of the Weighted priorities for the criteria (Stevenson & Ozgur, 2007, p. 497)
Criterion Weighted Sum (1) Avg weight (2) Weighted sum priority (3)=(1)/(2)
Price 1.904 .608 3.13136
Sound .834 .2721 3.0669
Options .363 .1199 3.0242
The weighted sum priorities obtained in Table 3-9 are averaged to determine the eigenvalue (λA).
Thus, n=3, CI and CR is calculated.
Since CR < 0.10 the priority is considered consistent.
n 3:=
,
, < 0.10
1
1
3
1
4
3
1
1
3
4
3
1
0.608
0.2721
0.1199
⋅
1.904
0.834
0.363
=
λA3.13136 3.0669+ 3.0242+
33.074=:=
CIλA n−
n 1−:= CI 0.037=
RI 0.58:=
CRCI
RI:= CR 0.064=
23
The next step is to determine three pair wise comparison matrices for each criterion comparing the
three products. The comparison in Table 3-10 is the three products in relation to Price. The pair wise
comparison is converted to proportion percentage values and averaged to see priorities. Table 3-10
shows that the Sharp product is preferred in terms of price.
Table 3-10 Comparison in relation to Price
Pair wise comparison Proportion percentage Priority percentage
Product Sharp Lucidity Clarity
Sharp 1 4 2
Lucidity 1/4 1 1/3
Clarity 1/2 3 1 ∑ 1.75 8 3.333
Product Sharp Lucidity Clarity
Sharp .5714 .5 .60
Lucidity .1429 .125 .10
Clarity .2857 .375 .30 ∑ 1 1 1
Product
Sharp .5571
Lucidity .1226
Clarity .3202 ∑ 1
After calculating consistency and priorities for Sound and Options the Priority percentage is
multiplied by the Avg. weight for each product and criteria. The final weighted score is then
calculated and the product with the highest overall priority is selected.
Table 3-11 Determination of the Overall priority (Stevenson & Ozgur, 2007, p. 500)
Sharp
Criterion Weight (%) (1) Priority (%) (2) (1)*(2)
Price .608 .5571 .3387
Sound .2721 .1373 .0374
Options .1199 .5794 .0695
Weighted score for Sharp .4456
Lucidity
Criterion Weight (%) (1) Priority (%) (2) (1)*(2)
Price .608 .1226 .0754
Sound .2721 .2395 .0652
Options .1199 .1865 .0224
Weighted score for Lucidity .1621
Clarity
Criterion Weight (%) (1) Priority (%) (2) (1)*(2)
Price .608 .3202 .1947
Sound .2721 .6232 .1696
Options .1199 .2341 .0281
Weighted score for Clarity .3984
In Table 3-11 the weighted score for each alternative is presented. The Sharp stereo system received
the highest score and should be selected in this example.
24
25
4 Methodology & Tools This chapter explains the approach when working with this thesis followed by descriptions of the tools
used.
According to directions from the mentor at the university, this chapter does not hold all of the
content that might be expected of a Master’s degree thesis. Nonetheless, the thesis fulfils the quality
requirements and the reported results should be the same if the study is repeated according to the
course of action below.
4.1 Course of action
The first step in writing this thesis was an introduction to the company and to the assignment. The
purpose and goals were defined. The author and mentors agreed that the extent of this area is
incredibly wide and had to be delimited and simplified so that the model could be easily used. The
delimitations were set to address the situation at Emhart Glass so that the model can be
implemented in practice.
Initially, the problem was specified based on the originally stated problem and the theoretical
research started in order to become familiar with subjects related to the stated problem and to
support the result on theory. All of the information for the theoretical framework was therefore
gathered from various published sources such as books, journals and periodicals. The sources were
accessed mainly from databases such as Elsevier, Ebsco and Emerald with total cost, total cost of
ownership, supplier selection, supplier evaluation and combinations of them as search concepts.
Since the problems discussed in the thesis are based on an assignment requested by the purchasing
department at Emhart Glass Sweden in Sundsvall all problem related issues are based on the
circumstances concerning the situation at this plant. This makes the research strategy a case study.
Referring to Yin (1994) a case study is an empirical phenomenon within its real life context, especially
when the boundaries between phenomenon and context are not clearly evident.
The next step was to explain the present situation at Emhart Glass. To be able to achieve an
understanding of the everyday work and problems the author was situated at the facility during the
writing of the thesis. Unstructured interviews were conducted with co-workers from the quality
department, the assembly line, logistics planning and the financial department to obtain a balanced
picture of the situation. The interviews also aimed to determine which factors to include in the
model. All interviews were individual and lasted for 45 minutes with the respondents in key positions
selected by the mentor.
Additional information about the factors to include was obtained by a form distributed to all
employees in the purchasing department. The results are presented in Appendix A. The author also
studied previous research and internal documentation to identify pertinent factors. The company
mission was also taken into consideration. A suggestion for what factors to include was constructed
and developed along with the mentor and the purchasing manager.
Once the selection criteria were confirmed, a group selected by the mentor was gathered for the
actual weighting of the criteria and sub-criteria of the AHP. There were three experienced
participants from the purchasing department and two participants from the quality department with
individual experience of customer relations and environmental issues. Two criteria were presented
26
to the entire group and the participants were asked to decide to what extent one was superior to the
other. The weighted AHP was then applied to three sets of suppliers delivering three different
commodities, i.e. twelve suppliers in total. During these tests purchaser were asked to select three or
four suppliers who delivered the same commodity in order to test the AHP. The results were drawn
from these tests.
Along with the development of the AHP, suggestions for what to include in the total cost calculations
were presented to the mentor at Emhart Glass. The elements were obtained in essentially the same
way as the in the AHP but more closely adjusted to suit implementation and the available data. The
calculations where conducted in Mathcad 14.0. and tested on three suppliers used in the AHP.
Mathcad is an engineering calculation software and a standard program at Emhart Glass Sweden.
4.2 Tools
During the study several tools described in literature where used in the study. All of the used tools
are described below.
4.2.1 Interviews
The interviews during the thesis were of characteristically unstructured and initially aimed to
increase the author’s knowledge. This is a one of the goals for unstructured interviews (Merriam,
1994). The interviews also helped to balance the picture of problem areas with opinions from other
departments.
4.2.2 Questionnaire
A questionnaire was distributed to the purchasing department employees. Seventeen responded
which is the equivalent of 41 % answer rate. The questionnaire responses were used to identify
important factors for purchasing in general and from a total cost perspective.
4.2.3 Analytical hierarchy process
AHP is based on paired comparison. Since a major part of the thesis is based on the AHP, its
foundation in described is section 3.3.3.
The method is preferably used with support of decision-making software. In the thesis all calculations
were conducted in ExpertChoice 11.5. The software was selected partly due to its online availability
and the graphic interface. However, the choice was largely supported by its use in scientific articles.
27
5 Present situation & problems This chapter describes the main problem areas and important activities performed at Emhart Glass.
The information for this chapter was gathered from interviews, internal documentation and other
remarks at the plant.
5.1 Production and purchasing
In March 2008 the assembly line for frames where fully functional and several previously hidden
problems occurred. Earlier production had three teams working simultaneously and if problems
occurred the operators simply helped the operators next to them. Line assembly requires more
accurate planning and deliveries from suppliers both in terms of time and quality. Even a small item
with small monetary value can, if lacking, stop the whole line. Production or the line organization and
base units are directly linked to the purchasing department in the value chain.
The (written) mission for the purchasing department is to set the conditions for the right quality of
purchased items. To achieve the mission the department has the following responsibilities:
• Establish contracts concerning price, quality and lead-time.
• Produce guidelines and methods in order to satisfy specifications.
• Maintain and update the supplier database.
• Evaluate new suppliers and report to the manager for approval.
• Cooperate with the quality department in signing quality agreements.
• Cooperate with the quality department contributing valuation of approved suppliers.
• Continuously present quality level per commodity for the quality council.
• Make decisions about changing supplier and if so, find a new supplier for established items.
When there is a requirement for an item in the direct material category the process starts by
determining if a new or existing supplier can provide the product. If the product is related to a
supplier the ERP-system is updated and a planner is releasing the order which can be a previous
purchasing order or a test order. If a new supplier is needed, the new supplier is first evaluated as
described in 5.3.2 and all administrative work is conducted. A new purchasing order is created and
has to be approved by the supplier. If no discrepancy actions are necessary the good process is
finished and the good ready for use. The process is described in Figure 5-1.
28
Figure 5-1 Purchasing process of direct material
Several of the other departments have activities closely related to those of the purchasing
department. Some of the activities are listed in Table 5-1 and gives an indication of what
departments are directly influencing purchasing costs.
Table 5-1 Responsibilities related to purchasing department
Quality department Line organization and base
units
Receiving and inspection
• After instructions from head
of purchasing carry out
revision of ISO 9001 at the
supplier
• Revise suppliers with quality
agreements
• Support and develop quality management internally and
at the supplier
• Audit manufacturing
processes of items for
quality agreements
• Decide whether to remove
items from quality agreements due to
disturbance or changes
• After three months from
quality agreement decode
items to “to stock without
inspection”
• Release order from
contracted supplier
• Audit released orders
• Adjust quantity and delivery
time due to changed
requirements
• Update purchasing data if
the original order is changed
• Verify received good
according to present
specifications
• Inform purchasing and
quality departments
concerning discrepancy on
items with quality agreements
• Suggest items suitable for
quality agreements
29
5.2 Sales & planning
The fact that all major sales activities are located at the headquarters in Switzerland has caused a gap
between the interests of sales and purchasing departments. The sales department is not working
actively in phasing out products and towards standardization. To some extent this causes high costs
since older parts have to be kept in stock as spare parts and new machines have to be modified to fit
the customers’ wishes rather than convincing the customer that modern techniques are better. The
effect is shown in Figure 5-2 . Of the total number of parts, 90 % have an annual volume below 400
pieces a year and 75 % below a 100 pieces annually. The sales force is also used to cut the price on
the end product without taking the total cost into consideration. This is shown to put pressure on the
purchasing department and the suppliers to cut prices rather than focusing on relationships and
improvement.
Figure 5-2 No. of parts in system
Concerning production planning, it is very common that changes from customers are allowed late in
the planning process. Sometimes changes are even made within the internal lead-time. This means
that purchasing has to pressure the suppliers to deliver within their internal lead-time. If the whole
chain is managed like this then planning and manufacturing are forced to go through the process in a
rush and quality problems might occur. Capacity might also be a problem for the supplier if the
supplier is manufacturing several items (as in Figure 5-3). In this case the supplier has to select which
item to manufacture and deliver on time, which may cause problems in the entire supply chain.
Figure 5-3 Supplier of multiple items
Another effect of this is that the problems, originally caused by Emhart Glass, influence the supplier
statistics negatively. The reasons are described in the next section.
010 000
20 00030 000
40 00050 000
60 000
70 00080 000
Total no. of parts
Active no. of parts
30
5.3 Evaluation
Evaluation is performed on the own department to some extent but much of the work aims to
evaluate the performance of the suppliers.
5.3.1 Evaluation of the purchasing department
In the present situation the purchasing department is evaluated based on purchasing price variance
(PPV). PPV is the difference between a predetermined price and the actual price paid to the supplier.
The predetermined price, denoted as standard cost, is the budgeted price the purchaser should
meet. When purchasing, a positive variance generates less profit for the company and a negative
gives more profit than calculated beforehand. However, the total cost can differ from this key
performance indicator. For instance, if the purchaser decides to buy bigger quantities the actual price
is probably lowered, but the cost for holding items in stock will rise. Other factors not included in
price are all other important cost aspects such as quality and transportation.
If the standard cost is calculated at correct level there should be no variance. The PPV is thereby used
as a parameter for evaluating the standard cost. A high standard cost raises the amount paid for each
product and consequently increases the price of the finished machine. A low standard cost means
that the purchaser has to focus on the price when negotiating with the supplier. The purchasing
department is responsible for suggesting standard cost on products for each year.
5.3.2 Evaluation of suppliers
Before becoming a supplier, an evaluation is performed by the purchaser together with the
company. It contains general information about the firm, financial information, information of
production and production techniques plus how the company manages quality and environmental
issues. The qualification process might be based on a questionnaire filled in by the supplier denoted
as simplified qualification. It might also be filled in onsite following the supplier assessment
workbook, a full qualification. The supplier assessment workbook is a guide for what information to
gather from the supplier. The full qualification renders in an evaluation based on five graded scales
within the following areas:
• General information
• Finance
• Production/technique
• Quality
• Environment
Emhart Glass’ suppliers are also divided into five levels of qualification status for each product based
on the evaluation and performance data:
• Unqualified (UC) – no qualification study has been done. These are suppliers that could be in
the queue for qualification but no action has taken place.
• Conditionally qualified (CQ) – Suppliers that have had the simplified or full qualification
completed but have not yet had a satisfactory performance review AND/OR have extensive
Corrective Actions. Any suppliers that have not had a satisfactory performance review or
have extensive Corrective Actions are considered as Conditionally Qualified. Suppliers
becoming conditionally qualified as a result of passing the simplified or full qualification will
31
be marked with Conditionally Qualified – phase in (CQ-PI) and suppliers falling out of the
status is marked Conditionally Qualified – phase out (CQ-PO).
• Qualified (Q) – Suppliers that have had the simplified or full qualification completed, have
had a satisfactory performance review and have no outstanding corrective actions.
• Disqualified (DQ) – Supplier that have been removed from the approved supplier list.
Depending on classification, different levels of quality verification is performed on the delivered item.
Approved products are items with quality assurance and are put directly to stock, while preferred
items are tested. About two thirds of all parts have quality assurance contracts.
Data on all incoming goods is saved and evaluated according to On Time Delivery (OTD) and
Technical Quality (TQ) is stored for all tested items.
• OTD – percentage of order lines delivered and reported into the Business Planning and
Control System (BPCS) at the latest on the (by Emhart Glass) requested delivery date
(approved by supplier).
• TQ – value of order line with detected quality problems (including negative variance in order
quantity)
The OTD accuracy has decreased drastically over the past two years but has recovered during 2008.
Figure 5-4 OTD as a percentage of No. of order lines from 1999 to 2008*
Many factors influencing the results of the OTD are caused by Emhart Glass itself. As mentioned
before it is common that changes are made late in the process. If the lead-time was 30 days and
changes are made 25 days from assembly the supplier usually tries to meet the request for shorter
lead-time. At the beginning of the lead-time it is rather common that the planner does not release
the order on the predetermined day. At Emhart Glass the lead-time includes transportation time
which varies depending on supplier. One scenario that may occur is that the supplier has stationary
transportation days. If the transportation day is missed, the products may have to wait a few days
until next pickup which increases the lead-time. Another issue is that incoming goods are not
reported into BPCS on the day of arrival. Goods from different suppliers are supposed to arrive on
separate days, but most of the suppliers have contracted weeks. When too many goods arrive at the
same time the volume is simply too great to handle in receiving.
70
80
90
100
OTD
OTD
*Average
Jan-Oct
In order to evaluate the supplier and exclude Emhart Glass internal problems
evaluated by OTD-2 that measure
is influenced by the behavior of Emhart Glass it somewhat loses its importance. It happens that the
purchaser and the supplier disagree on the
The purchaser cannot always trust the evaluation as an argument for improving the supplier since
Emhart Glass may cause the root problem itself.
A big part of the OTD failures is however caused by the supplier.
somewhat be explained by the business climate
proportional to OTD due to high workload at the supplier. The improvements in 2008
by a lower load at the suppliers but is also caused by
suppliers.
A developing project is the Bubble
visually. The X-axis is the rejection rate in percent,
of deliveries. The Y-axis is 1 - OTD
each supplier. In the lower left corner the goals to achieve are marked in green and yellow.
development for each supplier can be traced from time to time
Figure 5-5 Bubble chart
Quality feedback system (QFS)
If faulty good are detected upon inspection
into the ERP-system. The report keeps track of all quality issues related to a specific component and
is reported back to the responsible purchaser and to the quality department for actions. Problematic
components are usually sent back to the supplier for corrections
under extreme time pressure it is sent to the Material Revie
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
-1,0 0,0 1,0 2,0 3,0 4,0 5,0
OT
D
Annual monetary volume Q3 2008
32
In order to evaluate the supplier and exclude Emhart Glass internal problems, suppliers are also
measures if the supplier delivered on their system lead-
of Emhart Glass it somewhat loses its importance. It happens that the
purchaser and the supplier disagree on the data, which makes both parties unsure of its accuracy.
The purchaser cannot always trust the evaluation as an argument for improving the supplier since
root problem itself.
A big part of the OTD failures is however caused by the supplier. The development in
business climate. High business activity is believed to be inversely
proportional to OTD due to high workload at the supplier. The improvements in 2008
lower load at the suppliers but is also caused by focus on OTD at Emhart Glas
A developing project is the Bubble chart, Figure 5-5, which aims to illustrate a suppliers
the rejection rate in percent, no. of complaints (No. of TQ issues) related to No.
OTD. The size of the bubble illustrates the annual monet
In the lower left corner the goals to achieve are marked in green and yellow.
development for each supplier can be traced from time to time via the chart.
If faulty good are detected upon inspection or later in the assembly, a complaint is reported as a QFS
The report keeps track of all quality issues related to a specific component and
rted back to the responsible purchaser and to the quality department for actions. Problematic
components are usually sent back to the supplier for corrections. If there is only a minor problem or
under extreme time pressure it is sent to the Material Review Board (MRB) for investigation. The
5,0 6,0 7,0 8,0 9,0 10,0 11,0 12,0 13,0 14,0 15,0 16,0 17,0
Complaint
Annual monetary volume Q3 2008
suppliers are also
-time. Since the OTD
of Emhart Glass it somewhat loses its importance. It happens that the
unsure of its accuracy.
The purchaser cannot always trust the evaluation as an argument for improving the supplier since
The development in Figure 5-4 can
. High business activity is believed to be inversely
proportional to OTD due to high workload at the supplier. The improvements in 2008 are explained
OTD at Emhart Glass with regard to the
which aims to illustrate a suppliers’ performance
o. of complaints (No. of TQ issues) related to No.
. The size of the bubble illustrates the annual monetary volume for
In the lower left corner the goals to achieve are marked in green and yellow. The
complaint is reported as a QFS
The report keeps track of all quality issues related to a specific component and
rted back to the responsible purchaser and to the quality department for actions. Problematic
. If there is only a minor problem or
w Board (MRB) for investigation. The
17,0 18,0 19,0 20,0
1
2
11
7
9
12
5
10
4
6
8
13
14
15
33
MRB decides if the component can be used in assembly despite the fault or if the component should
be adjusted in-house.
Cost of poor quality
Emhart Glass has been measuring the cost of poor quality since 2002 and covers four areas:
• Internal cost, cost for scrap and adjustments.
• External cost, cost of customer complaints from financial product warranties and administration of complaints.
• Cost of inspections are costs from all units of receiving inspections, random inspections on
quality approved products in stock and similar measuring services. Costs for holding
measuring equipment are also included.
• Purchasing cost of administration for purchased items.
The measurements are separated at the two facilities in Sweden and it is not possible to trace it back
to a supplier.
34
35
6 A suggested total cost model This chapter contains the results and analysis of the total cost model. A suggestion for supplier
selection with the analytical hierarchy process is followed by a suggestion for how to calculate the
total cost of purchasing.
The total cost model was constructed in two sections where the first part rates and selects the best
supplier and the second part calculates the total cost. Thereby, the first part is value based and the
latter dollar based.
6.1 The AHP
The first part is the AHP-model that rates the suppliers and gives the presumptive suppliers a score
based on the selection criteria.
6.1.1 Selection criteria
Since there are so many aspects influencing the total cost it is of extreme importance that the right
criteria are considered. Each criterion was selected considering previous research, the present
situation and existing documentation at Emhart Glass. The company mission was also considered as a
ground.
The AHP-model without weights is shown in Figure 6-1 and the process selects the suppliers based
on quality, delivery, agility and environmental performance. Each aspect is explained in the following
sections.
Figure 6-1 Unweighted AHP-model
36
Quality
Quality is related to costs of poor quality. The first sub criteria for evaluating quality is technical
quality (TQ) which is the ability to fulfill the agreed technical specifications and the ability to deliver
the ordered volume. TQ is already measured upon inspection at Emhart Glass for items without
quality assurance.
If the supplier has a high level of technical quality it might be suitable for quality assurance. The
quality inspection required evaluator is an evaluator of how suitable each supplier is judged to be for
quality assurance or how the supplier fulfils the expectations so that no inspection is required upon
receiving.
Supplier transaction complexity evaluates if there are any limitations for changing from a specific
supplier. This is referred to as transaction costs.
Delivery
Delivery is an important area since the consequences of poor delivery accuracy are very costly,
generally as an effect of delays in the value chain. Reliable OTD evaluates the OTD accuracy of the
supplier and is a well known KPI.
A supplier with short lead-time has a higher degree of control over its value chain and the supplier is
probably more cost efficient.
The geographical distance from supplier is important both in terms of emissions of CO2 but also for
minimizing costs and risks from the transportation itself including insurance, customs duties and
similar.
Agility
Agility can be said to compare the flexibility and responsiveness of the suppliers and how the
suppliers are developing. Agility is also a comparison of how the suppliers are using their assets. The
word agility is preferable to prepare for the future and the ideas of a responsive supply chain and
agile manufacturing.
At first technical development compares the investments in machines and technical knowledge.
However, the necessity of modern machines might be considered with the capacity of functions and
how it is used in mind.
The ability to identify opportunities and collaborate on solutions evaluates to which extent the
supplier initiates and suggests improvements and how the supplier collaborates in solving problems
identified by the buyer.
The level of trust and openness is important so that both parties are willing to share information. The
relationship between buyer and supplier should be built on trust so that the parties can help each
other and gain competitive advantage from each other.
Sometimes circumstances change. The planned production has to be rescheduled, new demands
occur or parts are missing or unusable. In these cases, it is important to have a supplier that is
flexible in its production chain and responsive to the buyer’s needs. This is evaluated by willingness
and ability to accept changes. In a long-term perspective, it can be new or developed products or
services.
37
Employee satisfaction evaluates the actions for decreasing the level of absence due to illness.
Absence due to illness correlates with work environment, employee satisfaction, motivation and
productivity.
Environmental performance
Environmental performance is a becoming more and more important and the demands from
customers and society are growing. It is therefore necessary to not only minimize the company’s own
environmental impact but also to take responsibility for the whole supply chain.
One step is to recognize whether the supplier has adopted any environmental management system
(EMS) and if the supplier is involved in other programs concerning environmental issues.
From a cost perspective it is also important to reduce waste. With a waste management program the
supplier can actively control and reduce the solid waste tonnage as well as hazardous waste.
By reducing and reusing packaging material the weight, volume and cost of transportation is
increased. A supplier that is actively working with returnable/ reduced packaging material is
preferred.
To consider effects in the whole supply chain the suppliers are evaluated concerning the level of
environmental requirements on their suppliers. The level of second tier supplier environmental
evaluation aims to push the buyer, the supplier and their suppliers to improve the environmental
performance.
38
6.1.2 The weighted AHP
The weights for the AHP were decided in a meeting with participant from the purchasing and quality
departments described in 4.1. Inconsistency was allowed so that the participants were allowed to
understand the thinking and how to work with the model without any constraints. At this stage, the
results aim to show patterns rather than accurate results. The meeting resulted in the priorities of
Figure 6-2 and are results from ExpertChoice.
Agility Quality Delivery Environmental
performance
Figure 6-2 Priorities of the selection criteria
Agility is by far the most important attribute for the suppliers of Emhart Glass. The level of trust and
openness thereby highly influences the overall picture but Willingness and ability to accept changes
is not far behind. The high priority for agility is not surprising since the most agile suppliers today are
receiving the best scores according to the present KPIs of OTD and TQ.
39
Quality, technical quality is vital and it is presently one of the most important KPIs. Technical quality
is more important than Quality inspection required but on the other hand a high level of Technical
quality is a supposition for quality assurance.
Concerning delivery, the Short lead-time and Reliable OTD is almost of equal importance. Both lead-
time and OTD are factors that the purchasing department is focusing on in the future improvement
plans. Therefore, geographical distance from supplier is not shown to be a priority even due to the
high risks.
Environmental performance was shown to have a very low priority and it shows that the current
selection of suppliers does not have any focus on environmental issues other than whether the
supplier is certified according to ISO 14001. However, the presence of an EMS received the lowest
priority and waste management the top which is contradictory to the present evaluation form.
6.1.3 Selecting a supplier
The AHP was tested on three sets of suppliers delivering separate commodities. The graph in Figure
6-3 is the result from one of the tests with four suppliers. The names of the suppliers were deleted
due to the sensitive information of the individual suppliers.
Figure 6-3 Supplier selection with AHP
In this test “red” was considered the best supplier despite not performing best on all aspects. In the
graph it is obvious what strengths and weaknesses are associated with each supplier. If the suppliers
are acknowledged with the model the comparisons might be used as support in negotiations. In
these tests the comments from the purchasers was positive since the results corresponded with their
gut feeling. This model did now show their beliefs were correct and on what aspects their gut feeling
was wrong. Since the involved purchasers where positively surprised by the accuracy of the model
the aspects included in the AHP are considered relevant with some exemptions commented in
Conclusions. The same graph can be presented for each of the four performance indicators.
40
6.2 Calculating the total cost of purchasing
The calculation of the total cost of purchasing is the dollar-based part of the total cost model. It is
divided into the segments suggested in literature covering cost of poor quality and inventory cost.
The available data in this specific case is also considered and decides how each post is calculated so
that actual calculations could be conducted. The calculations are thereby based on historical
performance of the suppliers. The calculation is conducted for one supplier at a time. The elements
of the total cost calculation follow below:
Formula 6-1 Administrative ordering cost (A)
� = �� ��
The administrative ordering cost is all costs for administrating an order. In the thesis, it does not
include delivery control and receiving activities that has a separate post called Inspection cost. The
administrative cost is calculated by multiplying an estimated standard cost for administrating one
order (��) by the number of invoices (� ) sent to the supplier. The standard cost was estimated by the
head of the purchasing department and the number of invoices was found in BPCS.
Formula 6-2 Quality feedback system (QFS)
��� = ���� ∗ �����
Formula 6-3 Material review board (MRB)
�� = �� � ∗ ����
QFS and MRB is the cost for each QFS report and each MRB errand. A standard cost for the reports
(���� and �� �) as well as the sum of QFSs and MRBs for each supplier was found in documents from
the quality department.
Formula 6-4 Inspection cost (I)
� = �� ��� �
Inspection cost is the cost for inspecting items for technical quality (TQ) upon receiving. The total
cost for conducting quality control (��) is multiplied by the number of items delivered from the
supplier (��) divided by the total number of received items (� � ). The inspection cost for the supplier
is thereby taken into consideration. �� was retrieved from the quality department, �� and � � from
BPCS. Inspection cost is only calculated for suppliers without quality assurance agreements.
Formula 6-5 Stockouts (SO)
�! = !� ∗ "
Stockouts includes backorder costs, lost sales costs and lost customer costs. It was calculated with
the assumption that each late order line causes delays in the assembly. The delay is avoided by
working overtime and a cost for overtime (!�) occur in terms of salary. x late orderliness, according
to OTD, is said to be equivalent with x hours of overtime. The number of late orderliness was
retrieved from the portal and the value of x was calculated by managers in assembly.
Formula 6-6 Holding cost (H)
# = $ ∗ %%
41
The mean value of all items in stock for the supplier (v) times the carrying charge (cc) is the holding
cost. Data was retrieved from BPCS.
The calculation also holds the cost for transportation (T) retrieved from the logistics partner and the
price (P) of all purchased goods from the supplier. P is the price according to purchasing orders from
BPCS.
Formula 6-7 The total cost of purchasing (TCP)
&�' = � + ��� +�� + � + �! + # + & + '
The final formula representing the TCP is Formula 6-7. Since TCP generates an estimated cost it can
be used for comparing the development between different periods in total or segment by segment. P
is the biggest element in monetary terms and is preferably excluded to keep track of the cost of poor
quality and inventory costs.
Since the purchasing price adds most costs to the TCP an index was formed that shows the level of
total cost in relation to P.
Formula 6-8 Cost Performance Indicator
�'� = 100 +1 − '&�'-
The Cost Performance Indicator (CPI) can be used for comparing different suppliers despite the
proportion of P, which is not possible by only extracting P from the TCP.
42
43
7 Conclusions This chapter holds the conclusions from the AHP, the TCP and some conclusions for the suggested
model.
This thesis shows that numerous aspects influence the total cost of purchasing. Therefor the problem
is to find the most important aspects rather than all aspects. Previous studies show that the
categorization of costs has changed over the years but the elements are almost the same except
from the importance of environmental factors.
The approach for allocating and categorizing costs differs if the aim is value-based or dollar-based.
This is why the thesis proposes a model in two parts where quality, delivery, agility and
environmental performance are suggested for the value-based AHP and cost of poor quality and
logistics costs for the dollar-based TCP.
7.1 The AHP
The AHP is a process that is easy to use and the results were very concrete and straightforward. Once
the criteria were selected and the weights set, the actual comparison between suppliers was
estimated to about 20 minutes using ExpertChoice. This is considered very fast with respect to the
number of factors included in the comparison and should imply better accuracy and more frequent
evaluation of suppliers.
The criteria presented in the thesis forced the department to focus on the total cost and decide what
factors are the most essential when selecting a supplier. The results showed that agility was the most
important aspect to consider and the overall opinion was that this reflects the current situation at
Emhart Glass. Since many purchasing orders are released late in the process, the agile supplier can
respond to the demands from the buyer and promise to deliver on the requested day.
The AHP is very suitable for supplier selection and can be developed and adjusted to suit any future
strategy. Although the AHP has many inputs it does not cover everything. The results should be
evaluated and compared with the purchasers’ judgment and experience.
7.2 Conclusions from the TCP
Despite the fact that the TCP is not entirely correct it is a step in the right direction. It opens for an
awareness of the elements in the TCP and shows what element is related to the greatest costs. This is
very useful when it comes to reducing the costs by indicating where to put the most effort on
improvements. However, most important is that it provides a direct estimate for the costs and
motives in supplier selection.
The TCP is preferably used during negations to show the supplier the cost of inadequate actions or
weaknesses in the buyer-supplier relationship. The TCP can also be used for calculating cost savings
through improvements and for estimating the costs of different strategies.
7.3 Final conclusions
The overall strategy has to be communicated to the entire organization. A situation where
management focuses on price in terms of PPV and sales in terms of the price paid by the customer is
hard to combine with high accuracy in quality and delivery requested by purchasing, planning and
44
the assembly. By implementing the suggested AHP, the supplier selection process can be illustrated
and the selection of a specific supplier can be motivated.
By letting different departments do the weighting, the AHP can show differences and similarities
among the demands on the suppliers. This can help create a solid overall strategy based on the
expectations of each department.
In order to take advantage of the results and conclusions of the thesis Emhart Glass is recommended
to invest in software for decision making, for instance ExpertChoice. It is possible to do the
calculations in Microsoft excel, Mathcad or similar but it is the graphic interface that adds usability.
Emhart should consider adopting different strategies for different commodities to a greater extent
than in the present situation. Regarding total costs, the results from both the AHP and the TCP
differed among the commodities. The weights in the AHP can be the same for all commodities but
the TCP can be improved to suit each commodity. The TCP presented in the thesis is constructed to
suit any purchasing situation of direct material but the accuracy can be better by adding or excluding
elements specific to the commodity.
The overall opinion at Emhart Glass in Sundsvall is that the model is interesting and focuses on new
areas outside the present framework for what is valuable at a supplier. It takes the focus away from
price and presents a wider range of criteria for supplier selection. It also presents a picture of the
costs generated when purchasing direct materials that can be calculated for a specific supplier.
Consequently, the thesis demonstrates a new KPI which indicates the total cost performance of
purchasing from a specific supplier. The CPI indicates the whole picture of purchasing and denotes
changes in the elements of the TCP. The new indicator is preferably used along with the present
indicators to apply a total cost perspective and evaluates the purchasing department and the
relations between a supplier and Emhart Glass. PPV should only be used to evaluate if the standard
cost is set at the right level.
45
8 Discussion & Suggestions for further studies The focus on total cost was shown to be a very wide ranging problem with a huge amount of aspects
to take into consideration. Despite rigorous planning much time passed studying literature that is not
referred to in the thesis but which lead to a greater understanding and the range of the problem
area. Much of that science suggested more advanced mathematical programming but that was not
applicable to single sourcing scenarios under the circumstances of this case.
Before studying literature on the subject, the idea was to create a dollar-based model only. However,
the idea changed since no support for a single sourcing model was found covering the range of the
problem. A model with inputs like the AHP is more general and can be adapted to any organization
by changing the weights. The TCP is not as general but the elements are probably found in all
manufacturing companies. The thesis can thereby provide ideas of what elements to include in a
similar model.
8.1 The AHP
The strength with the AHP was shown in the end of the process when it was tested. It was easy to
overview the results and draw conclusions about the performance of each supplier. However, the
input to the model is sensitive and the results will most probably differ somewhat when the persons
involved in the process are more familiar with it. During the meeting when the criteria were
weighted, the participants learned how to think during the meeting and the comparisons were made
more quickly. It might also be interesting to achieve more inputs from groups from other
departments and have separate meetings with for example assembly, production and management.
The content and the thinking in the AHP showed itself to be different in the two weighting steps. In
the first step, where only the criterion where compared, it was easy to understand the differences
between all included aspects. The question during the first comparisons was:
How much more is one criteria preferred over the other? With a specific supplier in mind the
question asked was:
Which supplier is preferred with respect to a certain criteria? The latter caused confusion on some
criterion, for example the necessity of comparing the geographical distance from supplier if all
suppliers are located in the south of Sweden. In the comparison between suppliers there was also
some confusion on how to compare given a lack of information. This occurred particularly in
comparison of environmental performance. This area was not considered in the current evaluation
form and it was hard for the purchasers to have an opinion at all. However, the example can be used
to explain one of the biggest strengths with the process. As long as the same reasoning is used for a
criterion, the comparison is made on the same foundation.
The AHP conducted in the thesis are exceeding the level of inconsistency. It might change the result
of the tested model. However, accuracy is not as important in the test on suppliers as the selection of
the included criteria. However if the model is implemented and used for supplier selection new
weights have to be set.
8.2 The total cost of purchasing
The applied TCP is not as general as the AHP since the formulas are based more on available data
than a general purchasing situation. The fact that the calculations should be applied and calculated
46
on single suppliers caused some problems in a late stage of the thesis and some elements were
excluded from the formula.
One important known cost that was not included was cost of customer complaints or warranties. In
some cases there was no doubt what caused the warranty claim but not always. To avoid a situation
where each individual complaint should be studied it was deleted from the formula. Depending on
commodity the likeliness of discovering problems differed. For example, problems with castings were
always discovered since they were used in production. Problems with circuit boards on the other
hand, could not be seen visually and was not always discovered during testing and thereby sent to
the customer resulting in a customer complaint. The reason for not including customer complaints
was that the data could not be allocated to an individual supplier.
Costs of environmental impact were also excluded. The intention was to calculate the emission of
CO2 and use the price for buying emission rights as an integer. Since the cost for reducing CO2 is very
small it should not have had any effect on the TCP.
8.3 Suggestions for further studies
A further recommendation is to develop a method to trace customer complaints back to a supplier.
Since the annual cost for warranties is extensive, it can be decreased for Emhart Glass by sharing the
cost with the responsible supplier.
It might also be interesting to do a complete study over organizational problems. Extensive savings
can probably be made if all activities in the value chain are working towards the same goal. A
suggestion is to begin with the communication and problem solving activities between Sweden and
Switzerland.
Another suggestion is to improve the communication between the suppliers and Emhart Glass. Much
of the administrative work could be performed automatically or by the supplier by electronic data
interchange.
47
9 Bibliography Alnestig, P., & Segerstedt, A. (1996). Product costing in ten Swedish manufacturing companies.
International journal of production economics , 46-47, 441-457.
Arbetsmiljöverket. (2008). Arbetsmiljölagen. Arbetsmiljöverkets publikationsservice.
Atkinson, A. A., & Kaplan, R. S. (1998). Advanced management accounting (3d ed.). Upper Saddle
River, USA: Prentice Hall cop.
Bergman, B., & Klefsjö, B. (2001). Kvalitet från behov till användning. Lund, Sweden:
Studentlitteratur.
Bhutta, K. S., & Huq, F. (2002). Supplier selection problem: a comparison of the total cost of
ownership and analytic hierarchy process approaches. Supply Chain Management: An international
Journal , 7 (3), 126-135.
Bowersox, D. J., Closs, D. J., & Cooper, M. B. (2007). Supply Chain Logistics Management (2nd ed.).
Michigan, USA: McGraw Hill.
Carr, A. S., & Smeltzer, L. R. (1997). An empirically based operational definition of strategic
purchasing. European Journal of Purchasing and Supply Management , 3 (4), 199-207.
Çelebi, D., & Bayraktar, D. (2008). An integrated neural network and data envelopment analysis of
supplier evalutation under incomplete information. Expert systems with Applications , 35 (4), 1698-
1710.
Davis, O. (1985). Strategic Purchasing. Purchasing Management Handbook , 59-83.
Degreave, Z., Labro, E., & Roodhoft, F. (2000). An evaluation of vendor selection models from a total
cost of ownership perspective. European Journal of Operational Research , 125 (1), 34-58.
Demirtas, E. A., & Üstün, Ö. (2008). An integrated multiobjective decision making process for supplier
selection and order allocation. Omega , 36 (1), 76-90.
Department for Environment Food and Rural affairs. (2006). Environmental key performance
indicators - Reporting guidelines for UK Business. London: Queens printer and Controller.
Dickson, G. (1966). An analysis of vendor selection systems and decisions. Journal of Purchasing , 2
(1), 5-17.
Drury, C. (2000). Management & Cost Accounting (5th ed.). London, UK: Thomson Learning.
Ellram, L. M. (1995). Total cost of ownership: An analysis approach for purchasing. International
Journal of Physical Distribution & Logistics , 25 (8), 4-23.
Emhart Glass Sweden AB. (2006). Från hantverk till världsledande industri. Sundsvall, Sweden:
Emhart Glass Sweden AB.
48
Ghodsypour, S., & O'Brien, C. (1998). A decision support system for supplier selection using an
integrated analytic hierarchy process and linear programming. International Journal of Production
Economoics , 56-57, 199-212.
Handfield, R., Walton, S. V., Stroufe, R., & Melnyk, S. A. (2002). Applying environmental criteria to
supplier assessment: A study in the application of the analytical hierachy process. European Journal
of Operational Research , 141 (1), 70-87.
Hanson, A. (2004). Hälsopromotion i arbetslivet. Lund: Studentlitteratur.
Harrington, J. H. (1999). Performance improvement: A total poor quality cost system. The TQM
Magazine , 11 (4), 221-230.
Innes, J., & Mitchell, F. (1993). Overhead Cost. London, UK: The Chartered Institute of Management
Accountants.
Johnsen, T. E., Johnsen, R. E., & Lamming, R. C. (2008). Supply relationship evaluation: The
relationship assessment process (RAP) and beyond. European Management Journal , 26 (4), 274-287.
Juran, J. M., & Godfrey, B. A. (1998). Juran's Quality Handbook (5th ed.). New York, USA: McGraw-
Hill.
Kaplan, R. S., & Cooper, R. (1997). Cost & Effect: Using Integrated Cost Systems to Drive Profitability
and Performance. Boston, USA: Harvard Business School Press.
Kokangul, A., & Susuz, Z. (2009). Integrated anlytical hierarch process and mathematical
programming to supplier selection problem with quantity discount. Applied Mathematical Modelling
, 33 (3), 1417-1429.
Kraljic, P. (1983, September). Purchasing must become Supply Management. Harvard Business
Review , p. 111.
Lai, K.-H., Gunasekaran, A., & Edwin Cheng, T. (2008). Responsive supply chain: A competitive
strategy in a networked economy. Omega , 36 (4), 549-564.
Martinsons, M. G. (2008). Relationship-based e-commerce: theory and evidence from China.
Information Systems Journal , 18 (4), 331-356.
Mattson, S.-A. (2004). Logistikens termer och begrepp. Stockholm, Sweden: PLAN Föreningen för
Produktionslogistik.
Merriam, S. B. (1994). Fallstudien som forskningsmetod. Lund: Studentlitteratur.
Nollet, J., Calvi, R., Audet, E., & Côté, M. (2008). When excessive cost savings measurement drowns
the objectives. Journal of Purchasing & Supply Management , 14 (2), 125-135.
Parkinson, S. (1999). Agile manufacturing. Work study , 48 (4), 134-137.
Ramsey, J., & Croom, S. (2008). The impact of evolutionary and developmental metaphors on
purchasing and supply chain management: A critique. Journal of Purchasing & Supply Management ,
14, 192-204.
49
Rodney, M., Denis, L., Henderson, J., & Hazlett, S.-A. (2008, October). A grounded theory research
approach to building and testing TQM theory in operations management. Omega , 36 (5), pp. 825-
837.
Saunders, M. (1997). Strategic Purchasing & Supply Chain Management (2nd ed.). Great Britain:
PITMAN Publishing.
Stevenson, W. J., & Ozgur, C. (2007). Introduction to management science weith spreadsheets. New
York, USA: McGraw Hill.
Tam, V. W., Tam, C., Zeng, S., & Chan, K. (2006). Environmental performance measurement indicators
in construction. Building and Environment , 41 (6), 164-173.
Tseng, F.-M., Chiu, Y.-J., & Chen, J.-S. (2009). Measuring business performance in the high-tech
manufacturing industry: A case study of Taiwan’s large-sized TFT-LCD panel companies. Omega , 37
(3), 686-697.
van Weele, A. J. (2005). Purchasing & Supply Chain Management (4th ed.). Eindhoven, Netherlands:
Thomson.
Viale, D. J. (1996). Basics of Inventory Management - From Warehouse to Distribution center. USA:
Course Technology Crisp.
Wouters, M., Anderson, J. C., & Wynstra, F. (2005). The adoption of total cost of ownership for
sourcing decisions––a structural equations analysis. Accounting, Organizations and Society , 30 (2),
167-191.
Yeung, A. C. (2008). Strategic supply management, quality initiatives, and organizational
performance. Journal of Operations Management , 26 (4), 490-502.
Yin, R. K. (1994). Caste Study Research - Design and Methods (2nd ed.). USA: Sage publications, Inc.
50
Internet
Grebener, P. (2004, June 12). Maskinteknik, info från inriktningsledarna. Retrieved September 30,
2008, from Royal Institute of Technology (KTH) Homepage:
http://www3.telge.kth.se/maskin/6s2405/mapp/Kursmaterial.doc
MGI Management institute Inc. (1999). Online courses: MGI Management Institute. Retrieved
November 6, 2008, from MGI Basics of Supply Chain Management:
www.mgi.com/onlinecourses/e56/unit5/57.html
SA, E. G. (n.d.). Our company: Emhartglass. Retrieved December 16, 2008, from Emhartglass:
http://www.emhartglass.com/en/our-company
Shields, H. C. (2005, May 25). Single Sourcing: Pros & Cons. Retrieved January 21, 2009, from
ThomasNet: Industrial Newsroom:
http://news.thomasnet.com/IMT/archives/2005/05/single_sourcing.html
Verbal
Position Department
Quality engineers Quality department
Manager mechanism assembly Production Manager financial department Finance
Logistics developer Logistics
Purchasers Purchasing department
1
Appendix A. Questionnaire for deciding relevant factors of purchasing
Hej, jag har nu kommit så långt med examensarbetet att det är dags att välja ut vilka faktorer som är relevanta i en modell för totalkostnad. Eftersom du är expert är jag tacksam för din hjälp med att identifiera faktorerna genom följande frågor:
1. Vilka faktorer är viktiga vid inköp ur ett totalkos tnadsperspektiv? (börja med att lista faktorer, max 10 st. Rangordna därefter faktorerna genom att markera med siffror från 1 och uppåt där 1 är viktigast)
Viktiga faktorer vid inköp ur ett totalkostnadsperspektiv? Rang Styckkostnad
Rätt artikel/utförande
Kvalitet
Leverantörssäkerhet
Utarbeta strategi för köp av varor/tjänster (1. Tex standardprodukter – fler leverantörer, prispress, 2. Specialkompetenskrävande prod – få leverantörer, nära samarbete) eller (1. Återkommande behov – RAMAVTAL 2. Sporadiska behov – MARKNADSANALYS, PRISPRESS 3. Investeringar – LEVERANTÖRSUTV/VAL, PRODUKTENS KVALITET, SERVICEGRAD, KOMMERSIELLA OCH BRANSCHVILLKOER, PRIS/AVTAL
Rätt tid
Teknisk kvalitet
1
Ställkostnad
Rätt kvalitet
Pris
Kvalitet Begränsa och standardisera produktsortiment Rätt kvalitet
Leveransprecision
2
Kvalitet
Rätt pris
OTD
Ledtid
Samordna inköp (skaffa effektiva rutiner för inköpshantering, centrilera så långt det går.) Flexibilitet i produktionen
Pris
3
Leveranssäkerhet
Rätt leverantör
Transporter
Pris Optimera och utveckla de administrativa flödena (tex samlingsfakturor, förkontering Pris
Leveranstid
4
Frakter
Rätt tid (OTD + Ledtid)
Processer
5
2
Flexibilitet
Emballage
Miljöhänsyn (transporter, emballage, korrosionsskydd etc.
Miljö
6
Kontroll overhead cost
Miljö
Ställkostnad
7
Ekonomi overhead cost
Transport
8
Tull 9
10
2. Vilka övriga faktorer är viktiga vid inköp? (börja med att lista faktorer, max 10 st. Rangordna därefter faktorerna genom att markera med siffror från 1 och uppåt där 1 är viktigast)
Övriga viktiga faktorer vid inköp? Rang Maskinpark som passar våra produkter
Samarbete med leverantör
Ständiga förbättringar
Att orderhandläggaren pratar svenska el. bra engelska
Antal leverantörer
1
Nära samarbete med lev. för att utveckla nya lösningar och material
Öppenhet Leverantörssamverkan
Att lev. har ordning i sitt system
2
Miljömedveten Kommunikation
3
Anpassningsbar
Pålitlighet – ärlighet
4
Information 5
Egna initiativ (från lev.) 6
3
7
8
9
10
Kommunikation med leverantör
Logistiska lösningar
Leverantör som tar initiativ till förändring (inte prishöjning)
Svar utan rang
3. Övrigt att tillägga? (tips, synpunkter, frågor)
