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Decision Making Processes in Carrier Selection for Supply Chains

Abstract

Due to increase of competition on the transportation service market, modern forwarding companies should be accurate in the question of a carrier choice. It remains evident that the most efficient supplier can not be chosen without precise range of selecting criteria. Thus, in the following study the most significant criteria for supplier selection question are determined. The majority of factors for supplier efficiency evaluation are adapted from analyzed papers in the similar field, while the specialists of international road transportations suggest another part of criteria. Afterwards, the chosen criteria are used in the process of supplier evaluation methodology development which is implemented in MS Excel and based on an expert assessment method. In other words, the result of the study is the tool which facilitates decision-making process of carrier selection for forwarding companies which specialize in the field of road transportation and do not have their own fleet.

Keywords: Supplier evaluation; Supplier selection; Decision-making process; Expert assessment method; Selecting criteria; Freight forwarder.

Introduction

Nowadays it is crucial for a company to have an efficient supply chain with reliable suppliers. As quality of products and services has direct impact on the final consumer, companies-buyers should be able to choose and evaluate their suppliers precisely and pay attention not only to the cost reduction, but also to other important factors.

For the last few decades a great amount of researches was devoted to the problem of supplier performance assessment. I would like to begin the observation of the existing frameworks with the paper in which the author for the first time emphasizes the importance of supplier evaluation problem (Dickson, 1966). In the study Dickson introduces the main criteria which purchasing managers use during supplier evaluation process. Out of collected data from 170 purchasing managers the next performance attributes were defined: cost offered, quality, performance history and delivery performance. However, the delivery performance indictor can only be used for already existing suppliers and can not be implemented to new ones. Another significant framework is focused on the dependence of the relative importance of the criteria on the level and type of risk in a specific purchasing situation (Cardozo and Cagley, 1971). Later the criteria of quality was defined as the highest ranked criteria followed by delivery performance and cost offered (Weber, Current, & Benton, 1991). Apart from the reviewed works, there is a numerous amount of modern ones, however they are mainly based on the listed classic researches and include the same or  a slightly modernized criteria for supplier performance evaluation. To sum up, it can be concluded that supplier evaluation process should focus not only on the least-cost criteria, but on such factors as delivery, quality, performance histories, and etc.

In the study I want to find out which indicators are the most important in the process of giving an accurate assessment of supplier performance. In the next step, I am going to use the most significant indicators for the development of the methodology for multi-factor evaluation of suppliers work. Despite the fact that classic practice of purchasing departments shows that price remains the decisive factor in the question of supplier’s choice. Technical and socio-economical factors shouldn’t be underestimated, as soon as they take into account such significant criteria as the quality of proposed services and products, flexibility of a supplier, history performance, warranty, claims policy, etc.

The purpose of this study is to find out which factors are the most important in the process of giving an accurate assessment of supplier performance in the sphere of international road transportation. After determination of the most significant indicators, they will be used in the process of development the methodology for multi-factor evaluation of suppliers work. Despite the fact that classic practice of purchasing departments shows that price remains the decisive factor in the question of supplier’s choice, technical and socio-economical factors should not be underestimated, as they take into account such significant criteria as the quality of proposed services and products, flexibility of a supplier, history performance, warranty, claims policy, etc.

It is evident that it is not possible to create a unique set of indicators for evaluation of every type of suppliers. There are some methods which include the only one factor (Cost-Ratio Model), and this method can be used for evaluation of many spheres of business, however this kind of estimation can not be considered as adequate and complete. Thus, the study is focused on efficiency indicators specifically selected for suppliers of freight forwarding companies, mainly in the sphere of international road transportation. In other words, the final chosen criteria should be selected for the assessment the group of suppliers who offer services in the field of international road transportation.

The urgency of supplier selection problem is caused by increasing customer requirements as well as growing of competitiveness on the market. The incorrect choice of a supplier can lead to the lost of both money and reputation of a company. Speaking about novelty, the selected efficiency attributes based on the analysis of existing works will group the unique integral performance criteria for giving a proper supplier assessment. Hence, the developed methodology will help companies-buyers to improve their decision-making effectiveness and minimize the risk of choice of an unreliable supplier and as a consequence to satisfy customer needs on a high level.

The core idea of the study is to develop the methodology of supplier efficiency evaluation based on created groups of unique integral performance criteria in order to solve multi-criteria supplier selection problem. In terms of the study the following objectives have to be achieved:

  • Analysis of literature devoted to the supplier selection question;
  • Selection of relevant criteria for supplier efficiency assessment in the sphere of international road transportation;
  • Development of the methodology for a forwarding company, describing the process of supplier efficiency assessment.

As the study is focused on the supply of the international freight forwarding company, the definition should be determined precisely. Thus, international freight forwarder (IFF) is an international trade company, which can provide a variety of functions to facilitate the movement of cross-border shipments. The functions provided by IFF company include: delivery and distribution services; handling payment arrangements; assistance in paperwork required for deliveries; and organizing local and international shipping; information services; insurance; customs services and warehousing and consolidation services. In terms of the paper, delivery can be defined as the minimal period of time for the supplier needs to complete the order based on the request of a customer and on the admitted reliability of the commitment (Bairly, 1987). Quality means both the level of quality declared and the real quality of delivered products or services, which a company-buyer receives. Another important term is the performance history indicator which represents the ability of suppliers to accomplish the objectives that a company-buyer demands (Abdul Hamid and Krishnapillai, 2006). Finally, warranty can be interpreted as an obligation of a supplier  that goods sold is a factually stated or legally implied and in the cases when goods fail to meet customer expectations, a supplier undertakes to repair or replace those goods.

Literature review

Nowadays, many contemporary frameworks are focused on the problem of supplier evaluation performance. It is evident that vendor selection is one of the key functions of purchasing department (Weber et al., 1991). Especially it works for manufacturing companies, where the quality of final product and the level of customer satisfaction directly depend on suppliers’ competence and quality of raw material. According to the work of Handfield, Walton, Sroufe, & Melnyk (2002) for the last few decades suppliers and supply chains have became increasingly critical for the success of companies. It is important to highlight that raw material on average constitutes from 40 to 60 per cent of the unit cost of a product. Moreover, in the case of buying raw materials from outside vendors the percentage is higher. As a result, an increase of a price for the unit of a product leads to a loss of customer trust. Thus, it can be concluded that if a company can establish long-term relationship with reliable suppliers, it enhances the whole supply chain as a focus company can be sure in quality of purchasing products or services and can reduce costs due to long-term arrangements. However, in the following work not only cost factor will be considered as a criterion for measuring the performance of suppliers, but other quantitative and qualitative factors which are important for the decision making process.

As it has already been mentioned, there are some works in the literature which include only cost factor and this approach can be used for evaluation of many spheres of business, however this kind of estimation can not be considered adequate and complete. I am going to review several frameworks devoted to the weight of price in the rating of criteria. According to Dickson’s (1996) work based on a survey of purchasing agents and managers the net price factor offered by each vendor (including discounts and freight charges) takes the 5th place and is evaluated as considerable important, while quality takes the 1st place and is categorized as extremely important, as well as delivery, performance history, warranties and claim policies criteria. However, in the work of Weber et. al (1991), which is primarily based on academic literature and compares different articles about vendor selection process, the results are not the same. Thus, the net price goes on the first place and the criterion of geographic location becomes one of the most important, while such criteria as performance history and warranties and claim policies lose its value according to the survey. As the authors analyze literature devoted to supplier evaluation and selection issue only up to 2000, the results can already be considered as outdated. Nevertheless, William Ho (2009) in his work analyses more contemporary articles written in the period from 2000 to 2008. The result of his work shows that quality again becomes the most popular criterion among authors, as well as in Dickson’s survey, while the delivery factor remains the same on the second position. Moreover, the work of William Ho observes that the third most popular criterion is price. Based on the above resources, it is possible to sum up that price is not the most important criterion in the process of supplier performance evaluation and traditional single criterion approach based on lowest cost bidding is no longer supportive. The traditional cost-based approach cannot guarantee that the selected supplier is comprehensive optimal as the customer-oriented criteria such as quality, delivery, flexibility, etc. are not considered.

The most of the existing articles are focused on vendor selection problem in industrial companies, where purchasing departments procure raw material from their suppliers (Dickson, 1966). However, far too little attention has been paid to the service provider evaluation and selection. Thus, in terms of my study I will mainly focus on the criteria appropriate for evaluation and comparison of a supplier that provides services in the sphere of international road transportations. The existing limitations are set due to the aim of the study, which is devoted to creation of a decision-making model for evaluation supplier performance in the forwarding company. As the process of evaluating and selecting the most appropriate supplier bases on the chosen criteria, the set of criteria should be selected precisely. Thus, authors (Kahraman, Cebeci, & Ulukan, 2003) suggest that selection criteria can be grouped into the distinct categories by merging resembling factors into one group. The author carries out service and cost criteria as the most important for the carrier selection, while authors of another work (Pedersen & Gray, 1998) performed the next four categories: timing, price, security and service. McGinnis (1989) in his work analyzes the data of 11 studies and concludes that every paper has its own combination of factors, but reliability remains the most important one, while transportation time is more valuable than freight price criterion. Premeaux (2002) compares the factors chosen by responders in 1991 to results in 2001. More up-to-date responses show that customers have started pay more attention to such factors as information access, availability of services, carrier performance and customer relations. Therefore, Voss, Page Jr, Keller and Ozment (2006) are the first authors who took into account carrier security criterion. To sum up, the listed frameworks are based on different way of classification, ranking, different methodologies, that means that results are hard to compare. However, the next paper examines supplier selection decisions in terms of the national aspect, where responders from different countries should rank the identical set of criteria (Wang, Bovik, Sheikh, & Simoncelli, 2004). Thus, the authors compare 5 countries (UK, US, China, Germany and Norway) and demonstrate the results which show that quality is considered the first priority factor for UK, US and China with delivery on the second place, while for Norway and Germany the result is opposite. Another research made in Israel with Israeli international traders (Perlman at. al 2009) identifies reliability group of factors as the most important, which includes such criteria as reliability of service and presented information. The second most important factor for responders is the deadlines, that means carriers are able to meet their own obligations towards customers and provide them with reliable schedules. Competitive price takes the third place, thus it is following that for Israeli traders price is not the decisive factor.

To conclude, I would like to point out that it is not possible to create a unique set of indicators for evaluation of every type of supplier. However, there is a basic set of criteria, such as quality of production, delivery, price, reputation and others, which suits both service and product companies, including freight forwarders.

 

Methodology

As the study is aimed at finding out the most relevant criteria for giving an accurate assessment of supplier performance in the sphere of international road transportation, data sourcing is one of the main parts of the study. Thus, the data gathering will be implemented by interviewing the employees of Major Cargo Service company and other specialists in the sphere of international road transportations. Moreover, during the work such methods of analysis as abstracting and reviewing of existing frameworks regarding the problem of performance assessment in the field of transporting will be used. The papers undertaken over the last decade will be sourced through such databases as Science Direct, JSTOR, Scopus, etc.

Another part of the research will be devoted to the choice of suppliers for the future assessment.  As long as the focus company is an international freight forwarder, one of their key services is international delivery forwarding, which includes cargo transportation. However, the company does not have its own vehicle fleet, which means they use services of carriers, which must be reliable as it affects the whole supply chain of the company. Thus, the main suppliers of the international road transportation department are international or domestic carriers. In the study, the group of suppliers will be selected out of a company database. One of the main limitations of the study is that efficiency evaluation can be done only with carriers, who have already provided their transportation services to the firm.  In other words, new suppliers can not be compared with already existing ones as criteria demand the information regarding the level of performed services, the percentage of successful carriages, etc.

Another limitation is that the group of carriers will be chosen in terms of the same direction. Such a limitation is caused by geo-political features which may vary depending on the direction of a carriage. As the range of criteria will be the same for every supplier, the chosen carriers should be in the same external conditions. Moreover, a transportation direction will be chosen in the interests of the company to analyze a specific group of suppliers.

The process of gathering and selecting the criteria for supplier assessment is crucial for reaching the aim of the work. During the analysis of existing literature the most significant criteria described by contemporary authors will be collected and compared. Thus, the main range of criteria will be formed out of already existing factors described in the frameworks. In the next stage, the criteria will be sorted by using the method of expert assessment. In other words, the process of sorting will be conducted with the help of specialists from the Major Cargo Service Company, including the head of the international road transportation department. The experts will choose the most relevant criteria, which afterwards will be grouped into general factors, such as economical, technical, qualitative etc. As complex factors, or multi-criteria factors, include qualitative criteria, they will be transferred into numeric values according to a corresponding scale.

On the other stage, according to the method of qualimetry, each criterion should get its own weight of importance, which will be identified by the same group of experts. It means that the method of expert assessment will be used again. The group of experts will range the chosen criteria according to their professional experience and competences in the sphere of international road carriages. As soon as these steps are carried out, the supplier with the highest efficiency will be identified.

Results

The literature analyzed during the work will collect the main ideas considering the different methods of supplier selection and assessment questions. It will be helpful not only for the future researchers in the field of supplier efficiency analysis and evaluation, but for managers of forwarding companies as they can get the summarized information considering relevant criteria used in the process of carriers assessment.

As it has already been mentioned, the process of choosing the most relevant criteria for carriers assessment will be taken in the two main steps. At first, the criteria will be selected out of those, described in the cotemporary literature. On the next step, they will be corrected by the specialists of the focus company. Presumably, the following factors will be included in the final range of criteria: performance history, number of vehicles owned by a carrier, warranties and claim policies, etc.

The developed methodology will be described in details specifically for forwarding companies. The methodology will include the algorithms of ranging the chosen criteria, the process of criteria comparison according to the experts assessment method based on the science of qualimetry and finally describe the process of estimation and getting results. Thus, managers of the focus company will have a tool for estimation of suppliers and will be able to compare and choose the most profitable suppliers considering not only cost factor, but other relevant quantitative and numeric criteria. Moreover, the tool will be developed in the MS Excel in order to make it available and easy to apply on practice as MS software is traditionally used in transportation companies.

Conclusion

As the role of suppliers in supply chains of modern companies tends to increase, the question of accurate supplier efficiency evaluation becomes urgent. It is especially important for forwarding companies to work only with efficient and reliable carriers as they play significant role in the question of customer satisfaction. It is evident that the best carrier can not be chosen correctly without relevant selecting criteria, that is why the results of this work will be helpful for forwarding companies who care about their reputation and success.

Another part of the study, which is devoted to the development of the unique methodology, includes the selected criteria and will be based on MS Excel. However, the created tool will have to be adopted manually to the new conditions if for example the amount of selecting criteria will change. Due to that fact, the research might be continued with the development of program, which can be directly installed in a corporate system of a company. Moreover, in the study will be used the method of expert assessment as the methodology will be created for the specific company, while the same procedure can be implemented through the hierarchy analysis method. This method has complex mathematical structure that increases the accuracy of results and reduces the subjective factor. Thus, the described method can be used in the future researches, afterwards the results can be compared to a more traditional expert assessment method.

References

  • Dickson, G. W. (1966). An analysis of vendor selection systems and decisions. Journal of purchasing2(1), 5-17.
  • Kahraman, C., Cebeci, U., & Ulukan, Z. (2003). Multi-criteria supplier selection using fuzzy AHP. Logistics information management16(6), 382-394.
  • Loetveit Pedersen, E., & Gray, R. (1998). The transport selection criteria of Norwegian exporters. International Journal of Physical Distribution & Logistics Management28(2), 108-120.
  • McGinnis, M. A. (1989). A comparative evaluation of freight transportation choice models. Transportation Journal, 36-46.
  • Premeaux, S. R. (2002). Motor carrier selection criteria: perceptual differences between shippers and motor carriers. Transportation Journal, 28-38.
  • Šimková, I., & Konečný, V. (2013). The Evaluation of Services Quality Forwarding. Perners Contacts8(4), 76-85.
  • Voss, M. D., Page Jr, T. J., Keller, S. B., & Ozment, J. (2006). Determining important carrier attributes: a fresh perspective using the theory of reasoned action. Transportation Journal, 7-19.
  • Weber, C. A., Current, J. R., & Benton, W. C. (1991). Vendor selection criteria and methods. European journal of operational research50(1), 2-18.
  • Cardozo, R. N., & Cagley, J. W. (1971). Experimental study of industrial buyer behavior. Journal of Marketing Research8(3), 329-334.
  • Handfield, R., Walton, S. V., Sroufe, R., & Melnyk, S. A. (2002). Applying environmental criteria to supplier assessment: a study in the application of the analytical hierarchy process. European journal of operational research141(1), 70-87.
  • Abdul Hamid, A.B. and Krishnapillai, G. (2006). “The Impact
  • of Purchasing and Early Supplier Involvement (ESI)
  • in a Manufacturing Firm”, Research Vot 75211, Universiti
  • Teknologi Malaysia.
  • (Bairly, 1987).????????
  • William Ho (2009) ???
  • (Perlman at. al 2009)
  • Wang, 2004???
  • Wang, Z., Bovik, A. C., Sheikh, H. R., & Simoncelli, E. P. (2004). Image quality assessment: from error visibility to structural similarity. IEEE transactions on image processing13(4), 600-612.


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