SUPPLIER SELECTION METHOD USING ANALYTICAL HIERARCHY PROCESS (AHP): A CASE STUDY ON A JIT AUTOMOTIVE INDUSTRY

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1 SUPPLIER SELECTION METHOD USING ANALYTICAL HIERARCHY PROCESS (AHP): A CASE STUDY ON A JIT AUTOMOTIVE INDUSTRY Industrial Engineering Department, President University johanoscarong@gmail.com; dickysalim92@gmail.com ABSTRACT Increasing product varieties has triggered strong competition among companies. To deal with this problem, every company has to improve their performance in order to produce the best quality of product. To fulfill the needs of best product, supplier selection process plays an important role in improving company s performance. In actual conditions, process of supplier selection is not an easy thing to determine, yet it needs a right strategic way to select the potential suppliers. In Just-In-Time (JIT) manufacturer, supplier selection, as long-term investment, is one of the success keys to the JIT implementation. Thus, the objective of this paper is to use a method for supplier selection process in JIT manufacturing industry by applying Analytical Hierarchy Process (AHP). This paper is written based on a study in the largest JIT Automotive Industry in Indonesia. The method begins by applying AHP to settle the criteria considered in a multi criteria and multi person decision making problem. A detailed step-bystep implementation of the method is provided and a case study based on a JIT automotive industry is conducted to prove and ensure the consistency and validity of the applied method. The proposed method AHP, as a method for selecting supplier in a multi person and multi criteria decision, aims to fulfill all the demand in the supplier selection process by considering all 5 criteria and 4 potential suppliers. The 5 criteria are cost, high quality, supplier experience, supplier capability and delay time (delivery). Keywords: Supplier selection, Analytical Hierarchy Process, Automotive Industry, Just-In-Time. ABSTRAK Peningkatan varietas produk telah memicu persaingan yang kuat antara perusahaan. Untuk mengatasi masalah ini, setiap perusahaan harus meningkatkan kinerja mereka untuk menghasilkan produk dengan kualitas terbaik. Untuk memenuhi kebutuhan produk yang terbaik, proses pemilihan pemasok memainkan peran penting dalam meningkatkan kinerja perusahaan. Dalam kondisi yang sebenarnya, proses pemilihan supplier bukan merupakan hal yang mudah untuk ditentukan, namun perlu cara strategis yang tepat untuk memilih calon pemasok. Dalam pabrikan Just-In-Time (JIT), pemilihan pemasok, sebagai investasi jangka panjang, merupakan salah satu kunci keberhasilan pelaksanaan JIT. Tujuan dari makalah ini adalah menggunakan metode yang tepat untuk proses pemilihan pemasok dalam industri manufaktur JIT dengan cara menerapkan Analytical Hierarchy Process (AHP). Makalah ini ditulis berdasarkan studi di Industri Otomotif JIT terbesar di Indonesia. Metode ini dimulai dengan menerapkan AHP untuk menyelesaikan kriteria yang dipertimbangkan dalam proses pengambilan keputusan multi kriteria dan multi person. Implementasi langkah-demi-langkah secara rinci dari metode ini disediakan dan studi kasus didasarkan pada studi di industri otomotif JIT yang telah dilakukan untuk membuktikan dan memastikan konsistensi dan validitas dari metode yang diterapkan. Metode AHP diusulkan, sebagai metode untuk memilih pemasok dalam keputusan multi-orang dan multi-kriteria, bertujuan untuk memenuhi semua permintaan dalam proses pemilihan supplier dengan mempertimbangkan semua 5 kriteria dan 4 calon pemasok. Ke 5 kriteria tersebut adalah biaya, kualitas tinggi, pengalaman pemasok, kemampuan pemasok dan waktu tunda (delivery). Kata kunci: Pemilihan pemasok, Analytical Hierarchy Process, Industri Otomotif, Just-In-Time INTRODUCTION Today, the competition among companies grows fast. In this competitive working environment, companies which design and operate their best supply chain will be more profitable and thus stronger. Supplier is one of the most important components in supply chain. A company which develops a good relationship with the supplier can get cost profit through ontime delivery and high quality products. Since the evaluation of suppliers has strategic importance for company, the result can be obtained by using right performance criteria and evaluation method to produce robust solutions in order to improve supplier s performance. Dickson presented 23 supplier selection criteria and assigned the rank [1]. 1

2 Supplier Selection Method Using Analytical Hierarchy Process (AHP): A Case Study on a JIT Automotive Industry It is never being expected that a supplier can be perfect, fulfills all supplier selection criteria. For example, supplier s product may have high quality, but the cost of production may be high. On the other hands, the cost of production from other suppliers may be the lowest, this is good for company, but at the same time the target delivery performance may be the worst. As seen from the example, to make a good decision, supplier selection process has to be systematically handled. Besides, it can also maintain a good relationship with supplier, which is important part in supplying product on time. A good relationship with supplier is very important in product development, in which it supplies product with cheaper cost, on time delivery and more alternatives. The success of a company is determined by the greater value and ability of the suppliers. Especially for the automotive industry itself, which is a wellknown practitioner of Japanese method, Just-In- Time manufacture engineering. JIT itself is mainly focusing on lean production, supplying delivery and minimum program availability. Based on Supply Chain Management concept, supplier selection is the beginning of a successful supply chain, one of very basic and important decision. Problem usually occurs from increasing complexity level that exists in considering supplier performance and factor/ criteria relationship. In order to make a continuous evaluation comprehensively, several criteria have to be considered. Hence, tradeoff between criteria must be considered in order to apply modern production strategy [2]. Difficulty in selecting supplier can be occurred because of several criteria, such as quantitative and qualitative factors. To understand trade-off in supplier selection process, one has to consider relative weight that a buyer/customer attaches several characteristics of their supplier currently with other competitors. Based on the premise, the objective of this paper is to set a concept to select supplier in JIT Manufacturing Industry that is able to fulfill all evaluation criteria in supplier selection process (multi person and multi criteria). Actually, there are many methods in supplier selection process, such as cluster analysis, goal programing, statistical method, and factor analysis [3], but to deduce the result from the method above requires long calculation and also consumes much time. Besides, the methods above are not efficient to handle complex situation, thus a better method like AHP can be used to solve complex problem into several parts, then order the variables into a hierarchy form to form a hierarchy, include selecting suppliers. LITERATURE REVIEW In the mid of 1960 s, group of researchers were developing the performance criteria to evaluate potential suppliers. Dickson (1966) firstly identify and analyze the variety of criteria in selecting supplier. Questionnaires were distributed well contained on the 23 important criteria in supplier selection. In the same year, Dickson asked the respondents to have assessment of the importance of each criterion on a 5-point scale, which are extreme, simply, average, less and not important. The results of the questionnaires concluded that quality, price and delivery schedules are the most important criteria in supplier selection [3]. Recently, Analytical Hierarchy Process (AHP) has been used as a tool by decision makers and researchers in multi criteria decision making. Vargas stated that many outstanding works have been published based on AHP, such as selecting best alternative and resource allocations [4]. Furthermore, Yahya and Kingsman used AHP approach to determine priority in selecting suppliers by applying vendor rating and in determining how the business should be allocated. In addition, Nydick also stated that AHP is a method to prioritize decision alternative by looking on several criteria, which can be qualitative or quantitative. AHP approach is used to decrease the ratio scales from some pairwise comparisons [5]. Pairwise comparisons will be used to build relation within the structure. Hence, the result generates matrix which the ratio scale derived in the main Eigen vector or Eigen function. The matrix is characterized by positive or opposite, which is a ij = 1/a ij. This process is called a step of Synthesis of Priority. 2

3 Regarding to this case, Saaty suggested a relative measurement scale in the value of 1 to 9, remembering the factors measured are in relative one with the others [6]. It is shown as below: Table 1. Measurement Scale [6] Intensity of Importance Definition Explanation 1 EQUAL Two activities contribute equally to the 3 MODERATE 5 STRONG 7 VERY STRONG 9 EXTREME objectives judgment slightly favor one activity over another judgment strongly favor one activity over another judgment very strongly favor one activity over another judgment extremely favor one activity over another 2, 4, 6, 8 MIDLE VALUE BETWEEN TWO VALUE DICISIONS According to Taha, there are several stages to construct a matrix by using the numerical value from the scale of comparison is [3]: 1. First step of writing the matrix a nxn pairwise comparison. 1 W Wn.. A =.. (1).. Wn 1 W1 2. The next step is combining the result from respondents through geometric average with systematically written as follow: Wi = n n λ j =1aij n n n i=1 λ j =1aij, i, j = 1,2,, n (2) Where: a : Matrix Pairwise Comparison Wi : Important Level of i 3. The final step is analysis level of the inconsistency Matrix Pairwise comparison. According to Saaty and Vargas, if aij represents factor i to factor j, and a jk represents factor j to factor k, the decision has to be consistent. From factor i to factor k should be all the same with a ij.a jk or a ij. a jk = a ik to all i, j, and k. The matrix is then consistent [7]. The collections of opinion between one factors with another is independent of each other, and this phenomenon causes lack of consistency answers by the respondents. Taha stated that too much lack of consistency is not desirable, thus repetitions interviews on several respondents in necessary if it is unclear [3]. It was also proven that consistency index from matrix order n can be obtained by formula: CI = n max n (3) n 1 Where: CI : Consistency Index n max : Normalized Matrix With value of n max can be searched by using this formula: n MAX = W 1 W1 +W 2 W2 +W 3 W3 + +W n Wn n (4) If Consistency Index is zero (0), the matrix is consistent. The limit lack of the consistency measured by using the Consistency Ratio (CR), which compares consistency index (CI) with random generating value (RI): 1.98 (n 2) RI = (5) n This value is depending on the order matrix n, hence the Consistency Ratio (CR) can be formulated as: CR = CI (6) RI If matrix is worth less than 10% (Consistency ratio < 0.1), the lack of consistency is still considered acceptable. The calculation was continued for level 3, in which to obtain the main Eigen vector value and Consistency Ratio (CR) at each level are obtained. RESEARCH METHODOLOGY This research mainly took place in selection process to determine the best supplier for chassis part. Currently, there are 4 potential suppliers for chassis part. In a term to maintain 3

4 Supplier Selection Method Using Analytical Hierarchy Process (AHP): A Case Study on a JIT Automotive Industry the vision of the company, which is to be the leader of automotive industry in Indonesia, the company applied a supply chain management system. Currently, the process of selecting has been organized by purchasing division, in which the selection process is determined based on 5 criteria; they are cost, quality, delivery, supplier capability, and supplier experience. The rating system and data collection is done by using questionnaire and interview, in which each criteria and potential suppliers are compared each other to get the preference point (1-9). In questionnaire, respondents were asked to give assessment and preference comparison to the criteria and suppliers used in the supplier selection process (see Table 1). Respondents, who are chosen in this study, are those who have been already in the process of evaluation and supplier selection previously. A Likert scale is then used for the questionnaire, ranging from score 1 to score 5, in which 1 indicates extremely disagree factor used for supplier assessment, while 5 strongly indicates agree factor used for supplier assessment and selection. The research methodology that is used for this research can be seen in Figure 1 below: Start Research Introduction Problem Identification Research Objective Literature Study Data Collection Data Calculation 1.Company general data 2.Company sourcing preferences 3.List of Potential supplier 4.Decision maker preferences Consistency Test No Data is OK Yes Data Analysis Selecting The Best Supplier Conclusion & Suggestion Finish Figure 1. Research Methodology 4

5 Table 2. Criteria VS. Alternative Supplier. No Data Required Initial Description 1 CS Cost 2 HQ High-Quality 3 Criteria SE Supplier Experience 4 DT Delay Time 5 SC Supplier Capacity 6 CHS Supplier Code 7 Alternative GAR Supplier Code 8 Supplier HIL Supplier Code 9 OTC Supplier Code This research is done by using AHP, in which the unstructured and complex decision making problem is broken down and restructured in a hierarchy form. Hence, the successful of JIT implementation in the company can be achieved as the important factor, which is supplier selection, is well-done. RESULT AND DISCUSSION The first important step of data processing is to develop a pairwise comparison matrix that consists of both alternatives and criteria. A pairwise comparison matrix can be set up as the importance of the criteria and the weighted value from questionnaire results are computed to measure the relative weight. Since there are five criteria of supplier selection, the result will show a 5 x 5 pairwise comparison matrix which are going to be calculated further with the summary score of the suppliers comparison in the next step (see Figure 2). After all the required data and information have been gathered, the next step of the general algorithm could be done by performing AHP step to obtain a normalized pairwise comparison matrix. The normalized pairwise comparison matrix is then added up in the row to get the weighted value of each criterion. The result will be shown in below: CO HQ SE DT SC CO HQ 1/3 1 1/3 4 1/2 A = SE 1/ /4 DT 1/5 1/4 1/4 1 1/3 SC 1/ Figure 2. 5x5 Criteria Pairwise Comparison Matrix CO HQ SE DT SC Average CO HQ A' = SE DT SC Figure 3. Normalized Pairwise Comparison Matrix (A Normalized). Next, the weighted value summary of each criteria of the suppliers has to be determined and calculated. The step starts by dividing each of the entry in the column i with the sum of entries in column i. After that, averaging each of the row in order to get the weighted value of each supplier in the row is an important step. The final step is dividing each entry by the total sum of the column, also the step to average the entry for each row are used for all criteria calculation and matrix set up. All of the steps are performed for all criteria to generate the weighted value. Finally, after all the pairwise comparison matrix have been computed and created, the weighted values for all criteria or key indicators can be summarized in the table below (see Table 3): Table 3. The Summary of All Weighted Value of Each Supplier Candidate Criterion CHS GAR OTC HIL 1. Cost/Price High Quality Supplier Experience 4. Delay Time Supplier Capability As the algorithm has been already solved and all the results are obtained, the final step of this method is to validate the result and finally select the best supplier. Before we validate the result and select the best supplier, each of the supplier has to be rated and after that time the 5x5 A Normalized matrix (see Figure 3) with each weighted value obtained for criteria (see Table 3). The result is shown in overall score determination Table 4. Finally, after the weighted values have been tabulated and the overall score of each supplier with criteria given have been 5

6 Supplier Selection Method Using Analytical Hierarchy Process (AHP): A Case Study on a JIT Automotive Industry computed, the final result of AHP is obtained and shown in Table 5. Table 4. Score Calculation and Overall Score Determination Supplier Name Score CHS GAR OTC HIL Table 5. Supplier Rank Based on Overall Score Rank 1 st 2 nd 3r d 4 th Supplier CHS GAR OTC HIL The final result shows that supplier CHS is the supplier is the supplier with the highest overall score among the other, thus it is the best recommended supplier with overall score CHS is followed by GAR (0.241), OTC (0.227), and the last one is HIL (0.109). This method shows that CHS is the best supplier that the company should choose for the supply chain partner. As the result of AHP has been obtained, it cannot be decided as final decision yet, since the method is performed based on comparison among the options that the decision makers use to set their preference among decision alternatives for every criteria. Since AHP is calculated based on a condition that a decision maker can omit the previous statement when he/she has to make many comparisons, the validity and consistency of the statement is crucial. The important point of the validity and consistency of the statement is preference that has been made for 1 pairwise comparison has to be consistent against other pairwise comparisons. Inconsistency can occur in AHP if the decision maker has to make audio statement regarding to any pairwise comparison. Consistency Index (CI) is an index that can be computed to rate/scale the inconsistency level in pairwise comparison. There are several data that are needed to calculate the CI, which is shown in Figure 5 below: Figure 4. Matrix A x A (CI) The result from the calculation above (between A and A Normalized) is: Figure 5. Result of Matrix A x A The next step is to divide each of results generated with the regarding weight that is obtained through criteria preference vector such as: : = : = : = : = : 0.21 = Total = Since the total score is , hence the average value/score can be calculated by dividing the total amount by number of criteria (n). The result of calculation is As we have obtained the average value, we can calculate the CI, in which the formula is given from previous section. The result of CI calculation is As the CI is not equal to 0 (CI = 0), it concludes that the decision making process is inconsistent. This result is normal, since the decision making performed by the decision maker is obtained through questionnaire and preference of each decision maker towards several criteria and options. As the CI is greater than 0 (CI > 0), the Random Index (RI) and CI ratio should be 6

7 evaluated. The formula for RI gives us a result of 1.188, with n is equal to 5. All the data needed are summarized in overall consistency result table (see Table 5). The limit lack of the consistency is measured by using Consistency Ratio (CR), which divides CI by RI. The result obtained is or 2.3%. Generally, the consistency level is very satisfying when CR is less than 10% (CI/RI < 0.10), and on the other hands if CI/RI > 0.10, there is an inconsistency and AHP results has no meaning or not be the best method in decision making process. Based on the result above, the matrix is worth of less than 10% (calculation shows that the CR is 2.3%). Since the CR is < 0.1, the lack of consistency is still considered as acceptable. Hence, the matrix is consistent and AHP analytical result has meaning also can be used as the best method in decision making process, especially selecting the best supplier. The results can strongly show that AHP, as a multi criteria decision-making tool, can be used to select the best supplier among many different suppliers with many different criteria. Table 6. Overall Consistency Result N 5 Average Score CI RI CR CONCLUSION The proposed method AHP, as a method for selecting supplier in a multi person and multi criteria decision, aims to fulfill all the demand in the supplier selection process by considering all 5 criteria and 4 potential suppliers. The 5 criteria are cost, high quality, supplier experience, supplier capability and delay time (delivery). AHP method is proven to be an appropriate method that is able to represent the right performance criteria to produce robust solutions in selecting the best supplier. AHP is proposed since it includes identifying key indicators and detailed step-bystep analysis. This method is more reflecting what more important criteria is for the suppliers and for the company among the selection criteria in supplier selection process. Based on the objective and result of this study, CHS is recommended as the best supplier to be selected and HIL is not a recommended supplier. Since this method is proven to be able to select the supplier based on criteria given in a complex and unstructured decision making problem, a recommendation to use this method for further research that requires structural and detailed selection process. Since this supplier selection method is proposed to suit best with the company s own condition and situation, proper adjustment might be needed within the criteria and requirement inside the company itself. Future studies regarding are important to fit better with other situation and most crucially to become applicable in many sectors/areas of JIT Automotive industries. In this research, the best supplier is CHS among other potential suppliers with overall score is 0.423, Consistency Index is and Consistency Ratio is 2.3%. REFERENCES [1]. Dickson, G.W., 1996, An Analysis of Vendor Selection Systems and Decisions, Journal of Purchasing, Vol. 2, No. 1, pp [2]. Karpak, et al., 1999, An Application of Visual Interactive Goal Programming: A Case in Vendor Selection Decisions, Journal of Multi-Criteria Decision Analysis, 8(2), pp [3]. Taha, H. A., 2003, Operation Research: An Introduction. Prentice-Hall, New Jersey. [4]. Vargas. 1990, Decision Making Process by Using AHP. New York: McGraw Hill. [5]. Yahya, S. and Kingsman, S., 1990, Vendor Rating for an Entrepreneur Development Program: a Case Study Using the AHP Method. Journal of Operational Research Society, Vol. 50, No. 9, pp [6]. Saaty, Y., 1980, The Analytical Hierarchy Process. New York: McGraw Hill. [7]. Saaty, T.L. and Vargas, 2001, Decision Making with Analytical Hierarchy Process. New York: McGraw Hill. 7