An Integrated Approach to Supplier Selection in Supply Chain Risk Management

Liu Shu

Abstract

Supply chain risk management is a very important functional activity for almost all production firms. Supplier evaluation and selection is one of the most critical decisions amongst all the activities encompassed by supply chain risk management. With increasingly complicated supply chain network and external environment, e.g. market uncertainties, natural disasters, economic and political instabilities, potential suppliers need to be evaluated against multiple criteria rather than traditional cost-based only approach, to enhance the efficiency and effectiveness of the buyer’s overall performance towards customer needs.

Nowadays suppliers and buyers usually establish their partnerships through pre-negotiated supply contracts, which could affect buying firms’ ability to react to sudden changes and hence the profit. Supplier and supply contract selection becomes particularly important in order to achieve an efficient and effective sourcing strategy.

This thesis will propose an integrated approach to select the best supplier while reducing supply chain risks at the same time. The approach starts with a thorough and systematic analysis to identify the most important factors to be incorporated into supplier evaluation. In the second phase Analytic Hierarchy Process is applied to rate potential suppliers based on weighted score of the factors identified in previous phase. After this, decision analysis technique is applied to compute the profit of supply contract offered by a few top suppliers identified in phase two. Finally, with results from phase II and III, tradeoff analysis is conducted to reach the final decision.

A numerical example will be studied to illustrate how the integrated approach could be implemented in real cases. The thesis concludes with a discussion of the contribution and possible improvements of the proposed approach.