Value Analysis Studies
Five cases applying AHP to supply chain risk management
We demonstrate SMART on same data
Finland 2010
Blackhurst, Scheibe & JohnsonInternational Journal of Physical Distribution & Logistics Management 38:2 [2008]
• Risk by product and by supplier• Purpose to identify degree of risk for
alternative suppliers
Finland 2010
Blackhurst et al. – SMART WeightsRisk Rank Based on 1st Weight
Defects/million parts 1 100.0 0.18
Ease of problem resolution 2-3 83.3 0.15
Timeliness of corrective action 2-3 83.3 0.15
Fire 4 66.7 0.12
Product complexity 5 50.0 0.09
Labor availability 6-7 33.3 0.06
Supplier bankruptcy 6-7 33.3 0.06
Labor dispute 8-10 22.2 0.04
Political issues 8-10 22.2 0.04
War and terrorism 8-10 22.2 0.04
Value of product 11 16.7 0.03
Earthquake 12-13 11.1 0.02
Flood 12-13 11.1 0.02
Finland 2010
Blackhurst et al. – ScoresCriteria Weights Supplier1 Supplier2 Supplier3 Supplier4
Defects/million 0.18 0.700 0.267 0.850 0.900
Ease of resolution 0.15 0.800 0.214 0.900 0.850Product complexity 0.09 0.800 0.761 0.700 0.850
Timeliness to correct 0.15 0.800 0.169 0.850 0.850
Product value 0.03 0.700 0.686 0.650 0.750Earthquake 0.02 0.850 0.650 0.950 0.350
Fire 0.12 0.850 0.200 0.300 0.700
Flood 0.02 0.950 0.650 0.800 0.600
Labor availability 0.06 0.850 0.300 0.800 0.650
Labor dispute 0.04 0.800 0.150 0.650 0.750
Political issues 0.04 0.800 0.400 0.850 0.600
Supplier bankruptcy 0.06 0.950 0.900 0.650 0.650
War and terrorism 0.04 0.750 0.400 0.750 0.700
Finland 2010
Blackhurst et al. – Value Scores
Supplier Score RankSupplier 1 0.799 1Supplier 4 0.779 2Supplier 3 0.746 3Supplier 2 0.355 4
Finland 2010
Value Analysis• Focus on improvement of alternatives• Supplier 2 clearly inferior – discard• IF SCORES VERY CLOSE– Consider additional criteria– Discard criteria where remaining alternatives have
equal performance• EITHER WAY– Consider improving existing alternatives– Broaden search to find additional suppliers– Seek actions to improve existing supplier performance
where they are weak
Finland 2010
Implications
• Supplier1 weak on important criteria– Weakest rating – defects/million parts
• Supplier3 best on production-related criteria– Slight disadvantage in defects– Greater disadvantage on product complexity, product value– Low on exposure to fire– Slight disadvantage with respect to labor– IMPROVE product design, quality
• Supplier4 – weak on external risk– IMPROVE by relocation?
Finland 2010
Wu, Blackhurst & ChidambaramComputers in Industry 57 350-365 [2006]
• AHP model for inbound supply risk• Two suppliers • 18 risk factors– We selected top 10
Finland 2010
Wu et al. – SMART weightsRisk Rank Based on 1st Weight
Cost 1 100 0.251
Quality 2 94 0.236
On-time delivery 3 81 0.203
Continuity of supply 4 51 0.128
Engineering/Production 5 17 0.043
Second Tier supplier 6 13 0.033
Demand 7 12 0.030
Internal legal issues 8 11 0.028
Natural/man-made disasters 9 10 0.025
Politics/Economics 10 10 0.025
TOTAL 399 1.0
Finland 2010
Wu et al. – Scores & ValueCriteria Weight Supplier1 Supplier2
Cost 0.251 0.801 0.801Quality 0.236 0.903 0.701On-time delivery 0.203 0.804 0.602Continuity of supply 0.128 0.907 0.507Engineering/Production 0.043 0.623 0.522Second Tier supplier 0.033 0.731 0.631Demand 0.030 0.929 0.612Internal legal issues 0.028 0.923 0.923Natural/man-made disasters 0.025 0.627 0.710Politics/Economics 0.025 0.917 0.917TOTAL 0.84 0.68
Finland 2010
Wu et al. - Sensitivity
• Many of their original 18 criteria didn’t discriminate
• Of the 10 used here, Cost, Internal legal issues, Politics/economics the same for both
• Supplier1 clear choice– Quality, delivery, continuity, demand– Weak on location – might relocate
• Supplier2 needs to improve:– Product features
Finland 2010
Kull & TalluriIEEE Transactions on Engineering Management 55:3 [2008]
• Used AHP to evaluate supplier ability to respond to risks
• Fed into goal programming model• Three candidate suppliers• Five risk categories– 14 specific measures
Finland 2010
Kull & Talluri – SMART WeightsRisk Category Rank Based on 1st Weigh
tQuality management Quality 1 100 0.342
Reliable material availability Delivery 2 72.8 0.249
Reliable cycle time Delivery 3 61.2 0.209
Protection against natural disaster Delivery 4 19.9 0.068
Excess capacity Delivery 5 11.6 0.040
Legal/Environmental control Quality 6 11.1 0.038
Power in the relationship Cost 7 5.2 0.018
Flexibility in processes Flexibility 8 3.4 0.012
Cost management capabilities Cost 9 2.6 0.009
Stable supply market Confidence 10 2.1 0.007
Information systems Confidence 11 0.7 0.002
Relations/Communications Confidence 12 0.7 0.002
Research capabilities Flexibility 13 0.7 0.002
Stable currency Cost 14 0.4 0.001Finland 2010
Kull & Talluri – Scores & ValueRisk Weight Supplier A Supplier B Supplier C
Excess capacity 0.040 1.0 0.50 0.25
Reliable material availability 0.249 0.33 1.0 0.33
Reliable cycle time 0.209 1.0 0.33 1.0
Protection against natural disaster 0.068 1.0 0.33 0.33
Cost management capabilities 0.009 0.33 0.33 1.0
Power in the relationship 0.018 1.0 0.33 1.0
Stable currency 0.001 1.0 1.0 1.0
Quality management 0.342 1.0 1.0 1.0
Legal/environmental control 0.038 1.0 0.33 1.0
Research capabilities 0.002 1.0 1.0 1.0
Flexibility in processes 0.012 1.0 0.175 0.413
Information systems 0.002 0.438 0.109 1.0
Stable supply market 0.007 1.0 1.0 0.33
Good relations/Communications 0.002 1.0 0.33 1.0
FINAL SCORE 0.825 0.737 0.746Finland 2010
Sensitivity
• Criteria that didn’t matter this choice– Stable currency, quality management, research– NOT A MATTER OF IMPORTANCE– A MATTER OF CONTEXT
• Supplier A won – weak on:– Material availability, cost management, IS
• Supplier C close – needs to improve on:– Protection against natural disaster, excess capacity,
process flexibility, supply market stability
• Supplier B weak on IS, process flexibilityFinland 2010
Schoenherr, Rao Tummala & HarrisonJournal of Purchasing & Supply Management 14 [2008]
• Considered five outsourcing options1. Sourcing finished goods from Mexico2. Sourcing finished goods from China3. Sourcing parts from China and assembling in the U.S.4. Sourcing parts from China, assembling in a Mexican
Maquiladora without investment5. Sourcing parts from China, assembling in a Mexican
Maquiladora with investment
• 17 Criteria
Finland 2010
Schoenherr et al. SMART WeightsRisk Factor Sub Obj Main Obj Rank Relative Weight
Product cost Cost Product 1 100 0.256
Product defect rate Quality Product 2 96.1 0.246
Order fulfillment risk Service Partner 3 25.4 0.065
Transportation risk Environment 4 24.6 0.063
ANSI compliance Quality Product 5 24.2 0.062
Competitor cost Cost Product 6 19.9 0.051
Supplier fulfillment risk Service Partner 7 19.9 0.051
On-time/budget delivery
Service Partner 8 19.9 0.051
Logistics risk Service Partner 9 16.8 0.043
Sovereign risk Environment 10 8.6 0.022
Wrong partner risk Mngt Capabilities Partner 11 8.2 0.021
Overseas risk Mngt Capabilities Partner 12 8.2 0.021
Supplier risk Mngt Capabilities Partner 13 7.8 0.020
Finland 2010
Schoenherr et al. Scores, ValueRisk factor weight FG-
MexFG-Chi
Parts Chi, US assy
Parts Chi, Maq no invest
Parts Chi, Maq w/invest
Product cost 0.256 0.25 1.0 0.22 0.94 0.44
Product defect rate 0.246 0.73 1.0 0.62 0.73 0.85
Order fulfillment risk 0.065 0.37 1.0 0.93 0.47 0.53
Transportation risk 0.063 1.0 0.59 0.38 0.33 0.31
ANSI compliance 0.062 1.0 1.0 1.0 1.0 1.0
Competitor cost 0.051 0.09 1.0 0.26 0.49 0.53
Supplier fulfillment risk 0.051 0.25 0.33 0.53 1.0 0.72
On-time/budget delivery 0.051 1.0 0.28 0.31 0.09 0.17
Logistics risk 0.043 1.0 0.49 0.22 0.16 0.16
Sovereign risk 0.022 1.0 0.54 0.54 0.20 0.20
Wrong partner risk 0.021 1.0 1.0 0.63 1.0 0.19
Overseas risk 0.021 0.46 0.125 1.0 0.125 0.23
VALUE SCORE 0.583 0.823 0.505 0.660 0.552
Finland 2010
Sensitivity
• China – big advantage in cost, quality– Weak – overseas risk, demand risk, natural
disaster, on-time/budget, supplier management– Could insure against overseas risk, natural disaster– Hedge against demand risk– Train or BPR for on-time, supplier management
Finland 2010
Second choice – make in China, Assemble in Maquiladora, without investment
• Relative advantages:– Reduce supplier fulfillment risk, wrong partner risk
• Disadvantages:– Transportation risk management– Order fulfillment risk– On-time deliver
Finland 2010
Third: Outsource to Mexico
• Outsource to Mexico– Weak: cost (most important)– Average: product quality (2nd most important)
• Build new facility in Mexico– Bad on cost
Finland 2010