Faculty of Technology, Policy
and Management
MSC Program
Management of Technology
Supplier Development for
Different Supplier Segments
Master Thesis Committee
First supervisor:
Dr. Jafar Rezaei
TLO section
Second supervisor:
Dr. Victor Scholten
TSE section
Chairman:
Prof. dr. Lorant Tavasszy
TLO section
Jing Wang
4258150
Abstract
In order to standout from competition in the global market, companies must rely on competent
suppliers. The supplier development program is designed to create and maintain a network of
competent suppliers, which has a major influence on the competitive advantages of a buying
company. The existing literatures on supplier development all adopt “one-size-fit-all” strategies.
However, to allocate scarce resources more efficiently suppliers need to be strategically segmented
and improved by tailored strategies. Moreover, a strong and close supplier-buyer relationship, to a
great extent depending on supplier willingness, also plays a key role for buying companies to achieve
lead position in the market. However, the existing literatures usually only focus on supplier
capabilities development while neglect supplier willingness improvement. To address these practical
problems, this research proposes a strategic method that considers capabilities and willingness as
two dimensions for segmenting and developing suppliers and links supplier development to supplier
segmentation to achieve an effective and efficient supplier development. In the proposed
methodology, Analytic Hierarchy Process (AHP), fuzzy Analytic Hierarchy Process (AHP) using fuzzy
preference programming (FPP) and Best-Worst Multi-Criteria Decision-Making Method are utilized
to solve the Multi-Criteria Decision Making (MCDM) problem of supplier evaluation. A supplier
development conceptual model is proposed to develop suppliers in different segments. The
proposed framework is further applied in a real world case with experience from a mid-size high
tech company as input to validate the model.
Keywords: supplier segmentation, supplier development, AHP, fuzzy AHP using FPP, BWM
Acknowledgements
Two years of Master life has been an enjoyable journey to me. This thesis is the final part of my
Master degree program in Management of Technology at TU Delft. Now that the time comes to a
conclusion, I would like to express my gratitude to all who helped me and encouraged me along the
way.
First and foremost I would like to express my sincere thanks and gratitude to my first supervisor, Dr.
Jafar Rezaei, for his guidance, inspiration, and full support to my research work. Thank you for
helping me to overcome the difficulties and challenges in my work, while setting high goals for me
and giving me the opportunity to write my first journal paper. It has always been a great pleasure
working with you.
I would also like to offer my gratitude to my thesis committee chairman Prof. Dr. Lorant Tavasszy,
and my second supervisor Dr. Victor Scholten, for your efforts on reviewing my thesis and your
valuable suggestions. I appreciate your advice and the inspirational discussions we had.
I have had the pleasure of collaborating with Beijing Time High Technology Ltd., and I would like to
extend my thanks to the colleagues in BTHT for their important contribution to this thesis, this work
wouldn’t have been finished without your help. Special thanks to Mr. Rong Tang, CEO of BTHT, the
discussions with you have broadened my horizon and allowed me to have an in-depth view of the
industrial perspective.
Also, I would like to extend special thanks to my friends and roommates, you enriched my staying in
Delft in many aspects. Life is happy with your accompany.
And most of all, I want to express my deepest appreciation to my family, for your endless love,
understanding, and encouraging me to pursue my dream.
Summary
In today’s competitive business climate most organizations focus on their core competencies and
outsource non-core products or services to external suppliers. Companies are becoming increasingly
depending on external suppliers for resources and complementary capabilities. The levels of
suppliers’ capabilities and willingness have a major influence on the buying company’s competitive
advantage in the marketplace. Effective supplier development supports the suppliers to improve its
capabilities and performance, which in return helps the buying company to achieve cost reduction,
productivity improvement, quality improvement, optimal resource utilization, etc.
The existing supplier development programs are mostly focusing on improving supplier capabilities.
However, a strong and close supplier-buyer relationship, to a great extent depending on supplier
willingness, is also crucial for the buying company to achieve a lead position in the marketplace.
Therefore, supplier’s willingness to engage in a relationship with a buyer also serves as an important
role, which should be taken into consideration. However in existing literatures the supplier’s
willingness is not included in supplier development activities.
Moreover, supplier development activities require the buying company to spend considerable time
and manpower, financial and technical resources which are scarce commodity in any company and
should be allocated more efficiently and strategically (Dyer, Cho, & Chu, 1998). Therefore rather
than employ a “one-size-fits-all” strategy for supplier development, more strategic approach to
manage supplier relationship is needed (Dyer et al., 1998; Krause, 1997). However, the supplier
development strategies in the existing literatures are not tailored for different types of suppliers but
consider all suppliers to be the same (Krause & Ellram, 1997a, 1997b). To optimize purchasing
effectiveness, a more strategic and systematic supplier development methodology is needed.
Supplier development has also gained increasing importance for Beijing Time High Technology
Company, a Chinese company specializing in testing instruments. The increasing challenges of export
and cost reduction lead the buyer to place higher expectation to its suppliers in the terms of delivery,
sustainability, long-term commitment, etc. How to achieve a better supplier performance in an
effective manner has become a practical problem that affects the company’s competitiveness. To
provide a solution to all these practical problems the following main research question has been
formulated:
How can the buying company classify the suppliers into different classes based on supplier
capabilities and willingness, and develop different types of suppliers to improve their willingness
or/and capabilities?
In order to answer the research question, this research carries out two phase of investigations. The
first phase is supplier segmentation. In our research, we propose not to consider supplier
segmentation and supplier development separately. Instead, supplier segmentation serving as a step
between supplier selection and supplier development provides basis for designing strategies to
develop suppliers (Rezaei & Ortt, 2013b). Hence buying company is suggested to strategically
segment their suppliers into different groups firstly, and then allocate different levels of resources to
each group. In Chapter 2, the necessity of integration of supplier segmentation and development has
also been supported by empirical evidence drawn from the experience of several companies.
In this research, Rezaei and Ortt’s supplier segmentation framework is adopted because other
portfolio approaches all have the drawbacks that they cannot incorporate all the important variables.
The suppliers are evaluated and segmented from the dimensions of capabilities and willingness. In
order to give a clear impression of the evaluation variables and help the decision-maker with making
selections, the conceptual model has been further developed in this research by classifying
capabilities and willingness variables into different groups according to their characteristics. The
capabilities criteria contain eight categories:








Technical capabilities,
Product quality capability,
Delivery capability,
Intangible capability,
Service capability,
Financial/cost capability,
Sustainable capability,
Organizational capability;
While willingness variables can be categorized into four classes:




Willingness to improve performance,
Willingness to share information,
Willingness to rely on each other,
Willingness to get involved in long-term relationship.
The final supplier evaluation consisting of a MCDM problem was derived by implementing AHP, fuzzy
AHP using FPP, and BWM. By comparing the results it is found that the differences between three
segmentations are minute and can be neglected, which has demonstrated the robustness of the
segmentation. Besides, it is also found that BWM is superior in data collection and consistency
improvement compared to conventional AHP and fuzzy AHP using FPP. The final segmentation is a
2×2 matrix, containing four categories of suppliers: low willingness, low capabilities (Type 1); high
willingness, low capabilities (Type 2); low willingness, high capabilities (Type 3); high willingness, high
capabilities (Type 4).
The second phase of this research focuses on supplier development. All of the supplier development
strategies in the existing literatures are reviewed and summarized in Chapter 5. Based on supplier’s
position in the grid, the obtained supplier segmentation serves for the distinction among different
development strategies regarding suppliers. With the purpose of mapping strategies to supplier
segmentation, the strategies have been classified into the following three categories:
Strategies to improve capabilities:



Competitive pressure
Emphasis on factors other than price
Establishing higher supplier performance expectations
Strategies to improve willingness






Two way communication
Joint-action
Plant visits to suppliers
Long-term commitment
Trust building
Purchasing large percentage of suppliers’ annual sales
Strategies to improve both capabilities and willingness




Supplier assessment and feedback
Making investments
Knowledge transfer
Supplier incentives
Therefore, the supplier development conceptual model can be obtained to move suppliers in each
segment to a better quadrant (see Table A):
Type 2: Low C High W
Type 4: High C and High W
Direct and Indirect involvement
Maintain a good relationship
These suppliers are willing to cooperate with the
buying company but lack of capabilities, which
illustrates the need of direct involvement and
availability of resources of the buying company.
These suppliers have a strong capabilities and
high Level of willingness, who are also attractive
to other buying companies in the marketplace.
Hence It is important to maintain a good
relationship with these suppliers through
effective communication, supplier incentives,
long term commitment, etc.
–
Develop supplier capabilities:

Competitive pressure

Emphasis on factors other than price

Establishing higher supplier performance
expectations

Supplier assessment and feedback

Making investments

Knowledge transfer

Supplier incentives
Type 1: Low C and Low W
Type 3: High C and Low W
Develop willingness before capabilities
Increase the buying company’s attractiveness
Type 1 suppliers have low levels of both
capabilities and willingness. Direct involvement
and resource commitment may induce risks to
the buying company. Indirect strategies can be
adopted.
These suppliers are capable but less willing to
work with the buyer. It is necessary for the buyer
to improve its own attraction by increasing its
resource-based, socially based and economical
attractiveness.
–
–
–
–
Develop supplier willingness:
Develop supplier willingness:

Two-way communication

Two-way communication

Plant visits to suppliers

Plant visits to suppliers

Long-term commitment

Purchasing a large
supplier’s annual sales
Develop supplier capabilities:
percentage

Competitive pressure

Emphasis on factors other than price

Supplier assessment and feedback

Establishing higher supplier performance
expectations

Making investments

knowledge transfer

Supplier incentives

joint action
Develop both capabilities and willingness:

Supplier assessment and feedback

Supplier incentives
Table A Supplier development for different supplier segments
of
Contents
1
2
Introduction .................................................................................................................................... 1
1.1
Problem sketch ....................................................................................................................... 1
1.2
Company description and problem identification .................................................................. 2
1.3
Research objectives ................................................................................................................ 3
1.4
Research question................................................................................................................... 3
1.5
Research framework ............................................................................................................... 4
1.6
Structure of the report............................................................................................................ 5
Literature review............................................................................................................................. 7
2.1
Supply chain management (SCM) ........................................................................................... 7
2.2
Supplier selection .................................................................................................................... 8
2.2.1
Definition......................................................................................................................... 8
2.2.2
Process ............................................................................................................................ 8
2.3
2.3.1
Definition....................................................................................................................... 11
2.3.2
Methods ........................................................................................................................ 11
2.3.3
Criteria classification ..................................................................................................... 15
2.4
Supplier Development .......................................................................................................... 18
2.4.1
Definition....................................................................................................................... 18
2.4.2
Benefits of supplier development................................................................................. 19
2.4.3
Supplier development process ..................................................................................... 19
2.4.4
Strategies Classification ................................................................................................ 21
2.5
Application of supplier management in real world .............................................................. 22
2.5.1
RWE (RWE, n.d.) ............................................................................................................ 22
2.5.2
Infineon (Infineon, n.d.) ................................................................................................ 24
2.5.3
Deutsche Bahn (DB) (DB, n.d.) ...................................................................................... 27
2.5.4
Comparison ................................................................................................................... 30
2.6
3
Supplier segmentation .......................................................................................................... 11
Conclusion ............................................................................................................................. 30
Supplier segmentation methodology ........................................................................................... 32
3.1
Analytic Hierarchy Process (AHP).......................................................................................... 33
3.2
An improved fuzzy preference programming ....................................................................... 35
3.2.1
Fuzzy Set Theory ........................................................................................................... 35
3.2.2
Fuzzy AHP using fuzzy preference programming (FPP) ................................................ 37
4
3.3
Best-Worst Multi-criteria Decision-Making Method (BWM) ................................................ 40
3.4
Conclusion ............................................................................................................................. 42
Application of supplier segmentation ........................................................................................... 43
4.1
4.1.1
AHP ................................................................................................................................ 47
4.1.2
Fuzzy AHP ...................................................................................................................... 50
4.1.3
BWM ............................................................................................................................. 52
4.2
Normalized scores ......................................................................................................... 55
4.2.2
Supplier segmentation .................................................................................................. 58
4.2.3
Comparison of three methodologies ............................................................................ 60
Conclusion ............................................................................................................................. 62
Supplier development ................................................................................................................... 65
5.1
Supplier development strategies .......................................................................................... 65
5.1.1
Supplier assessment and feedback ............................................................................... 65
5.1.2
Competitive pressure .................................................................................................... 65
5.1.3
Knowledge transfer ....................................................................................................... 66
5.1.4
Joint action .................................................................................................................... 67
5.1.5
Plant visits to suppliers ................................................................................................. 67
5.1.6
Making investments ...................................................................................................... 67
5.1.7
Two-way communication.............................................................................................. 67
5.1.8
Long-term commitment ................................................................................................ 68
5.1.9
Supplier incentives ........................................................................................................ 68
5.1.10
Emphasis on factors other than price ........................................................................... 68
5.1.11
Purchasing a large percentage of suppliers’ annual sales ............................................ 69
5.1.12
Establishing higher supplier performance expectations............................................... 69
5.1.13
Trust building ................................................................................................................ 69
5.2
6
Result analysis ....................................................................................................................... 55
4.2.1
4.3
5
Data collection and processing ............................................................................................. 43
Supplier development conceptual model ............................................................................. 70
5.2.1
Strategy classification ................................................................................................... 70
5.2.2
Supplier development conceptual model ..................................................................... 75
5.3
Validation (interview) ........................................................................................................... 79
5.4
Conclusion ............................................................................................................................. 82
Conclusion, recommendation, reflection and future research .................................................... 85
6.1
Conclusion ............................................................................................................................. 85
7
6.2
Recommendation (RQ 7)....................................................................................................... 88
6.3
Reflection .............................................................................................................................. 89
6.4
Future research ..................................................................................................................... 90
Bibliography .................................................................................................................................. 91
Chapter 1
Introduction
1 Introduction
1.1 Problem sketch
In today’s competitive business climate, most organizations focus on their core competencies and
outsource non-core products or services to external suppliers. Firms can benefit from this strategic
approach in several ways. For example, such combination allows firms to maximize their returns on
internal resources by focusing on the function they perform best and make full advantage of their
supplier’s capabilities, which increase the buying companies’ ability to respond to their customers
(Rezaei & Ortt, 2012a). Such growing trend of outsourcing leads purchasing to become a critical role
in an organization’s effectiveness and efficiency and suppliers have a direct effect on cost reduction,
profitability and flexibility of a company. The raw materials and components parts account for the
main cost of a product and companies have to spend a considerable percentage of their revenue on
procurement (Goffin, Szwejczewski, & New, 1997). In most industries, the purchased materials and
services accounts for the majority cost of a product. In some cases, it can reach up to 70% (Spekman,
Kamauff, & Spear, 1999). In high tech companies, the cost of raw materials and component parts
represent up to 80% of total product cost (Weber, Current, & Benton, 1991). A saving of 1% on
purchasing costs can have the same effect on profit as an 8%-10% increase in sales (Sandelands,
1994).
Hence companies are becoming increasingly depending on external suppliers for resources and
complementary capabilities, and the levels of suppliers’ capabilities and willingness have a major
influence on the buying company’s competitive advantage in the marketplace. Supplier management
has become a major factor influencing the competitive success and survival according to the
increasing pressure of reducing the cost and inventories to improve global market position.
Sometimes the buying company may face the problem that suppliers are not providing products that
were demanded by the buyer, like the products do not meet the requirement or price provided by
suppliers cannot make the buying company competitive, etc. There are three solutions for such
problems (Chavhan, Mahajan, & P., 2012):



Switching suppliers. Buying company can search other suppliers which are more capable
than current one.
Vertical integration. Bringing in the needed product by acquiring the supplier or setting up
manufacturing capability internally
Supplier development. By adopting various supplier development strategies, the current
supplier’s performance and/or capability can be improved to meet the buying company’s
requirement.
Switching to new suppliers may lead to considerable switching costs, especially when the
components/services are strategically important or there are few alternative suppliers. Setting up
manufacturing internally results in huge investments. Apparently, supplier development is the most
feasible solution which would make the suppliers more efficient and capable and in return improve
the buyer’s competitive advantage. How to develop the suppliers in an effective way has become a
major issue that attracts increasing attentions.
1|Page
Chapter 1
Introduction
Relevant research articles addressing supplier development were mainly focusing on improving
supplier’s capabilities. However, a strong and close supplier-buyer relationship, to a great extent
depending on supplier willingness, is also crucial for the buying company to achieve a lead position
in the marketplace. Supplier willingness was defined by Rezaei and Ortt as “the confidence,
commitment and motivation to engage in a (long-term) relationship with the buyer” (Rezaei & Ortt,
2012a, 2012b). High levels of willingness from both the supplier and the buyer result in mutual trust
and increase the length of the relationship (Krause, Handfield, & Tyler, 2007; Sako & Helper, 1998),
which has a major impact on the buying firms’ competitive advantages. For example, trust in longterm relationships can overcome the difficulties in relationships in the supply chain, such as conflicts,
abuse of power and low profitability (Rezaei & Ortt, 2012a; Sullivan & Peterson, 1982). Trust also can
help to maintain the stability of the supply chain in the long term (Chen & Paulraj, 2004). Therefore,
supplier’s willingness to engage in a relationship with a buyer also serves as an important role, which
should be taken into consideration. However in existing literatures the supplier’s willingness is not
included during supplier development.
Moreover, supplier development activities require the buying company to spend considerable time
and manpower, financial and technical resources which are scarce commodity in any company and
should be allocated more efficiently and strategically (Dyer et al., 1998). Therefore rather than
employ a “one-size-fits-all” strategy for supplier development, more strategic approach to manage
supplier relationship is needed (Dyer et al., 1998; Krause, 1997). In order to optimize purchasing
effectiveness, supplier segmentation is introduced as a means to deal with different suppliers in a
systematic way (Rezaei & Ortt, 2012a, 2013b). Supplier segmentation logically takes place after
supplier selection and before supplier development, yielding distinct groups of suppliers based on
their similarities (Rezaei & Ortt, 2013b). However, there is no extensive investigation on linking
supplier development to supplier segmentation. The supplier development strategies in the existing
literatures are not tailored for different types of suppliers but consider all suppliers to be the same
(Krause & Ellram, 1997a, 1997b).
To address the gap in existing literatures, the aim of this research is to propose more strategic
approach to develop different segments of suppliers.
1.2 Company description and problem identification
In this research, the company of Beijing Time High Technology Ltd. (BTHT) is selected as a case study.
BTHT is a medium-sized company specializing in testing instruments, which has 180 employees. The
company is the leading manufacturer of testing instruments in China, serving more than 70 types of
products. The majority of its products are sold and consumed in China, accounting for 75% its annual
sales. The company relies on local distributors to serve the market of Europe, South Korea, America,
etc. Currently, its sales network has reached to 60 countries in the world.
BTHT have been focusing on improving efficiency, reducing cost and increasing cost. It demands high
quality products at low prices. Hence better supplier performance, guaranteeing its leading position,
is always what the company pursues. Moreover, in recent years more challenges for export and cost
reduction have raised.
For example, BTHT has changed its supply chain mode from depending on inventory to serve the
market. The company has adopted the production strategy of ‘Just-in-Time’ to improve return on
2|Page
Chapter 1
Introduction
investments by reducing in-process inventory and associated carrying cost. BTHT only keeps a small
inventory on crucial components and does not conduct purchasing other components or assembly
until it receives the order from the customer. Hence the company has enhanced its requirements to
its suppliers on delivery.
Moreover, BTHT’s products are exported to 60 countries in the world. Different countries and
regions have their own safety regulations that the products sold in the regions should meet. For
example, products sold in the USA require UL standards, while European market requires CE mark to
declare the product is assessed before being placed on the market and meets EU safety, health and
environmental protection requirements (European Commission, 2014). Therefore, BTHT requires its
suppliers to have high-level quality control system and also a willingness to get involved in a longterm relationship with BTHT. Since once the safety certification has been approved, the internal
components of the product cannot be changed.
Also, the environmental friendliness of products has gained increasing attention in the last decade.
For example, Restriction of Hazardous Substances Directive (RoHS) was adopted in 2003 by
European Union, and took effect on 1 July 2006 (European Commission, 2006). This directive
restricts the use of six hazardous materials in the manufacture of various types of electronic and
electrical equipment. Therefore, to serve the European market, BTHT has raised the bar of its
supplier’s sustainable capability.
Hence BTHT has adjusted its strategies on purchasing according to these challenges, which
consequently placed higher expectation to its suppliers. Thus supplier development becomes
imperative for achieving better supplier performance.
1.3 Research objectives
To addressing the problem mentioned in section 1 and section 2, the following objective is
formulated:
Classify suppliers according to their capabilities and willingness, and design strategies to deal with
different type of suppliers in order to improve their capabilities and willingness.
To reach this main goal, the following sub-objectives should be completed:





Classify suppliers based on their willingness and capabilities;
Design strategies to improve willingness of suppliers in ‘low willingness and high capabilities’
segment;
Design strategies to improve capabilities of suppliers in ‘high willingness and low capabilities’
segment.
Design strategies to improve both willingness and capabilities of suppliers in ‘low willingness
and low capabilities’ segment.
Validate the conceptual model by the real world case.
1.4 Research question
To achieve the objectives as described above, research questions must be completed. The main
research question shall answer the main objective:
3|Page
Chapter 1
Introduction
How can the buying company classify the suppliers into different classes based on supplier
capabilities and willingness, and develop different types of suppliers to improve their willingness
or/and capabilities?
To get all the input which is necessary to answer the main research question some sub-questions are
defined.







RQ1: Why is it important for a buying company to develop suppliers?
RQ2: Why is it necessary to link supplier development to supplier segmentation?
RQ3: Why should the company consider supplier willingness in addition to supplier
capabilities while performing supplier segmentation and development?
RQ4: How can a buying company achieve its supplier segmentation?
o What are the criteria to evaluate suppliers?
o What is the appropriate multi-criteria decision making method for supplier
segmentation?
RQ5: What are the strategies to improve supplier willingness, supplier capabilities, and both
the supplier willingness and capabilities?
RQ6: How to improve suppliers in different supplier segments?
o What are the main strategies to improve suppliers’ willingness in ‘low willingness
and high capabilities’ segment?
o What are the main strategies to improve suppliers’ capabilities in ‘high willingness
and low capabilities’ segment?
o What are the main strategies to improve both willingness and capabilities of
suppliers in ‘low willingness and low capabilities’ segment?
RQ 7: How can the results of this research be applied in our case? (application)
Question 1, 2 and 3 answer why this research is being conducted, which are already partially
answered in Chapter 1. Question 4, 5 and 6 answer how the objective should be approached and the
steps to answer the main research questions. The last research question refers to the application
and validation of the developed methodology to our case.
1.5 Research framework
This research can be divided into two phases as illustrated in the Figure 1. The first phase focuses on
supplier segmentation and the second phase deals with the supplier development. Both phases
include gathering the necessary information for building a robust and comprehensive methodologies
and application/validation in the selected company. Last but not least, conclusions and
recommendations will be given.
4|Page
Chapter 1
Introduction
Figure 1 Research Framework
1.6 Structure of the report
The rest of the research is structured in the following way.
Chapter 2: Literature review
Theories related to supply chain management, supplier selection, supplier segmentation, and supplier
development will be presented. Moreover, the supplier management in real world will be examined.
Chapter 3: Supplier segmentation methodology
A five-step methodology that is used to segment suppliers will be introduced, including three multicriteria decision making methods, AHP, fuzzy AHP using FPP and BWM.
Chapter 4: Application of supplier segmetation methodology
The supplier segmentation methodology will be applied in a real world company.
Chapter 5: Supplier development conceputal model
The supplier development strategies in existing literature will be reviewed; supplier development
conceptual model will be formulated and validated by the experience of the case company.
Chapter 6: Conclusions and future research
Revise research questions and main findings and make suggestions for future research
5|Page
Chapter 2
Literature review
2 Literature review
Supplier management usually contains three steps: supplier selection, supplier segmentation and
supplier development (see Figure 2). Generally speaking, a number of qualitative and quantitative
criteria are identified by the company to choose the most suitable suppliers. After the suppliers are
chosen, the buyer further classifies the selected suppliers in the step of supplier segmentation.
Logically, supplier segmentation happens between supplier selection and supplier development
(Rezaei & Ortt, 2013a). Hence, the supplier segmentation criteria also reflect supplier selection
criteria (Rezaei & Ortt, 2012a). The segmentation could provide a solid basis for supplier
management over time. In the step of supplier development, most suitable strategies can be
formulated to deal with different segments of selected suppliers (Dyer et al., 1998).
supplier
selection
supplier
segmentation
supplier
development
Figure 2 Steps of supplier management
Therefore, this chapter will review the supplier related activities. Section 2.1 will give an overview of
supply chain management, in which supplier management will be identified as the key aspect of
supply chain management. Sections 2.2, 2.3, and 2.4 will review the existing literatures on “supplier
selection”, “supplier segmentation”, and “supplier development”. Section 2.5 will examine the
application of supplier management in the real world.
2.1 Supply chain management (SCM)
Supply chain serves as the major factor influencing the competitive success and survival according to
the increasing pressure of reducing the cost and inventories to improve global market position
(Grossmann, 2005). The definition of supply chain management (SCM) differs across authors. For
example, Cooper et.al defined SCM as “an integrative philosophy to management the total flow of
distribution channel from supplier to the ultimate user” (Cooper, Lambert, & Pagh, 1997). Monczka
et.al described SCM as “integration and management of sourcing, flow, and control of materials
using a total systems perspective across multiple functions and multiple tiers of suppliers” (Monczka,
Handfield, & Giunipero, 1998). According to Mentzer at.al, the definitions are classified into three
categories: a management of philosophy, implementation of a management philosophy, and a set of
management process (Mentzer, DeWitt, & Keebler, 2001).
Although the definition of supply chain management could be various, the goal is common. The
short-term objective of supply chain management is primarily to increase productivity and reduce
the entire inventory and the total cycle time (Ou, Liu, Hung, & Yen, 2010). The long-term goal is to
7|Page
Chapter 2
Literature review
increase customer satisfaction, market share, and profits for all organizations in the supply chain,
including suppliers, manufactures, distribution centers and customers (Ou et al., 2010). By using
effective supply chain management, firms are able to achieve multiple manufacturing goals like
flexibility, cost reduction, improvement on quality and delivery (Wacker, 1996).
The supply chain management strategies can be categorized into three dimensions: supplier
management activities and strategy, customer relationship activities and strategy, and system-wide
supply chain management strategy (Wisner, 2003). With an increasing impact of suppliers on cost,
quality, time and responsiveness of buying firms, the supplier management as well as buyer-supplier
relationship management is increasingly becoming the key aspect of supply chain management.
2.2 Supplier selection
2.2.1 Definition
Supplier selection strategy is adopted by the buying company to evaluate and select suppliers, which
fulfills the requirements of the buying company at an acceptable price. Supplier selection is a multicriteria problem which includes both qualitative and quantitative factors.
The supplier selection has been critical for the supply chain management for several reasons
(Ndubisi, Jantan, Hing, & Ayub, 2005). First, the trend towards “just-in time” manufacturing has
caused a supply base reduction. Second, the buyer and supplier need greater interaction because of
resource scarcity. Third, an increasing number of suppliers have been involved early in the planning
process by the buying firms to help the buyers to deliver superior value to their customers. By
bringing the leading technologies into design process at an early stage, suppliers are able to assist
the manufacturing company to reduce the cycle time and to improve the product quality.
2.2.2 Process
According to Cousins et.al, strategic supplier selection involves four main stages (Cousins, Lamming,
Lawson, & Squire, 2007):
1.
2.
3.
4.
initial supplier qualification;
agree measurement criteria;
obtain relevant information;
make selection
initial supplier
qualification
agree
measurement
criteria
obtain
relevant
information
make
selection
Figure 3 Strategic supplier selection process
Step 1 Initial supplier qualification
The goal of initial supplier qualification is to identify suppliers who meet the minimum standards of
product and process, and are capable of supporting the buyer’s long term objectives (Cousins et al.,
2007). Since the resources are constrained, the supplier qualification could help to reduce the pool
of suppliers, so that the buyer could conduct detailed evaluation and selection among a manageable
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number of qualified suppliers. Therefore, this step is not ranking the suppliers by their qualification,
but sorting suppliers who meet the requisite standards.
Step 2 Agree measurement criteria
To build more effective relationship with suppliers, the buying companies shall adopt supplier
selection to strengthen the selection process. Dickson firstly carried out study on identifying factors
that the buying company considers in awarding contracts to suppliers. He proposed 23 criteria for
vendor selection including quality, delivery, performance history, etc. (Dickson, 1966). Out of these
23 criteria, he concluded that quality, delivery and performance history are the three most
important criteria. Hence it can be seen that the financial factors serve as critical measure in the
decision making process of traditional vendor evaluation methods.
Later, Weber conducted another research by reviewing, annotating, and classifying 74 related
articles since Dickson’s well-known study. Based on a comprehensive review of vendor evaluation
methods, he concluded that price is the most important factor, followed by delivery and quality.
These researches revealed that factors like quality, delivery, and price are common variables of
vendor selection. Selection criteria typically contains three categorizes or fall into one of the three
categorizes (Figure 4) (Kahraman, Cebeci, & Ulukan, 2003; Kilincci & Onal, 2011). While more
detailed criteria of supplier selection in either specific industries or specific countries could be
various. The criteria should reflect the firm’s needs and its supply and technology strategy.
Supplier Selection
Supplier Criteria
Product Performance Criteria
Service Performance
Financial status
Product Price
Follow-up
Management
Handling
Lead Time
Technical ability
Product Quality
Technical Support
Quality System
Professionalizm
Geographical Location
Support resources
Figure 4 the hierarchy of the supplier selection problem
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Step 3 Obtain relevant information
This step is to collect information according to the criteria. The information should be comparable
across suppliers, timely and accurate (Cousins et al., 2007). The information could be obtained from
three resources (Cousins et al., 2007):



Information offered from suppliers.
Supplier visits. A cross-functional team from the buyer could visit the potential suppliers to
evaluate specific areas, like level of technological expertise, levels of capacity utilization, etc.
This also offers a good forum for information exchange, sharing cultures and allows both
parties to understand more about each other’s businesses.
Supplier performance measures. Existing suppliers can be evaluated against current
performance.
Step 4 Make selection
Supplier selection is a multi-criteria decision making (MCDM) problem that involves trade-offs
among multiple criteria and includes both quantitative and qualitative factors. Extensive multicriteria decision making approaches have been proposed for supporting supplier selection, such the
analytic hierarchy process (AHP), analytic network process (ANP), case-based reasoning (CBR), data
envelopment analysis (DEA), fuzzy set theory, etc.
The research from Ho et.al summarized the methods that have been utilized in supplier selection
process (Ho, Xu, & Dey, 2010) (see Table 1). Based on the results of multi-criteria decision making
methods, the best alternatives will be selected.
Methodologies
classification
Individual approaches
Integrated approaches
methodology
Data envelopment analysis
Mathematical programming
 Linear programming
 Integer linear programming
 Integer non-linear programming
 Goal programming
 Multi-objective programming
Analytic hierarchy process
Case-based reasoning
Analytic network process
Fuzzy set theory
Simple multi-attribute rating technique
Genetic algorithm
Integrated AHP approach
 Integrated AHP and Bi-negotiation
 Integrated AHP and DEA
 Integrated AHP, DEA, and artificial neural network
 Integrated AHP and GP
 Integrated AHP and grey relational analysis
 Integrated AHP and mixed integer non-linear programming
 Integrated AHP and multi-objective programming
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Other approach
Literature review
Integrated fuzzy approaches
 Integrated fuzzy and AHP
 Integrated fuzzy, AHP and cluster analysis
 Integrated fuzzy and GA
 Integrated fuzzy and multi-objective programming
 Integrated fuzzy and quality function development
 Integrated fuzzy and SMART
Integrated ANN and CBR
Integrated ANN and GA
Integrated ANP and multi-objective programming
Integrated ANP and GP
Integrated DEA and multi-objective programming
Integrated DEA and SMART
Integrated GA and multi-objective programming
Table 1 Multi-criteria decision making approaches for supplier evaluat ion (Ho et al., 2010)
2.3 Supplier segmentation
2.3.1 Definition
Supplier segmentation serves as a step between supplier selection and supplier relationship
management (Rezaei & Ortt, 2012a). Researches across industries have generated different criteria
and approaches to facilitate the process of supplier segmentations. The identification of different
supplier segmentation dimension is a consequence of industry specific criteria, such as the business
environment and relationship criteria involved in the supplier-buyer relationships (Svensson, 2004).
2.3.2 Methods
Parasuraman firstly introduced the conceptual approach “vendor segmentation” in 1980. The main
idea of vendor segmentation is to “identify distinguishable segments of potential vendors of each
item to be purchased by an industrial marketer, based on characteristics that are closely related to
the key characteristics of the marketer’s own customer segments” (Parasuraman, 1980). The
implementation of the vendor selection was described as a stepwise procedure:




Step 1: Identification of Key Features of Customer Segments
Step 2: Identification of Critical Vendor Characteristics
Step 3: Selection of Relevant Dimensions for Vendor Segmentation
Step 4: Identification of Vendor Segments
Parasuraman’s research didn’t specify the segmentation dimension (Rezaei & Ortt, 2012a). Instead,
he proposed that the dimensions should be derived in step 2, taking into account any overlap of
those features across various customer segments. Hence, the dimension could be various in
different cases.
Later, another researcher Kraljic introduced the first comprehensive portfolio approach for the
determination of differentiated purchasing strategies (Kraljic, 1983). Aiming at minimize supply risk
and make the most of buying power, he classifies the materials that a company purchased from the
perspective of supply risk and profit impact (Kraljic, 1983). The result is a 2×2 matrix and a
classification in four categories: bottleneck (high supply risk and low profit impact); non-critical (low
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supply risk and low profit impact); leverage (high profit impact and low supply risk); strategic (high
supply risk and high profit impact) (Kraljic, 1983) (see Figure 5).
Figure 5 Categories and strategies in the Kraljic approach (Kraljic, 1983)
Kraljic’s portfolio approach has been adopted by several large companies like Shell, Alcatel, Philips,
Siemens, etc. (Gelderman & Weele, 2002). Most current approaches to supplier segmentation are
extensions or modification of Kraljic’s approach. Olsen and Ellram further developed Kraljic portfolio
model by categorizing the purchases from two dimensions: difficulty of managing the purchase
situation and strategic importance of the purchase (Olsen & Ellram, 1997). The typology proposed by
Bensaou is based on two dimensions: buyer’s specific investments and the supplier’s specific
investments (Bensaou, 1999). According to their model, the suppliers can be classified into four
categories: market exchange, captive buyer, captive supplier, strategic partnership. Kaufman et. al
developed a strategic supplier typology to segment suppliers according to their performance
(Kaufman, Wood, & Theyel, 2000). There are two dimensions in his research, namely technology and
collaboration. Four categorizes can be obtained: commodity supplier, collaboration specialist,
technology specialist, problem-solving supplier. Dyer suggested to segment suppliers into two
primary categories: strategic partners and durable arm’s-length suppliers, in order to allocate
different levels of resources to each group (Dyer et al., 1998). Strategic partners provide high-value
inputs that are related to the buying company’s core competence, while durable arm’s-length
suppliers only provide non-crucial products. Masella and Rangone proposed four different supplier
segmentation systems according to the time horizon involved and on the content of relationship
(Masella & Rangone, 2000). The length of reference time involves long-term relationship and shortterm relationship, depending on factors like the level of investments in specific assets and switching
costs. The content of relationship can be related to logistic or strategic goals. The logistic integration
refers to arrangements on performance such as quality, service support, etc. Strategic integration
implies arrangement beyond performance, like supplier know-how.
To sum up, several portfolio approaches have been proposed, while they all have the drawback that
each of the proposed approaches contains several variables, while is not able to cover other
important variables. Aiming at dealing with the problem that there is no integrated approach to
supplier segmentation, a new approach to supplier segmentation, considering the various variables
used in existing literature, was introduced by Rezaei and Ortt (Rezaei & Ortt, 2012a, 2012b). The
new approach segments the suppliers from two dimensions: capabilities and willingness. Capabilities
and willingness are defined as follows:
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Supplier’ capabilities are complex bundles of skills and accumulated knowledge, exercised through
organizational processes that enable firms to co-ordinate activities and make use of their assets in
different business functions that are important for a buyer.
Supplier’s willingness is confidence, commitment and motivation to engage in a (long-term)
relationship with a buyer.
Furthermore, they defined supplier segmentation as:
Supplier segmentation is the identification of the capabilities and willingness of suppliers by a
particular buyer in order for the buyer to engage in a strategic and effective partnership with the
suppliers with regard to a set of evolving business functions and activities in the supply chain
management.
The variables consist of willingness and capabilities are summarized in the table below (Rezaei & Ortt,
2012a, 2012b). Since the number of variables of capabilities and willingness are considerable. In real
application, the company decision-maker will be asked to choose the most important variables
according to their firm strategy, product life cycle, industry competition, etc. (Rezaei & Ortt, 2012a,
2012b)
dimension
willingness
capabilities
variables
Commitment to quality
Honest and frequent communications/communication
Openness
Commitment to continuous improvement in product and process
Relationship closeness
Open to site evaluation
Bidding procedural compliance
Reciprocal arrangements
Prior experience with supplier
Impression
Ethical standards
Willingness to co-design and participate in new product
development
Willingness to integrate supply chain management relationship
Mutual respect and honesty
Willingness to share information, ideas, technology, and cost
savings
Consistency and follow-through
Supplier’s effort in eliminating waste
Supplier’s effort in promoting JIT principles
Dependency
Willingness to invest in specific equipment
Long term relationship
Price/cost
Profit impact of supplier
Delivery
Quality
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Reserve capacity
Industry knowledge
Production, manufacturing/transformation facilities and capacity
Geographic location/proximity
Design capability
Technical capability
Technology monitoring
Management and organization
Supplier process capability
Reputation and position in industry
Financial position
Performance awards
Performance history
Cost control
Technology development
Repair services
After sales support
Packaging ability
Reliability of product
Operational controls
Training aids
Labor relations record
Impact on energy utilization
Ease of maintenance design
Communication system
Desire for business
Human resource management
Amount of past business
Warranties and claims
Market sensing
Customer linking
Environmental health and safety
Innovation
Supplier’s order entry and invoicing system including EDI
Public disclosure of environmental record
Availability of clean technologies
Hazardous waste management
Pollution reduction capability
ISO 14000 and 14001 certification
Recycling and reverse logistics program
Environmentally friendly product packaging
Hazardous air emissions management
Table 2 Variables of suppliers’ willingness and capabilities for possible supplier segmentation (Rezaei & Ortt, 2012a)
By applying these two overarching dimensions, the suppliers can be classified into four categories
(see Figure 6): low willingness, low capabilities; high willingness, low capabilities; low willingness,
high capabilities; high willingness, high capabilities. The resulting matrix is much more inclusive than
those used by other methods, because the dimensions are based on multiple criteria (Rezaei & Ortt,
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2013a). This research adopts this robust conceptual model for supplier segmentation. Moreover, five
more capabilities variables are added to the list in this research in order to make the framework
more complete, including “contribution to the production”, “cost reduction program”, “follow-up”,
“lead time” and “R&D expenditure” (Ho et al., 2010; Kilincci & Onal, 2011).
Figure 6 Supplier segmentation based on supplier potential (Rezaei & Ortt, 2012a)
2.3.3 Criteria classification
In order to give a clear impression of the variables and helps the decision-maker with making
selections, the conceptual model is further developed by classifying capabilities and willingness
variables into different groups according to their characteristics.
According to existing literatures, six major categories of resource have been suggested: financial
resources, physical resources, human resources, technological resources, reputation, and
organizational resources (Grant, 1991; Hofer & Schendel, 1978; Mahoney & Pandian, 1992). Creating
capabilities is not simply a matter of assembling a team of resources, but involves complex patterns
of coordination between people and between people and other resources (Mahoney & Pandian,
1992). A key ingredient in the relationship between resources and capabilities is the ability of an
organization to achieve cooperation and coordination within teams (Mahoney & Pandian, 1992). So
a company’s human resources and organizational resources can be reflected by organizational
capability. Product quality capability can serve as a reflection of physical resources.
Influenced by Just-in-time principles, more buying companies pay increasing attention on the
delivery capability of suppliers. Besides, service performance criteria should always be included in
the supplier evaluation criteria because any purchase involves some degree of service (Kilincci &
Onal, 2011). Since the aim is to evaluate suppliers, delivery capability and service capability are
crucial criteria in addition to the major categories mentioned above. In recent years sustainability
has received a great deal of attention from the media and business community. Companies have
shifted their attention from only improving the environmental performance of the companies’ own
processes and production activities to the entire value chain in which it operates including their
supply base. As a result, sustainable capability can serve as another important criterion for
evaluating suppliers.
To sum up, capabilities variables can be classified into the following 8 categorizes:
1. Technical capability, e.g. capability in design, production improvement
2. Product quality capability, e.g. quality assurance
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3.
4.
5.
6.
7.
8.
Literature review
Delivery capability, e.g. capacity level, order entry system
Intangible capability, e.g. reputation, brand recognition
Service capability, e.g. follow-up, technical support
Financial/cost capability, e.g. cost reduction program, price
Sustainable capability, e.g. pollution reduction
Organizational capability, e.g. human resources management
Goal
Capabilities
Main criteria
Technical capability
Product quality capability
Delivery capability
Intangible capability
Service capability
Financial/Cost capability
Sustainable capability
Sub-criteria
Industry knowledge
Design capability
Supplier process capability
Technology monitoring
Technology development
Innovation
Production, manufacturing/transformation
facilities and capacity
R&D expenditure
Quality
Reliability of product
Ease of maintenance design
Ease of operation
Contribution to the production
Geographic location/proximity
Delivery
Reserve capability
Profit impact of supplier
Packaging ability
Lead time
Reputation and position in industry
Labor relations record
Amount of past business
Performance awards
Performance history
Repair services
After sales support
Training aids
Follow-up
Supplier’s order entry and invoicing system
including EDI
Financial position
Price/cost
Cost reduction program
Cost control
Hazardous air emissions management
Hazardous waste management
Environmentally friendly product packaging
Recycling and reverse logistics program
Pollution reduction capability
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Organizational capability
Availability of clean technologies
Public disclosure of environmental record
ISO 14000 and 14001 certification
Environmental health and safety
Impact on energy utilization
Management and organization
Human resource management
Market sensing
Operational controls
Customer linking
Communication system
Desire for business
Warranties and claims
Table 3 classification of capabilities variables
To the author’s knowledge, there is no existing classification of willingness. Classification is usually
based on major characteristics that distinguish between the objects. As mentioned in Section 1,
supplier’s willingness is confidence, commitment and motivation to engage in a relationship with a
buyer (Rezaei & Ortt, 2012a). Therefore supplier’s willingness should reflect not only the suppliers’
willingness to improve itself, but also the willingness to maintain and develop the buyer and
supplier’s relationship.
“Willingness to improve performance” can serve as the supplier’s effort for self-improvement. By
providing better products or services, the suppliers show their commitment to engage in a long-term
relationship with the buyer.
“Willingness to share information” is an important indicator of supplier’s willingness to maintain and
develop the buyer and supplier’s relationship. Besides, according to commitment-trust theory
(Morgan & Hunt, 1994), successful relationship requires trust and relationship commitment. “Trust is
defined as a willingness to rely on an exchange partner in whom one has confidence” (Rotter, 1967).
Confidence on the part of the trusting party results from the firm belief that the trustworthy party is
reliable and has high integrity, which are associated with such qualities as consistent, honest, fair,
responsible, etc. (Morgan & Hunt, 1994). “Willingness” is a critical facet of trust’s conceptualization
because “if one believes that a partner is trustworthy without being willing to rely on that partner,
trust is limited” (Moorman, Deshpande, & Zaltman, 1993).
“Commitment to relationship is defined as an enduring desire to maintain a valued relationship”
(Moorman et al., 1993). For a supplier, if it believes that an ongoing relationship with the buyer is so
important as to warrant maximum efforts at maintaining it (Morgan & Hunt, 1994), this supplier has
a strong willingness to get involved in a long-term relationship with the buying company.
In summary, as a relationship-related criterion willingness contains the following four dimensions:
1.
2.
3.
4.
Willingness to improve performance
Willingness to share information
Willingness to rely on each other
Willingness to get involved in a long-term relationship
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Goal
willingness
Literature review
Main criteria
willingness to improve
performance
Willingness to share
information
Willingness to rely on
each other
Willingness to get
involved in long-term
relationship
Sub-criteria
Commitment to continuous improvement in product
and process
Supplier’s effort in eliminating waste
Supplier’s effort in promoting JIT principles
Willingness to integrate supply chain management
relationship
Honest and frequent communications/
communication openness
Openness
Willingness to share information, ideas, technology,
and cost savings
Open to site evaluation
Mutual respect and honesty
Ethical standards
Impression
Dependency
Long-term relationship
Commitment to quality
Relationship closeness
Willingness to invest in specific equipment
Prior experience with supplier
Reciprocal arrangements
Willingness to co-design and participate in new
product development
Bidding procedural compliance
Consistency and follow-through
Table 4 Classification of willingness variables
2.4 Supplier Development
2.4.1 Definition
“Supplier development” was first introduced by Leenders to describe the activities adopted by
manufacturers to increase the number of alternative suppliers and supplier performance (Leenders,
1966). This definition did not strongly mention that supplier development program should be
supported by both the suppliers and the buyers. The buyers serve as the initiation and play a key
role in supplier development program.
Later, some other researcher considered supplier development as a joint effort of suppliers and
buyers. Krause extended the scope and purpose of supplier development by defining it as “an effort
of a buying firm with a supplier to increase the performance and/or capabilities of a supplier and to
meet the buying firm’s long-term and/or short-term needs” (Krause, Handfield, & Scannell, 1998).
Here Krause recognized that supplier development is collaboration between buying and supplying
firms to enhance supplier’s capability and/or capabilities for the sake of buying company.
Supplier development may range from limited involvement such as supplier qualification and
supplier performance evaluation, to more intense efforts like assistance with new product design
and provide training to supplier’s personnel (Krause, 1997). In this research, the scope of supplier
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development has been broadened from developing supplier capabilities to increase the level of
supplier willingness, in order to meet the buying firm’s short and/or long-term supply needs.
2.4.2 Benefits of supplier development
A number of studies have identified the benefits and outcomes of adopting supplier developing
practices. The supplier development improves supplier performance along with the supply chain.
The supplier program supports the suppliers to improve its capability and performance, which in
return help the buying company to achieve competitive advantages and enhance the market
position. The main benefits out of supplier development program are listed in Table 5.
Benefits
Cost reduction
Authors
(Talluri, Narasimhan, & Chung, 2010);
(Wouters, van Jarwaarde, & Groen, 2007);
(Sako, 2004)
Productivity improvement
(Sako, 2004)
Buyer performance improvement
(Sako, 2004)
An increased percentage of on time delivery
(Krause, 1997); (Krause & Ellram, 1997a)
Improvement in quality
(Krause, 1997); (Talluri et al., 2010)
Increase the buying firm’s financial performance
(Talluri et al., 2010)
Lean manufacturing capability improvement
(Dyer & Nobeoka, 2000)
Operations improvement
(Sánchez-Rodríguez, 2009)
reduction in defective products
(Krause & Ellram, 1997b)
Collaboration between buyer and supplier
(Sánchez-Rodríguez, 2009)
Optimal resource utilization
(Talluri et al., 2010)
Competitive advantage
(Krause & Ellram, 1997a)
Reduce supplier dependency
(Wouters et al., 2007)
Supplier performance
(Krause & Ellram, 1997a)
Shorter cycle times
(Krause, 1997); (Krause, Scannell, &
Calantone, 2000)
Improvements in relationships between buyer and (Krause, 1997); (Krause et al., 2000)
suppliers
Table 5 Benefits of supplier development
2.4.3 Supplier development process
Some rather general supplier development process that support firms in identifying, evaluating,
conducting and following up on supplier development projects have been proposed by researchers.
Krause et.al proposed a seven step supplier development process model, which starts from identify
critical commodities for development to systematically institute ongoing continuous improvement
(Krause et al., 1998). Hartley and Jones focused on supplier development process and introduced a
four-step model, which includes assess the supplier’s readiness for change, build commitment
through collaboration, implement system-wide changes, transition out of the supplier’s organization
(Hartley & Jones, 1997). Hartley also pointed out that process-oriented rather than results oriented
supplier development could be more effective, since the improvement effort will continue once the
buying firm accomplishes its activities (Hartley & Jones, 1997).
The most famous conceptual model that describes the organizational decision process associated
with a supplier development program was proposed by Hahn and Watts in 1990s (Hahn, Watts, &
Kim, 1990) (see Figure 7). In their research, the need for developing suppliers must be recognized by
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the top management group firstly, followed by the formation of a supplier development team or
department. Then the supplier development activities would be triggered by supplier evaluation,
including assessment of existing and new suppliers. The assessment process is based on four
dimensions: product, quality, cost and service. The next step is to identify the areas for improvement
and design a development plan as well as reach a consensus on the plan with the suppliers. The final
stage is the implementation of the plans and the evaluation of results. Once a supplier development
project has been completed, the supplier’s continued progress must be monitored and tracked over
time. Ongoing exchange of information will help to maintain the momentum of supplier
development project (Krause et al., 1998).
Competition/Customers (Product/Quality/Cost/Service)
New suppliers
selection based on
capabilities and
willingness
Initiation organization/Objectives
Existing suppliers
evaluation based on
capabilities and
willingness
Supplier ratings
Supplier involvement
Determination of areas to be improved and the degree of
emphasis for each
Supplier
development
program activity
matrix
Organize the implementation team (Cross Functional
Members)
Consensus development plans (Time phase)
Implement supplier development plans
Evaluate the results-Technical capabilities, Quality, Delivery,
Costs
Figure 7 Supplier development decision process (Hahn et al., 1990)
Based on Hahn and Watts’s supplier development conceptual model, this research focuses on
supplier ratings and formulation of supplier development activity matrix. Instead of evaluating the
suppliers with only four variables, we will apply a multi-variable approach to assess and segment the
suppliers.
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2.4.4 Strategies Classification
In existing literature, researchers have proposed several strategies for supplier development.
Supplier development strategies were classified by Sanchez et.al into three categories based on
buyer’s resource involvement parameters (Chavhan et al., 2012) (see Table 6).
Basic Supplier Development




Evaluation of supplier’s
performance and feedback
to suppliers;
Sourcing from a limited
number of suppliers;
Parts standardization;
Supplier qualification
Moderate Supplier
Development
 Visiting supplier’s plants;
 Awards and approval of
supplier’s performance
improvement;
 Collaboration with
suppliers in materials
improvement;
 Supplier certification
Advanced Supplier
Development
 Training to supplier;
 Collaboration with supplier;
 Involvement of suppliers in
the buyer’s new product
development process;
 Intensive information
exchange with suppliers.
Table 6 Classification of supplier development strategies
Krause categorized the supplier strategies as internalized and externalized activities according to
resource-based theory and the internalization/externalization framework (Krause et al., 2000). The
classification of externalized and internalized supplier development strategies is widely adopted
(Krause, 1997). Wagner classified strategies in a similar way: direct and indirect development
strategies. These kinds of classification are based on the extent of involvement of the buying
company. The main strategies are listed in the Table 7.
Externalized/indirect supplier development
 Competitive Pressure
 Supplier assessment efforts
 Supplier incentives for improvement
Internalized/direct supplier development
 Transaction specific investment
 Human investment
 financial investment
Table 7 Classification of supplier development strategies
In the case of externalized supplier development, the buying company commits no or only limited
resources to a specific supplier (Krause et al., 2000). The buying company uses external market and
communication approach to stimulate or enforce the suppliers to make improvement. The
externalized supplier development activities usually include assessing suppliers, communicating
supplier evaluation results and performance goals, increasing supplier’s performance goals,
increasing competition by the use of multiple sources or promising future business (Wagner, 2006).
In the case of direct supplier development, the buying firm plays an active role and dedicates human
and/or capital resources to a specific supplier (Krause et al., 2000). This is frequently done by
education and training programs, personal transfer, provision of equipment or capital, etc. (Wagner,
2006). The theoretical bases of internalized supplier development is transaction cost theory (Wagner,
2010). The human and capitals dedicated by the buying firm can be considered as relationshipspecific investments, which are frequently associated with the customization of products or the
tailoring of production processes by the supplier on behalf of the buying firm.
Traditional classification methods only focus on the degree (low, high) of extent that the buying
company gets involved in the supplier development activities. There is no direct link between the
strategies and the supplier’s willingness or capabilities improvement. In this research, a new
framework of the supplier development strategies classification will be proposed.
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2.5 Application of supplier management in real world
In this section, several examples of supplier development in real world will be studied.
Understanding the principles behind those successful company cases helps to develop our theory on
supplier segmentation and development.
2.5.1 RWE (RWE, 2014)
RWE is one of European leading electricity and gas companies. The company indicates that its
suppliers are the key to achieve a top position in the energy market. Therefore, RWE focuses on the
most efficient suppliers to support the company. Its supplier management system allows the
company to promote cooperation between suppliers and RWE, which contains four key elements
(RWE, 2014):




Supplier selection:
– Initiation of supplier selection and definition of strategic importance of suppliers
Supplier evaluation:
– Group-wide uniform evaluation criteria and system
– Group-wide uniform communication of evaluation results, also to suppliers
Supplier classification:
– Group-wide uniform system of supplier classification based on the results of supplier
evaluation and strategic importance
– Classified strategic recommendations for action
Supplier development:
– Business-specific definition of actions and programs to improve supplier performance on
the basis of supplier classification
– Management and controlling of development activities
Figure 8 Supplier management circle of RWE
Supplier selection is a preliminary step for supplier management. After selection, the selected
suppliers have to been through evaluation and classification, and then the supplier development
activities will be carried out to achieve a better supplier performance.
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Selected suppliers are objectively evaluated by RWE-internal experts, and the results will be
communicated with the suppliers. This process contains five steps:
 Step 1: Preparation
o select evaluators per product group and /or supplier
 Step 2: Implementation
o evaluating the suppliers according to six dimensions as follows:
 quality,
 logistics,
 commercial aspects,
 technology/innovation,
 risk,
 industrial safety/environmental protection
 Step 3: visualization of results
 Step 4: Plausibility check of results
 Step 5: communicate the evaluation results within RWE and to suppliers
The detailed criteria of those six dimensions can be found in the figure below:
Figure 9 Supplier evaluation criteria of RWE
In RWE, the category to which a supplier is assigned is determined by combing the evaluation of
suppliers with the assessment of their strategic status. This supplier segmentation forms the basis
for optimizing the cooperation between the supplier and RWE. It is possible for a supplier to move
into a higher-rated category by not only improving its performance but also aligning its strategy with
RWE requirements. This will enhance the supplier's opportunities for establishing business relations.
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Figure 10 Supplier classification in RWE (derivation of strategic action recommendations)
With the purpose of modifying a supplier to enhance its performance, RWE develop the objectives of
supplier development jointly with the supplier on the basis of its classification and evaluation results.
The objectives are usually achieved in various ways:



Suppliers optimize themselves in line with jointly defined objectives whose progress is
regularly analyzed and discussed.
RWE actively supports the supplier's development, i.e. jointly identified measures are carried
out by RWE together with the supplier.
Ad-hoc measures are implemented by the supplier in the short term in line with defined
objectives.
2.5.2 Infineon (Infineon, 2014)
Infineon Technologies is a German semiconductor manufacturer offering semiconductors and
system solutions for automotive and industrial electronics and chip card and security applications.
The company mentions that a long-lasting partnership between Infineon and its suppliers is vitally
important for their business development, since purchasing products and services already accounts
for more than 50 percent of the company’s revenue, and purchasing’s share of costs is continuously
rising. The company’s purchasing capability and the competitiveness of its suppliers are strategic
core elements.
Infineon adopts a holistic, company-wide approach to manage its suppliers. This approach is based
on four interlocking modules, through which uniform sourcing, evaluation, classification and
development of suppliers is achieved (Figure 11). The company mainly concentrates on its most
important suppliers and develops/maintains strategic alliances with key suppliers. Its goals of
supplier management are:


The management of suppliers, based on the total cost of the relationship
The concentration of purchasing volume on the best suppliers
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


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The decrease in purchasing costs and increase in supplier performance
The improvement of co-operation
The optimization of the entire value chain in collaboration with suppliers
Figure 11 Supplier management in Infineon
In Infineon, only the most important suppliers taking a significant percentage of their purchasing
volume will be evaluated via the Supplier Evaluation System. The smaller suppliers are taken into
account only if they are strategically important.
The goals of supplier evaluation are:




To evaluate the performance of its suppliers (document performance and development over
time);
To identify areas of improvement (strengths and weaknesses) in order to work on corrective
action plans;
To compare suppliers against competitors and markets (benchmarking);
To concentrate the company’s purchasing volume on the best suppliers.
The supplier evaluation system process includes three steps:
 Step 1: conducting evaluations
Suppliers are evaluated by appropriate experts from purchasing, logistics, quality, risk and
technology. The performance and efficiency of suppliers will be evaluated using standard Infineonwide criteria, as shown in the following figure.
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Figure 12 Criteria for evaluating suppliers in Infineon
 Step 2: Analysis of evaluation data
Then evaluation data will be analyzed and interpreted by various ways for successful supplier
development and the determination of improvement strategies/targets.
 Step 3: communication of results
Once evaluation is completed, the results are made available on the system for all authorized users
within the company. Thus, supplier performance is transparent throughout the organization and can
be communicated clearly.
After evaluation, the individual results in each evaluation category are weighted and aggregated to
provide an overall result for each supplier. On the basis of these results, the supplier is placed into
one of the three standard performance classes that have been defined across Infineon:
on
probation
preferred
standard
Figure 13 . Infineon’s Supplier segmentation
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The evaluation frequency is geared to site-specific requirements. On the corporate level, the
evaluation is done once a year to Infineon's major suppliers
2.5.3 Deutsche Bahn (DB) (DB, 2014)
Deutsche Bahn AG (DB) was founded in 1994. Today, it is one of the world’s leading passenger and
logistics companies and operates in 130 countries. DB considers suppliers as their partners in
safeguarding Group success, and effective supplier management help the company to improve its
market position. DB implements a standardized regulating process to make sure their high quality
standards together with their suppliers.
The supplier development process in DB contains three phases on a continuous, recurrent basis
(Figure 14):


Supplier qualification
Supplier appraisal

Supplier development
Figure 14 DB supplier management process
 Step 1: Supplier qualification
In the first phase, according to defined minimum standards DB includes suitable suppliers in the pool
of potential DB contract partners. This could accelerate the award process. The principles for future
development of the qualified suppliers are also created in this step.
 Step 2: Supplier appraisal
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The supplier appraisal process is carried out according to standard criteria and serves as the base for
supplier development. DB differentiates according to different supplier classes, performance
dimensions and phases which lead to a final rating. First of all, the appraisal process allocates the
suppliers to three classes:



high (high appraisal intensity and frequency)
middle (middle appraisal intensity and frequency)
low (low appraisal intensity and frequency)
The supplier class that the suppliers are allocated to depends on the requirement category of their
DB relevant supplies and services, and on the strategic significance of the products or services.
Figure 15 Deriving supplier class
In the next step, the supplier will be evaluated from three dimensions: quality, cost and punctuality;
along with three phases: offer, supply and service phase, until the product has been proven in
practice (see Figure 16).
The appraisal results in a rating on the following levels:



outstanding, i.e. the supplier's supplies and services fulfilled DB's requirements
good, i.e. the supplier's supplies and services mainly fulfilled DB's requirements
restricted, i.e. the supplier's supplies and services partly fulfilled DB's requirements
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poor, i.e. the supplier's supplies and services did not fulfil DB's requirements
The results of assessment will be communicated with the suppliers once a year.
Figure 16 DB assess logic of dimensions and phases
Supplier development
The aims of Supplier development in DB are to enhance the quality of approved suppliers and
improve the chances for new suppliers. It concentrates all purchasing activities that help to further
optimize the performance of existing suppliers. Hence, the supplier development usually takes place
not only after the supplier appraisal process, but also during qualification and after orders have been
placed.
The supplier development strategies are designed after obtaining the appraisal results and supplier
classification. There are four basic possible strategies usually as shown in Figure 17. The company
uses incentive strategy to promote the outstanding suppliers (Type 1). For good suppliers (Type 2),
DB cultivates and possibly expands supplier relations. To develop restricted suppliers (Type 3), the
company proceeds with strategic further development of supplier relations. For the suppliers getting
a rating of poor, they would be critical reviewed and possibly phased out.
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Figure 17 DB supplier development strategies
2.5.4 Comparison
By comparing the supplier management approaches of RWE, Infineon and DB, it can be found that
the supplier managements in these three companies are all a continuous process and through three
main steps: supplier selection, supplier evaluation & segmentation, and supplier development. The
criteria for evaluating suppliers are different according to the companies’ different business sectors
and company strategies. Unlike Infineon who only assesses the most important suppliers, RWE and
DB take all the suppliers into account. Both of them have an axis in the supply segmentation to
illustrate the strategic importance of the suppliers or the products they supply.
In the development phase, RWE and DB adopt similar strategies. Both of the two companies awards
and maintain a good relationship with excellent suppliers, promote the average suppliers, critical
review and phase out the below average suppliers.
2.6 Conclusion
Supplier management mainly consists of three basic elements: supplier selection, supplier
segmentation, and supplier development which form a cyclical process. By reviewing the supplier
management in the real world (RWE, Infineon, DB) we found that most companies also adopt this
cyclical process to manage their suppliers. Supplier development is based on the result of supplier
segmentation, which demonstrates the motivation of this research.
Supplier selection serving as the first step of supplier management usually contains four steps: initial
supplier qualification; agree measurement criteria; obtain relevant information; and make selection.
In the next step, supplier segmentation is carried out, providing a solid basis for supplier
development. The conceptual model proposed by Rezaei and Ortt has been recognized as the most
appropriate basis for supplier segmentation since it covers multiple variables and companies are
flexible to choose variables according to their own perspectives. As the evaluation criteria are not
predefined, the chosen criteria could reflect the companies’ strategies and long-term goals. In order
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to give a clear impression of the variables and help decision makers to make selections, Rezaei and
Ortt’s conceptual model has been further developed in this research by classifying capabilities
variables into eight categories (technical capabilities, product quality capability, delivery capability,
intangible capability, service capability, financial/cost capability, sustainable capability,
organizational capability) and categorizing willingness criteria into four categories (willingness to
improve performance, willingness to share information, willingness to rely on each other, willingness
to get involved in long-term relationship). From the real world application it can be found that the
evaluating criteria vary based on different companies and businesses. The conceptual model
adopted in our research just reflects such flexibility, allowing the buying companies to choose freely
from the criteria list.
After the supplier segmentation is achieved, supplier development should be implemented. A
number of studies have identified the benefits and outcomes of adopting supplier developing
practices, such as cost reduction, productivity improvement, improvement in quality, etc. However,
conventional supplier development conceptual models adopt “one-fits-all” strategies and strategies
are classified only based on the degree of extent that the buyer involved. Tailored strategies for
different type of suppliers and more strategic classification are needed to achieve more efficient and
effective supplier development.
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3 Supplier segmentation methodology
In this chapter, the methodology that is used to evaluate and segment suppliers will be introduced,
which includes the following five steps (Rezaei & Ortt, 2013a):
Step 1: Determine a number of willingness and capabilities criteria based on the willingness and
capabilities lists (Table 3).
Step 2: Determine the weights of respective willingness and capabilities criteria respectively using an
MCDM method.
Step 3: Assign a score to each supplier with respect to each capabilities and willingness criterion by
the decision-maker.
Step 4: Determine the final aggregated scores of willingness and capabilities of each suppliers.
Step 5: Classify the suppliers based on their final aggregated scores into XY segments, where X and Y
are the number of levels considered for capabilities and willingness respectively.
This chapter will mostly focus on the multi-criteria decision making methods that are employed to
classify suppliers. As mentioned in Chapter 2, three multi-criteria decision making (MCDM) methods
will be employed. Multi-criteria decision making (MCDM) methods deal with the process of making
decisions in presence of multiple objectives (Pohekar & Ramachandran, 2004). A decision maker is
asked to choose among quantifiable or non-quantifiable and multiple criteria, and assess the
alternatives against the criteria. A MCDM problem can be generally shown as a matrix, as follows.
Criteria
Alternatives
A1
A2
C1
W1
a11
a21
C2
W2
a12
a22
…
...
...
...
Cn
Wn
a1n
a2n
Am
an1
an2
...
amn
Where  A1 , A2 ,
, Am  represents a set of decision alternatives, which is evaluated in terms of a set
of decision criteria c1 , c2 ,
, cn  . w1 , w2 ,
, wn  represents weights of the criteria, indicating the
relative importance of the criteria. aij is the score of alternative i with the respect to criterion j. The
goal is to select the best alternatives, which means the alternatives with the highest overall degree
would be chosen. The overall degree of an alternative can be obtained using a simple additive
weighted value function as follows:
n
Vi   w j aij
(1)
j 1
In this research, three multi-criteria decision-making methods will be employed to classify suppliers:
Analytic Hierarchy Process (AHP), fuzzy AHP using fuzzy preference programming, and Best-Worst
Method (BWM). The reason for adopting three methods is that multi-criteria decision making is
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based on experts’ knowledge, and there is no benchmark for the results. Therefore, in order to make
sure the derived results are close to the optimal solution, we adopted three multi-criteria decision
making methods here. If the weights resulting from three methods are close enough, it
demonstrates that the segmentation is robust and reliable. The reasons for choosing AHP, fuzzy AHP
and BWM are as follows.
Analytic hierarchy Process (AHP) has become the most widely used multiple criteria decision making
tools since its invention in 1977 (Saaty, 1977). It is simple to implement yet powerful to deal with
complex problem, helping managers and researchers make effective decisions by structuring and
evaluating the relative attractiveness of competing options or alternatives (Handfield, Walton,
Sroufe, & Melnyk, 2002). The process makes it possible to incorporate judgments on intangible
qualitative criteria and tangible quantitative criteria (Özkan, Başlıgil, & Şahin, 2011). Many
outstanding works have been carried out based on AHP, including applications of AHP in planning,
selecting a best alternative, resource allocation, optimization, etc. Since AHP is the most popular
approach for decision making, we adopt it as our first approach.
AHP is based on precise information, however, in the real world most decision making happens
when the information is not precisely known. To deal with vagueness of human thoughts, Zadeh first
introduced fuzzy set theory for modeling decision making processes based on vague and imprecise
information (Kahraman et al., 2003; Zadeh, 1965). The merit of using fuzzy approach is to express
the alternatives and the criteria with fuzzy numbers rather than crisp numbers. Hence Fuzzy AHP is a
powerful mathematical tool for modeling: uncertain systems in industry, nature, and humanity; and
facilitators for commonsense reasoning in decision-making in the absence of complete and precise
information (Ertuğrul & Karakaşoğlu, 2007). In this research fuzzy AHP is adopted as the second
method to segment the suppliers.
In AHP and fuzzy AHP, the weights are derived from pairwise comparisons of criteria and the scores
are derived from pair-wise comparisons of the alternatives against the criteria. There is a crucial
challenge that the pairwise comparison matrices usually lack of consistency in practice. Especially in
our case, there are up to 8 main criteria of capabilities, so the consistency of the main capability
criteria comparison matrix tends to be problematic. To handle this potential issue, we will adopt a
new multi-criteria decision-making method BWM, which conducts the pairwise comparison in a
different way compared to the existing approaches (Rezaei, 2014). The new method uses less
comparison data, and remedies the inconsistency.
3.1 Analytic Hierarchy Process (AHP)
AHP contains three steps: 1) structure of the hierarchy; 2) comparative judgment of the alternatives
and the criteria; 3) synthesis of the priorities (Özkan et al., 2011; Saaty & Vargas, 2001).
The first step is to define criteria and sub-criteria. Based on the identified criteria and sub criteria,
the hierarchical model is structured. The developed AHP model contains at least three levels: the
overall goal of the problem at the top, multiple criteria that define alternatives in the middle, and
alternatives at the bottom (Amiri, 2010). A typical problem structuring is depicted in Figure 18.
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Figure 18 hierarchical model of AHP
After establishing the hierarchy model, the next step is to pairwise compare the relative importance
of each criterion within each level. The pairwise comparison starts from the second level and finishes
in the lowest level. In each level, the criteria are compared pairwise according to their levels of
influence and based on the specified criteria in the higher level. The pairwise comparisons are based
on a standardized comparison scale of nine levels (see Table 8). The result of pairwise comparison
can be summarized in a matrix as follows:
A=
criteria
A1
A2
A1
1
w2/w1
A2
w1/w2
1
…
…
An
w1/wn
w2/wn
An
wn/w1
wn/w2
…
1
Verbal judgment or preference
Equal importance
Weak importance of one over another
Essential or strong importance
Demonstrated importance
Absolute importance
Intermediate values between the two adjacent judgments
Intensity of importance
1
3
5
7
9
2,4,6,8
Table 8 comparison scale (Saaty, 1977)
At the last step, the relative weights can be found for each matrix. The weights are given by the
eigenvector ( w  (w1 , w2 ,..., wn ) ) corresponding to the largest Eigen value λmax as (Özkan et al.,
2011; Saaty & Vargas, 2001):
Aw  maxW
(2)
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The resulting criteria weight should fulfill the requirement:

n
Wi  1 .
i 1
Consistency
The quality of the output of the AHP is strictly related to the consistency of the pairwise comparison.
If all the pairwise comparisons are completely consistent then, the following relation should always
be true among any three comparisons aik, akj, and aij:
aik  akj  aij , for any 1  i, j, k  n
(3)
Saaty expresses the inconsistency of a pairwise comparison matrix in terms of the consistency index
(CI). The CI index is defined as follows:
CI 
max  n
(4)
n 1
Where n is dimension of the matrix and λmax is the maximal eigenvalue.
CI is compared with the random ratio (RI), which is obtained as an average over a large number of
reciprocal matrices of the same order whose entries are random (Saaty & Vargas, 2001; Saaty, 1990).
The values of RI have been predefined by Satty for problems with n≤10 as indicated in table 9.
If the ratio (called the consistency ratio CR) of CI and the random index (RI) is significantly small (less
than 0.1), the estimate of w can be accepted. If the final consistency ratio exceeds this value, the
evaluation procedure has to be repeated to improve consistency.
n
RI
1
0
2
0
3
0.52
4
0.89
5
1.11
6
1.25
7
1.35
8
1.40
9
1.45
10
1.49
Table 9 average random consistency index (R.I.) (Saaty & Vargas, 2001)
3.2 An improved fuzzy preference programming
3.2.1 Fuzzy Set Theory
Fuzzy AHP, providing a more widely frame than classic AHP, has proven to be an effective way for
formulating decision problems where the information available is subjective and imprecise (Ertuğrul
& Karakaşoğlu, 2007). Qualitative aspects are represented by the means of linguistic variables, and
expressed qualitatively by linguistic terms and quantitatively by a fuzzy set in the universe of
discourse (U) and respective membership function (Osiro, Lima-Junior, & Carpinetti, 2014). In the
following, some important definitions and notations of fuzzy set theory will be reviewed (Zadeh,
1965, 1976; Zimmermann, 2001).
Definition 1: fuzzy set
“A fuzzy set is a class of objects, with a continuum of membership grades, where the membership
grade can be taken as an intermediate value between 0 and 1. A fuzzy subset A of a universal set X
is defined by a membership function f A ( x) which map each element x in X to a real number [0,1] ”:
A   x,  A ( x) , x  X
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 A ( x) equals to 1, x completely belongs to the fuzzy set A . If  A ( x) equals to 0, x does not
belong to the fuzzy set A . If
 A ( x) equals to a value between 0 and 1, x partially belongs to the
fuzzy set A .
Definition 2: fuzzy numbers
Triangular Fuzzy Number
A fuzzy number N on   (, ) is defined to be a Triangular Fuzzy Number (TFN) if its membership
function
N ( x) :   0,1 is:
 x l
 m  l , l  x  m,

ux
 N ( x)  
, m  x  u,
u  m
0, otherwise,


(5)
Where l  m  u , and u as well as l are the upper and lower bounds of the support N respectively, m
is the modal value. The fuzzy number can be represented as (l,m,u).
l
m
u
Figure 19 A triangular fuzzy number
The operational laws of triangular fuzzy number are as follows:
Fuzzy number addition 
N1  N2  (l1 , m2 , u2 )  (l2 , m2 , u2 )  (l1  l2 , m1  m2 , u1  u2 )
(6)
Fuzzy number multiplication 
N1  N2  (l1 , m2 , u2 )  (l2 , m2 , u2 )  (l1  l2 , m1  m2 , u1  u2 )
(7)
Fuzzy number division (/)
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N1 (/) N 2  (l1 , m2 , u2 )(/)(l2 , m2 , u2 )
 (l1 / u2 , m1 / m2 , u1 / l2 )
where li , mi , ui are all positive real numbers
(8)
Trapezoidal Fuzzy Number
A fuzzy number N on   (, ) is defined to be a Trapezoidal Fuzzy Number if its membership
function  N ( x) :   0,1 is:
 xa
 b  a , l  x  m1
 1
1, m  x  m2
 N ( x)   1
 c  x , m  x  u,
 c  b2 2

0, otherwise,
(9)
Where a and c are lower and upper bounds of the support N respectively, b1=b2 is the modal value
and a<b<c.
Figure 20 Trapezoidal fuzzy number
Definition 3: Linguistic variables
A linguistic variable is characterized by a quintuple ( x, T ( x),U , G, M ) , where x is the name of the
variable; T(x) is the term set of x; G is a syntactic rule for generating the names of values of x; and M
is a semantic rule for assigning each value its meaning.
3.2.2 Fuzzy AHP using fuzzy preference programming (FPP)
Mikhailov proposed a new approach for deriving priorities from fuzzy pairwise comparison judgment
(Mikhailov, 2003). The aim of this approach is to determine the relative weight of the criteria
w  (w1 , w2 ,
, wn ) such that the ratios wi / w j are approximately within the scopes of the pair
wise judgment:
lij 
wi
 uij
wj
(10)
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This inequality indicates a maximization of decision-maker’s satisfaction. While for each i and j, there
could be many different pairs of i and j that satisfies the inequality above. However, different ratios
wi / w j can be measured by a membership function:
 wi
 w  lij w
 j
, i  mij ,
 mij  lij w j
 N ( x)  
 u  wi
 ij w j wi
,
 mij ,

 uij  mij w j
(11)
The membership function (9) may take the following values:
ij (
wi
w
w
)  (, 0) , if i  lij or i  uij
wj
wj
wj
(12)
wi
w
)   0,1 , if lij  i  uij
wj
wj
(13)
ij (
The membership function takes the maximum value of 1 when wi / w j = mij
The purpose of fuzzy preference programming is to find the optimal crisp priority vector w* of the
fuzzy feasible area P on the (n-1) dimensional simplex Qn-1.

Q n 1   wi


n
 w  1, w  0
i 1
i
i
(14)

With the following membership function:
 p (w)  min ij (w) i  1, 2,..., n 1, j  2,3,..., n, j  i
(15)
ij
According to Mikhailov (Mikhailov, 2003) ,since the fuzzy feasible area is a convex set and all fuzzy
constraints are defined as convex, there is always an optimal crisp priority vector that has a
maximum degree of membership
*   p ( w*)  max min( ij ( w))
wQn1
(16)
ij
According to the max-min operator for deriving a maximizing solution proposed by Bellman and
Zadeh, the problem (16) can be transformed to the following problem:
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max 
s.t.
(mij  lij ) w j  wi  lij w j  0,
(uij  mij ) w j  wi  uij w j  0,

n
k 1
(17)
wk  1,
wk  0
i  1, 2,
, n  1, j  2,3,
, n, j  i, k  1,...., n
By solving the above non-linear program, the optimal solution ( w*, *) is obtained. The first
component w* represents the priority vector that has a maximum degree of membership in the
fuzzy feasible area, and the second component  * measures the degree of satisfaction and is a
natural indicator for the inconsistency of the decision maker’s judgment (Mikhailov, 2003).
Improved fuzzy AHP using FPP
The membership function (9) is linearly decreasing over interval (, mij ) and linearly decreasing
over interval (mij , ) . However, this is not totally applicable for fuzzy numbers. To deal with this
issue, Rezaei improved Mikhaliov’s approach by taking into account the skewness and non-linearity
of the reciprocal fuzzy numbers (Rezaei, Ortt, & Scholten, 2013). In fuzzy AHP, Rezaei defined that
there are two types of fuzzy numbers describing the comparison of criteria:

Type 1: Triangular fuzzy numbers (TFNs): 1, 2,3,...,9

Type 2: the corresponding reciprocals of the TFNs of Type 1:
1 1
1
, ,..., ,1
9 8
2
As defined in function (5), type 1 fuzzy numbers are linearly increasing and decreasing over interval
(lij , mij ) and (mij , uij ) respectively, while the reciprocal of a TFN (type 2 fuzzy number) is not linearly
changing over its left and right intervals. For type 2 fuzzy numbers, the satisfaction of decision-maker
with different w j / wi is represented by the membership function:
 wj
 w  l ji w
 i
, j  m ji ,
 w   m ji  l ji wi
 ji  j   
 wi   u  w j
 ji wi w j
,
 m ji ,

 u ji  m ji wi
(18)
Therefore, applying the logic of Mikhailov, the improved fuzzy AHP using FPP can be described as
follows (Rezaei et al., 2013):
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max 
s.t.
(mij  lij ) w j  wi  lij w j  0, 
 for fuzzy numbers of Type 
(uij  mij ) w j  wi  uij w j  0, 
(m ji  l ji ) wi  w j  l ji wi  0, 
 for fuzzy numbers of Type 
(u ji  m ji ) wi  w j  u ji wi  0, 

n
k 1
(19)
wk  1,
wk  0
i  1, 2,
, n  1, j  2,3,
, n, j  i, k  1,...., n
By solving the non-linear programming problem above, the optimal priority vector w * and  * can
be found.  * can be interpreted as the consistency index.
3.3 Best-Worst Multi-criteria Decision-Making Method (BWM)
BWM is an efficient methodology which could handle the issue that the pair-wise comparison
matrixes of AHP and fuzzy AHP lack consistency. BWM includes 5 steps to derive the weight of the
criteria (Rezaei, 2014):
Step 1. Determine a set of decision criteria
In this step, the decision maker determines the criteria c1 , c2 ,
, c1 for evaluating the alternatives
to arrive at a decision.
Step 2. Determine the best and the worst criteria
The best criterion can be considered as the most desirable or the most important criteria and the
worst criterion represents less desirable or less important criteria to the decision. In this step, the
decision maker identifies the best and the worst criteria from his perspective.
Step 3. Conduct pairwise comparison between the best criterion and the others
In this step, the preferences of the most important criterion over the rest criteria are determined by
using a number from 1 to 9. The comparison result can be expressed by a Best-to-Others vector as
follows:
AB   aB1 , aB 2 ,
, aBn  ,
Where aBj indicates the relative importance of the best criterion B over the other criterion j , and
aBB  1 .
Step 4. Conduct pairwise comparison between the worst criterion and the others
This step includes determining the preferences of the other criterion over least important criterion
by using a number from 1 to 9. The comparison result can be expressed by a “Others-to-Worst
vector” as follows:
40 | P a g e
Chapter 3
Aw   a1W , a2W ,
Supplier segmentation methodology
, anW  ,

Where a jW indicates the relative importance of the other criterion j over the worst criterion j , and
aBB  1 .
Step 5. Find the optimal weight ( w1* , w1* ,
, wn* )
For each pair of wB / w j and w j / wW , the optimal weight should meet the requirement that
wB / w j  aBj and w j / wW  a jW . To satisfy the conditions, the maximum absolute difference
Wj
WB
 a jW for all j should be minimized. Also taking into consideration the non aBj and
WW
Wj
negativity characteristic and sum condition of the weights, the following problem can be formulated:
 w
w
min max  B  aBj , j  a jW
wW
 w j
s.t.
w
j



(20)
1
j
w j  0, for all j
Hence, problem (20) can be transferred to the following linear programming problem:
min 
s.t.
WB
 aBj   ,
Wj
Wj
WW
(21)
 a jW   ,
w
j
1
j
w j  0,
By solving the linear programming problem, the optimal weights ( w1* , w1* ,
, wn* ) and  can be
obtained. The consistency ratio of BWM can be expressed as follows:
Consistency
Ratio 
*
Consistency
(22)
Index
41 | P a g e
Chapter 3
Supplier segmentation methodology
aBW
1
2
3
4
5
6
7
8
9
Consistency
Index
0.00
0.44
1.00
1.63
2.30
3.00
3.73
4.47
5.23
Table 10 consistency index (Rezaei, 2014)
It can be seen that the bigger the  * , the more consistent the vectors are.
3.4 Conclusion
In this chapter a five steps method for developing supplier segmentation was introduced, which
includes 1) determine a number of criteria; 2) determine the weights of respective criteria; 3) assign
a score to each supplier; 4) determine the final aggregated scores; 5) classify the suppliers based on
their final aggregated scores into XY segments.
In order to derive the weights of respective criteria in step 2, three multi-criteria decision making
methods were selected, because multi-criteria decision making method is based on experts’
knowledge and there is no benchmark for the results. Adopting three methods help us to examine if
the results are close to optimal solution. Within these three methods, AHP is the most widely used
method since its invention in 1977, which is able to handle both qualitative and quantitative data
(Saaty, 1977). “Improved AHP using FPP” was chosen because of its ability to deal with fuzziness in
human thinking, and the fact that it takes into account non-linearity and skewness of reciprocal
numbers (Rezaei et al., 2013). However, both of these two methods may face problem of lacking
consistency in practice. In order to overcome this issue, a third methodology BWM was introduced.
This new method uses less comparison data, and remedies the inconsistency.
42 | P a g e
Chapter 4
Application of supplier segmentation
4 Application of supplier segmentation
In this chapter, the proposed methodology in Chapter 3 is applied in the case company, Beijing Time
High Technology Company.
4.1 Data collection and processing
By interviewing the CEO and vice-president of the selected company, the relevant data were
gathered. Firstly, the CEO and vice-president were asked to screen the list of capabilities and
willingness criteria to select a handful of criteria for each dimension. After serious consideration and
discussion, they chose 11 sub-criteria for capabilities and 7 sub-criteria for willingness as shown in
the Table 11 and 12.
Main willingness criteria
W
1
willingness to improve performance (C )
Selected willingness sub-criteria
Commitment to continuous improvement in
W
product and process (C11
)
Supplier’s effort in promoting JIT principles
(C12W )
Willingness to share information (C2W )
Honest and frequent communications/
W
communication openness (C21
)
W
Open to site evaluation (C22
)
Willingness to rely on each other (C3W )
W
Ethical standards (C31
)
Willingness to get involved in long-term
relationship (C4W )
W
Long-term relationship (C41
)
W
Commitment to quality (C42
)
Table 11 main criteria and sub-criteria considered to evaluate supplier willingness
Main capabilities criteria
C
1
Selected capabilities sub-criteria
Technical capability (C )
C
Process capability (C11
)
Product quality capability (C2C )
C
Quality (C21
)
C
Product reliability (C22
)
Delivery capability (C3C )
C
Delivery (C31
)
C
Reserve capability (C32
)
C
Lead time (C33
)
Intangible capability (C4C )
C
Amount of past business (C41
)
Service capability (C5C )
C
After sales support (C51
)
Financial/cost capability (C6C )
C
)
Price/cost (C61
Sustainable capability (C7C )
C
Availability of clean technologies (C71
)
Organizational capability (C8C )
C
Management and organization (C81
)
Table 12 main criteria and sub-criteria considered to evaluate supplier capabilities
43 | P a g e
Chapter 4
Application of supplier segmentation
Afterwards, the hierarchy of supplier capabilities and willingness are established, which includes
three levels: identified goals, criteria, and sub-criteria. (Figure 21 and figure 22).
technical capability
process capability
quality
quality capability
product reliability
delivery
delivery capability
capability
reserve capability
lead time
intangible capability
amount of past business
service capability
after sales support
financial/cost capability
price/cost
sustainable capability
availability of clean
technologies
organizational capability
management and
organization
Figure 21 Hierarchy of suppliers’ capabilities
44 | P a g e
Chapter 4
Application of supplier segmentation
commitment to
improvement in product
and process
supplier's effort in
improving 'just-in-time'
principles
willingness to improve
performance
honest and frequent
communication
willingness to share
information
willingness
open to site evaluation
willingness to rely on each
other
ethical standards
long-term relationship
willingness to get invovled
in long-term relationship
commitment to quality
Figure 22 Hierarchy of suppliers’ willingness
Then the company was asked to assign a score between 1 (very low) to 5 (very high) for each
criterion as applied to the various suppliers.
score
description
1
Very low
2
Low
3
medium
4
high
5
Very high
Table 13 Linguistic variables
Firm no.
87 suppliers who provide more than 5 products were evaluated. Two decision makers from
purchasing department, one from quality management and one from manufacturing department
had a meeting together to discuss the scale, making sure they have the same subjective definition of
the level of scale. The work is divided into four parts. Each employee gave scores to the suppliers
that they are familiar with. The score shows how each supplier is perceived based on the criterion.
The resulting scores for the various criteria are presented in Table 14.
1
2
3
4
5
6
7
8
9
10
11
C
C
C
C
C
C
C
C
C
W
W
W
W
W
C
C11C C21
C31
C32
C33
C41
C51
C61
C71
C81
C11W C12W C21
C22
C31
C41
C42
C22
4
4
4
4
4
4
4
4
4
5
4
5
5
5
5
3
5
5
4
5
4
3
5
5
5
4
4
5
5
5
4
5
4
3
5
4
4
4
3
4
4
4
5
4
4
5
4
4
5
4
4
4
4
5
4
5
5
5
5
5
4
4
4
5
5
4
5
5
5
5
5
5
5
5
5
5
4
5
5
5
4
5
5
4
4
4
5
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5
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4
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5
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3
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3
5
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3
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3
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4
45 | P a g e
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15
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61
4
5
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3
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3
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4
4
5
5
3
4
5
5
4
5
5
4
5
4
4
4
5
4
4
4
Application of supplier segmentation
5
5
4
5
5
5
5
5
4
5
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5
5
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5
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4
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4
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3
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3
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3
4
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5
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5
3
4
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5
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5
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5
4
3
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4
5
4
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5
4
3
5
5
4
4
4
4
4
4
4
5
5
4
4
4
5
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5
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4
3
4
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5
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4
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5
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5
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5
4
3
4
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4
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3
5
5
4
3
5
5
4
4
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5
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4
5
4
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5
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4
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5
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3
5
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3
5
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5
5
5
5
5
5
5
5
4
2
5
5
4
4
3
4
5
2
4
5
5
4
4
4
4
4
5
4
4
4
4
4
4
4
4
4
4
4
4
4
3
4
4
4
4
4
4
3
4
5
4
5
4
3
3
4
5
5
5
4
5
5
5
5
4
4
4
3
4
4
5
4
5
4
3
4
4
4
5
5
4
4
4
5
4
5
4
4
5
4
3
5
5
5
4
5
4
3
5
5
4
5
5
4
4
5
4
4
4
3
4
5
4
4
4
4
5
4
4
5
4
3
4
3
4
5
4
5
4
4
4
5
3
4
4
4
4
4
4
5
4
4
4
4
4
4
5
4
4
4
4
3
4
4
4
4
5
5
5
2
4
5
3
4
3
4
5
4
4
5
5
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5
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5
4
4
5
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5
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4
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3
4
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4
4
4
5
4
4
5
4
4
4
4
4
4
4
4
5
3
3
4
4
5
3
5
4
4
4
4
5
4
5
4
3
3
4
3
4
5
4
3
4
4
5
4
4
5
4
3
5
5
4
4
4
4
4
4
4
5
5
4
4
5
5
4
4
4
4
1
4
4
5
4
3
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3
4
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4
3
3
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4
5
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46 | P a g e
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4
3
Application of supplier segmentation
4
4
4
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5
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1
4
3
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3
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3
3
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5
4
4
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5
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4
4
4
3
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4
4
5
4
4
5
5
5
5
4
5
4
4
4
4
5
4
5
4
4
4
4
3
3
4
4
4
4
5
4
4
5
5
5
4
5
4
4
5
4
5
5
5
5
5
4
5
5
4
4
4
4
4
4
5
5
5
4
5
4
4
4
5
3
5
3
5
3
5
3
4
4
5
5
3
4
3
4
4
4
5
5
5
3
3
3
4
5
3
3
5
4
5
4
5
4
5
4
5
5
4
4
3
4
4
4
5
5
5
3
4
3
4
4
3
4
4
4
3
4
4
4
4
5
3
4
4
4
3
4
4
4
4
4
3
4
5
3
4
4
4
4
4
4
4
5
4
4
4
4
4
4
3
3
4
4
4
4
4
4
4
4
4
3
3
4
2
4
5
5
4
4
4
4
4
3
4
4
3
4
4
4
4
4
5
4
4
3
4
4
3
4
4
4
4
4
4
4
4
4
4
4
4
4
3
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
5
4
4
3
4
4
4
4
4
4
4
4
5
5
4
4
Table 14 willingness and capabilities measures of the suppliers
Afterwards, three multi-criteria decision making methods are applied to derive the weights of each
criterion.
4.1.1 AHP
We started from the first level to evaluate the contribution of the main criteria to the goals. The CEO
and purchasing manager were asked to conduct a pairwise comparison with regard to different main
criteria. The relative importance is described by linguistic variables, and then converted into crisp
variables for AHP (see Table 15 and 16).
Capability
(C)
C1C
C2C
C3C
C4C
C5C
C6C
C7C
C8C
C1C
1
1/7
1/6
2
1/3
1/5
1/4
3
C
2
7
1
2
8
4
3
4
8
C3C
6
1/2
1
8
3
2
2
8
C4C
C
1/2
1/8
1/8
1
1/5
1/8
1/4
2
C
5
3
1/4
1/3
5
1
1/3
1/2
5
C
6
C
5
1/3
1/2
8
3
1
4
5
C7C
4
1/4
1/2
4
2
1/4
1
2
C
47 | P a g e
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C8C
Application of supplier segmentation
1/3
1/8
1/8
1/2
1/5
1/5
1/2
1
Table 15 pairwise comparisons of capabilities main criteria
Willingness
(W)
C1W
C2W
C3W
C4W
C1W
1
6
3
2
C2W
1/6
1
1/5
1/4
C3W
1/3
5
1
2
C4W
1/2
4
1/2
1
Table 16 pairwise comparison of willingness main criteria
For those main criteria that include more than one sub-criterion, the pairwise comparisons are
conducted as well. The pairwise comparisons can be found in Table 17 and 18.
Product quality capability (C2C )
C
C21
C
C
22
Delivery capability (C3C )
C
C31
C
32
C
C
C33
C
C21
C
C22
1
3
1/3
1
C
C31
C
C32
C
C33
1
2
1/6
1/2
1
1/7
6
7
1
Table 17 pairwise comparisons of the capabilities sub-criteria
Willingness to improve performance (C1W )
C11W
C12W
C11W
1
1/3
C12W
3
1
W
C21
W
C22
1
3
1/3
1
W
C41
W
C42
W
C41
1
1/5
W
C42
5
1
Willingness to share information (C2W )
W
C21
C
W
22
Willingness to get involved in long-term relationship (C4W )
Table 18 pairwise comparison of the willingness sub-criteria
The weights of criteria and sub-criteria can be obtained by calculating the eigenvalue of the pairwise
comparisons, as shown in Table 19 and Table 20. Through multiplying the relative weights of the
sub-criteria by the weights of the main criteria, the global weights of sub-criteria can be obtained
(see column 5 of Table 19 and 20).
48 | P a g e
Chapter 4
Main willingness
criteria
willingness to improve
performance (C1W )
Willingness to share
information (C2W )
Willingness to rely on
each other (C3W )
Willingness to get
involved in long-term
relationship (C4W )
Application of supplier segmentation
Criteria
weights
0.480
0.059
0.265
0.196
Willingness sub-criteria
Commitment to continuous
improvement in product and
W
process (C11
)
Sub-criteria
weights
0.250
Global
weights
0.120
Supplier’s effort in promoting JIT
W
principles (C12
)
0.750
0.360
Honest and frequent
communications/ communication
W
openness (C21
)
0.750
0.044
W
Open to site evaluation (C22
)
0.250
0.015
W
Ethical standards (C31
)
1.000
0.265
W
Long-term relationship (C41
)
0.167
0.033
W
Commitment to quality (C42
)
0.833
0.163
Table 19 results based on AHP—weights of criteria and sub-criteria (willingness)
Main capabilities criteria
Criteria
weights
0.040
Capabilities sub-criteria
Product quality
capability (C2C )
0.324
C
Quality (C21
)
0.750
0.243
C
Product reliability (C22
)
0.250
0.081
Delivery capability (C3C )
0.225
C
Delivery (C31
)
0.151
0.034
C
Reserve capability (C32
)
0.091
0.020
C
Lead time (C33
)
0.758
0.171
0.027
C
Amount of past business (C41
)
1.000
0.027
Service capability (C5C )
0.086
C
After sales support (C51
)
1.000
0.086
Financial/cost capability
0.181
C
Price/cost (C61
)
1.000
0.181
0.093
Availability of clean technologies
1.000
0.093
1.000
0.025
Technical capability
C
1
C
Process capability (C11
)
Sub-criteria
weights
1.000
Global
weights
0.040
(C )
Intangible capability
C
4
(C )
C
6
(C )
Sustainable capability
C
7
C
71
(C )
Organizational capability
C
8
(C )
(C )
0.025
Management and organization
C
81
(C )
Table 20 results based on AHP-weights of criteria and sub-criteria (capabilities)
Consistency check
Using the equation in Chapter 3, the consistency ratio is checked for each pairwise comparison
matrix (see Table 21). It can be seen that each matrix has a CR smaller than 0.1, which means the
consistency of the comparisons are acceptable.
49 | P a g e
Chapter 4
Application of supplier segmentation
Pairwise comparison matrix
Consistency ratio (CR)
C
W
C2C
C3C
C1W
C2W
C4W
0.057
0.056
0
0.031
0
0
0
Table 21 Consistency ratio of all pairwise comparison matrixes
4.1.2 Fuzzy AHP
To obtain fuzzy pairwise comparisons of main criteria and sub-criteria, the obtained linguistic
variables are converted to fuzzy numbers, as shown in Table 22 to 25.
Capability
(C)
C1C
C1C
(1,1,1)
C2C
(6,7,8)
(1,1,1)
(1,2,3)
(7,8,9)
(3,4,5)
(2,3,4)
(3,4,5)
(7,8,9)
C3C
(5,6,7)
(1/4,1/3,1/2)
(1,1,1)
(7,8,9)
(2,3,4)
(1,2,3)
(1,2,3)
(7,8,9)
C4C
C2C
C3C
C4C
(1/6,1/7,1/8) (1/7,1/6,1/5)
(1/4,1/3,1/2) (1/9,1/8,1/7) (1/9,1/8,1/7)
C5C
(1,2,3)
C6C
C7C
C8C
(1/4,1/3,1/2) (1/6,1/5,1/4) (1/5,1/4,1/3) (1,2,3)
(1,1,1)
(1/6,1/5,1/4) (1/9,1/8,1/7) (1/5,1/4,1/3) (1,2,3)
C5C
(2,3,4)
(1/5,1/4,1/3) (1/4,1/3,1/2)
(4,5,6)
(1,1,1)
(1/4,1/3,1/2)
(1/3,1/2,1)
(4,5,6)
C6C
(4,5,6)
(1/4,1/3,1/2)
(1/3,1/2,1)
(7,8,9)
(2,3,4)
(1,1,1)
(3,4,5)
(4,5,6)
C7C
(3,4,5)
(1/5,1/4,1/3)
(1/3,1/2,1)
(3,4,5)
(1,2,3)
(1/5,1/4,1/3)
(1,1,1)
(1,2,3)
(1/3,1/2,1)
(1,1,1)
C8C
(1/5,1/4,1/3) (1/7,1/6,1/5) (1/9,1/8,1/7) (1/3,1/2,1) (1/6,1/5,1/4) (1/6,1/5,1/4)
Table 22 Fuzzy pairwise comparison of main criteria (capabilities)
Willingness
(W)
C1W
C2W
C3W
C4W
C1W
(1,1,1)
(5,6,7)
(2,3,4)
(1,2,3)
C2W
(1/7,1/6,1/5)
(1,1,1)
(1/6,1/5,1/4)
(1/5,1/4,1/3)
C3W
(1/4,1/3,1/2)
(4,5,6)
(1,1,1)
(1,2,3)
C4W
(1/3,1/2,1)
(3,4,5)
(1/3,1/2,1)
(1,1,1)
Table 23 Fuzzy pairwise comparisons of the main criteria (willingness)
The pairwise comparison of sub-criteria can also be described as fuzzy numbers:
C
C21
C
C22
C
C21
(1,1,1)
(2,3,4)
C
C22
(1/4,1/3,1/2)
(1,1,1)
C
C31
C
C32
C
C33
C
C31
(1,1,1)
(1,2,3)
(1/7,1/6,1/5)
C
C32
(1/3,1/2,1)
(1,1,1)
(1/8.1/7,1/6)
C
C33
(5,6,7)
(6,7,8)
(1,1,1)
C
Product quality capability (C2 )
C
Delivery capability (C3 )
Table 24 Fuzzy pairwise comparisons of sub-criteria (capabilities)
W
Willingness to improve performance (C1 )
C11W
C12W
50 | P a g e
Chapter 4
Application of supplier segmentation
C11W
(1,1,1)
(1/4,1/3,1/2)
C12W
(2,3,4)
(1,1,1)
Willingness to share information (C2 )
W
C21
W
C22
W
C21
(1,1,1)
(2,3,4)
W
C22
(1/4,1/3,1/2)
(1,1,1)
Willingness to get involved in long-term relationship (C4 )
W
C41
W
C42
W
C41
(1,1,1)
(1/6,1/5,1/4)
W
C42
(4,5,6)
(1,1,1)
W
W
Table 25 Fuzzy pairwise comparisons of sub-criteria (willingness)
Afterwards, by solving the improved non-linear programming model, as presented in equation (19)
for each comparison matrix, the crisp weights of criteria and sub-criteria are obtained, as shown in
Table 26 and 27. To obtain the global weights of sub-criteria, the relative weights of the sub-criteria
are multiplied by the weights of the main criteria (see column 5 of Table 26 and 27).
Main willingness
criteria
willingness to improve
Criteria
weights
0.433
W
1
performance (C )
Willingness sub-criteria
Commitment to continuous
improvement in product and
Sub-criteria
weights
0.250
Global
weights
0.108
W
process (C11 )
Supplier’s effort in promoting JIT
0.750
0.325
0.750
0.045
0.250
0.015
1.000
0.233
W
0.167
0.046
W
0.833
0.228
W
12
principles (C )
Willingness to share
0.061
W
2
information (C )
Honest and frequent
communications/ communication
W
openness (C21 )
W
Open to site evaluation (C22 )
Willingness to rely on
0.233
Ethical standards (C31 )
0.273
Long-term relationship (C41 )
W
3
W
each other (C )
Willingness to get
involved in long-term
Commitment to quality (C42 )
W
relationship (C4 )
Table 26 results of fuzzy AHP—weights of criteria and sub-criteria (willingness)
Main capabilities criteria
Technical capability
Criteria
weights
0.032
Capabilities sub-criteria
0.277
Quality (C21 )
C
1
Sub-criteria
weights
1.000
Global
weights
0.032
0.750
0.207
Product reliability (C22 )
0.250
0.069
C
0.141
0.034
C
Process capability (C11 )
(C )
Product quality
C
2
capability (C )
C
C
C
Delivery capability (C3 )
0.244
Delivery (C31 )
51 | P a g e
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Application of supplier segmentation
C
Reserve capability (C32 )
C
Lead time (C33 )
Intangible capability
0.100
0.024
0.760
0.185
1.000
0.030
1.000
0.114
0.030
Amount of past business (C41 )
Service capability (C5 )
0.114
After sales support (C51 )
Financial/cost capability
0.192
Price/cost (C61 )
1.000
0.192
0.079
Availability of clean technologies
1.000
0.079
1.000
0.033
C
4
C
(C )
C
C
6
C
C
(C )
Sustainable capability
C
7
C
71
(C )
(C )
Organizational capability
0.033
C
8
Management and organization
C
81
(C )
(C )
Table 27 results of fuzzy AHP—weights of criteria and sub-criteria (capabilities)
4.1.3 BWM
In order to obtain the weights by applying BWM, firstly the manager and CEO were asked to select
the most important and the least important criteria respectively for each level. Then pairwise
comparisons are conducted between the best/worst criterion and the other criteria. The results can
be found in the Table 28 to 41.
Willingness (W)
W
The most important criterion: C1
C1W
C2W
C3W
C4W
1
6
3
2
Table 28 Best criterion vector for main criteria (willingness)
Willingness (W)
The least important criterion: C2
C1W
6
C2W
1
C3W
5
C4W
4
W
Table 29 Worst criterion vector for main criteria (willingness)
Capabilities (C)
C
The most important criterion: C2
C1C
C2C
C3C
C4C
C5C
C6C
C7C
C8C
6
1
2
8
5
3
4
9
Table 30 Best criterion vector for main criteria (capabilities)
Capabilities (C)
C
The least important criterion: C8
C1C
2
C2C
9
C3C
8
C
4
2
C
5
3
C
6
5
C
C
C
52 | P a g e
Chapter 4
Application of supplier segmentation
C7C
4
C
8
1
C
Table 31 Worst criterion vector for main criteria (capabilities)
W
Willingness to improve performance (C1 )
C11W
C12W
3
1
W
The most important criterion: C12
Table 32 Best criterion vector for sub-criteria (willingness to improve performance)
W
Willingness to improve performance (C1 )
W
The least important criterion: C11
C11W
1
W
12
3
C
Table 33 Worst criterion vector for sub-criteria (willingness to improve performance)
W
Willingness to share information (C2 )
W
C21
W
C22
1
3
W
The most important criterion: C21
Table 34 Best criterion vector for sub-criteria (willingness to share information)
W
Willingness to share information (C2 )
W
The least important criterion: C22
W
C21
3
W
22
1
C
Table 35 Worst criterion vector for sub-criteria (willingness to share information)
W
Willingness to get involved in long-term relationship (C4 )
W
C41
W
C42
5
1
W
The most important criterion: C42
Table 36 Best criterion vector for sub-criteria (willingness to get involved in long-term relationship)
W
Willingness to get involved in long-term relationship (C4 )
W
The least important criterion: C42
W
C41
5
W
C42
1
Table 37 Worst criterion vector for sub-criteria (willingness to get involved in long-term relationship)
C
C
C21
C
C22
C
1
3
Product quality capability (C2 )
The most important criterion: C21
Table 38 Best criterion vector for sub-criteria (product quality capability)
C
Product quality capability (C2 )
C
The least important criterion: C22
C
C21
3
C
C22
1
Table 39 Worst criterion vector for sub-criteria (product quality capability)
C
Delivery capability (C3 )
C
The most important criterion: C33
C
C31
C
C32
C
C33
6
7
1
Table 40 Best criterion vector for sub-criteria (delivery capability)
53 | P a g e
Chapter 4
Application of supplier segmentation
C
C
Product quality capability (C2 )
The least important criterion: C32
C
C31
2
C
C32
1
C
C33
7
Table 41 Worst criterion vector for sub-criteria (delivery capability)
By solving the non-linear programming model, as presented in Equation (21) for each pair of vectors,
the weights of criteria and sub-criteria can be obtained. However, what is important to notice here
is that for the case of more than 3 criteria, the solution is not unique. Therefore, we obtained an
interval of weights for each criteria rather than a crisp number for main willingness criteria and main
capabilities criteria (see the Table 42 and 43). To obtain their global weights, their relative weights
were multiplied by the weights of the main criteria (see column 5 in Table 42 and 43), and the global
weights are also intervals.
Main willingness
criteria
willingness to
improve
Criteria
weights
[0.461,0.510]
W
performance (C1 )
Willingness sub-criteria
Commitment to
continuous improvement
in product and process
Sub-criteria
weights
0.250
Global
weights
[0.115,0.127]
(C11W )
Supplier’s effort in
promoting JIT principles
0.750
[0.346,0.382]
0.750
[0.051,0.056]
0.250
[0.017,0.019]
(C12W )
Willingness to
share information
[0.067,0.075]
(C2W )
Honest and frequent
communications/
communication openness
W
(C21
)
Open to site evaluation
W
22
(C )
Willingness to rely
on each other
[0.213,0.236]
Ethical standards (C31 )
1.000
[0.213,0.236]
[0.180,0.259]
Long-term relationship
0.167
[0.030,0.043]
0.833
[0.150,0.215]
Sub-criteria
weights
1.000
Global
weights
[0.044,0.063]
0.750
[0.226,0.247]
0.250
[0.075,0.082]
W
(C3W )
Willingness to get
involved in longterm relationship
W
41
(C )
Commitment to quality
(C4W )
W
42
(C )
Table 42 results of BWM—weights of criteria and sub-criteria (willingness)
Main capabilities
criteria
Technical capability
Criteria
weights
[0.044,0.063]
Capabilities sub-criteria
[0.301,0.329]
Quality (C21 )
C
1
C
Process capability (C11 )
(C )
Product quality
C
2
capability (C )
C
C
Product reliability (C22 )
54 | P a g e
Chapter 4
Application of supplier segmentation
Delivery capability
[0.227,0.274]
C
3
(C )
0.141
[0.032,0.039]
0.100
[0.023,0.027]
Lead time (C33 )
0.759
[0.172,0.208]
Amount of past business
1.000
[0.035,0.046]
1.000
[0.065,0.079]
1.000
[0.128,0.151]
1.000
[0.096,0.105]
1.000
[0.031,0.033]
C
Delivery (C31 )
C
Reserve capability (C32 )
C
Intangible capability
[0.035,0.046]
C
4
C
41
(C )
(C )
Service capability
[0.065,0.079]
After sales support (C51 )
[0.128,0.151]
Price/cost (C61 )
[0.096,0.105]
Availability of clean
C
5
C
(C )
Financial/cost
C
6
C
capability (C )
Sustainable capability
C
7
C
71
(C )
technologies (C )
Organizational
[0.031,0.033]
C
8
Management and
C
81
capability (C )
organization (C )
Table 43 results of BWM—weights of criteria and sub-criteria (capabilities)
4.2 Result analysis
4.2.1 Normalized scores
From Table 19, 20, 26, 27, 42, 43, it can be seen that based on the CEO and vice-president’s
comparisons, ‘willingness to improve performance’ is the most important dimension for supplier
willingness, and ‘quality capability’ serves as the most significant factor for supplier capabilities.
To compare the actual weights of all sub-criteria, it is important to consider both the weights of the
main criteria and the relative weights of the sub-criteria. The fifth column of Table 19, 20, 26, 27, 42,
43 shows the actual (global) weights of all the sub-criterion. The difference in actual weights is now
obvious: “supplier’s effort in promoting JIT principles” serves as the most crucial factor for supplier
willingness and the least important criterion is “open to site evaluation”; “Quality” has the biggest
weights for evaluating supplier capabilities, “reserve capability” owns the smallest importance.
The
final
aggregate
scores
of
willingness
for
supplier
k, Wk
are
calculated
as
Wk  i 1 wi aik , k  1,..., K , where wi is the global weight of willingness sub-criterion i ; ai is the
n
assigned score to supplier k with respect to sub-criterion i ; n is the number of sub-criteria and K is
the number of the suppliers. The final aggregate scores of capabilities also can be obtained in the
similar way. From Table 14, it can be seen that all of the suppliers get scores above 3. The CEO
indicated that in their mind all the suppliers should get a minimum score of 3, otherwise the supplier
should be replaced. Therefore, in this case all the suppliers will be categorized in ‘high willingness
and high capabilities’ group according to Rezaei and Ortt’s segmentation model (Rezaei & Ortt,
2013a). In order to effectively classify the suppliers, the suppliers’ relative levels of willingness and
capabilities are considered. To obtain the relative level of supplier willingness and capabilities, the
final scores have been normalized by the following functions:
Normalized Willingness score supplier j 
Willingness score supplier j  min Cap
max Cap  min Cap
55 | P a g e
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Chapter 4
Application of supplier segmentation
Normalized Capability score supplier j 
Capability score supplier j  min Cap
max Cap  min Cap
(24)
Hence the normalized scores resulting from three methods are shown in Table 44, where for BWM,
the scores of willingness and capabilities of each supplier are reported by the mid-points and the
width of the intervals.
Supplier
no.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
AHP
willingness capabilities
0.73
0.88
0.92
0.75
0.74
0.88
0.71
0.57
0.42
0.88
0.71
0.68
0.72
0.57
0.49
0.52
0.71
0.57
0.77
0.85
0.12
0.44
0.91
0.70
1.00
0.88
0.74
0.78
0.50
0.00
0.71
0.57
0.91
0.88
0.89
0.69
0.88
0.90
0.54
0.29
0.88
0.83
0.91
0.87
0.22
0.40
0.60
0.39
0.91
0.87
0.97
0.96
0.31
0.54
0.69
0.78
0.27
0.48
0.62
0.35
0.65
0.51
0.68
0.60
0.65
0.51
0.65
0.77
0.86
1.00
0.32
0.55
0.65
0.51
0.35
0.52
0.65
0.77
0.65
0.87
Fuzzy AHP
willingness capabilities
0.75
0.88
0.93
0.72
0.76
0.88
0.73
0.57
0.45
0.87
0.72
0.68
0.73
0.59
0.51
0.53
0.73
0.57
0.78
0.84
0.11
0.43
0.92
0.73
1.00
0.88
0.74
0.81
0.48
0.00
0.73
0.57
0.92
0.88
0.85
0.67
0.89
0.89
0.52
0.28
0.89
0.81
0.92
0.86
0.20
0.39
0.57
0.41
0.92
0.86
0.97
0.97
0.29
0.53
0.70
0.81
0.26
0.48
0.59
0.34
0.62
0.50
0.70
0.62
0.62
0.50
0.62
0.76
0.81
1.00
0.30
0.55
0.62
0.50
0.33
0.52
0.62
0.76
0.67
0.87
BWM
willingness capabilities
0.65(0.17)
0.77(0.15)
0.77(0.17)
0.73(0.06)
0.66(0.17)
0.85(0.07)
0.64(0.16)
0.59(0.07)
0.41(0.16)
0.82(0.07)
0.64(0.16)
0.66(0.06)
0.65(0.16)
0.57(0.06)
0.48(0.16)
0.50(0.07)
0.64(0.16)
0.59(0.07)
0.66(0.17)
0.83(0.06)
0.22(0.13)
0.45(0.04)
0.76(0.17)
0.68(0.08)
0.82(0.18)
0.85(0.07)
0.81(0.00)
0.73(0.08)
0.50(0.15)
0.06(0.05)
0.64(0.16)
0.59(0.07)
0.76(0.17)
0.84(0.08)
0.74(0.16)
0.69(0.07)
0.74(0.17)
0.84(0.07)
0.49(0.15)
0.33(0.05)
0.74(0.17)
0.79(0.06)
0.76(0.17)
0.85(0.06)
0.28(0.14)
0.41(0.05)
0.55(0.15)
0.40(0.06)
0.76(0.17)
0.85(0.06)
0.80(0.17)
0.89(0.08)
0.35(0.13)
0.53(0.06)
0.62(0.16)
0.73(0.08)
0.32(0.14)
0.47(0.06)
0.55(0.15)
0.39(0.05)
0.57(0.16)
0.55(0.05)
0.60(0.17)
0.59(0.06)
0.57(0.16)
0.55(0.05)
0.57(0.16)
0.74(0.07)
0.71(0.16)
0.93(0.07)
0.35(0.14)
0.55(0.06)
0.57(0.16)
0.55(0.05)
0.38(0.14)
0.50(0.06)
0.57(0.16)
0.74(0.07)
0.57(0.17)
0.81(0.06)
56 | P a g e
Chapter 4
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
Application of supplier segmentation
0.65
0.35
0.71
0.65
0.65
0.04
0.78
0.65
0.65
0.35
0.65
0.76
0.46
0.65
0.91
0.60
0.38
0.65
0.65
0.54
0.78
0.65
0.21
0.35
0.33
0.65
0.51
0.65
0.86
0.81
0.65
0.65
0.41
0.63
0.54
0.24
0.35
0.35
0.35
0.35
0.88
0.58
0.39
0.11
0.96
0.45
0.00
0.77
0.55
0.82
0.77
0.51
0.35
0.78
0.77
0.77
0.55
0.77
0.86
0.39
0.77
0.98
0.82
0.65
0.77
0.81
0.65
0.83
0.77
0.46
0.46
0.75
0.63
0.65
0.78
0.66
0.60
0.77
0.51
0.67
0.66
0.29
0.33
0.44
0.55
0.55
0.55
0.93
0.66
0.65
0.54
0.76
0.58
0.54
0.62
0.33
0.73
0.62
0.62
0.04
0.73
0.62
0.62
0.33
0.62
0.77
0.48
0.62
0.92
0.57
0.36
0.62
0.67
0.52
0.73
0.62
0.24
0.33
0.32
0.67
0.48
0.67
0.81
0.76
0.62
0.62
0.40
0.61
0.52
0.18
0.33
0.33
0.33
0.33
0.84
0.55
0.37
0.10
0.95
0.47
0.00
0.76
0.55
0.80
0.76
0.50
0.35
0.79
0.76
0.76
0.55
0.76
0.84
0.39
0.76
0.99
0.80
0.65
0.76
0.78
0.65
0.81
0.76
0.42
0.44
0.76
0.63
0.65
0.76
0.67
0.59
0.76
0.50
0.67
0.67
0.28
0.34
0.43
0.55
0.55
0.55
0.92
0.67
0.65
0.50
0.74
0.53
0.49
0.57(0.16)
0.38(0.14)
0.64(0.16)
0.57(0.16)
0.57(0.16)
0.16(0.14)
0.65(0.16)
0.57(0.16)
0.57(0.16)
0.38(0.14)
0.57(0.16)
0.65(0.17)
0.46(0.16)
0.57(0.16)
0.76(0.17)
0.55(0.15)
0.40(0.15)
0.57(0.16)
0.57(0.17)
0.49(0.15)
0.65(0.16)
0.57(0.16)
0.30(0.14)
0.38(0.14)
0.36(0.14)
0.57(0.17)
0.48(0.15)
0.57(0.17)
0.71(0.16)
0.68(0.16)
0.57(0.16)
0.57(0.16)
0.43(0.14)
0.58(0.15)
0.49(0.15)
0.29(0.12)
0.38(0.14)
0.38(0.14)
0.38(0.14)
0.38(0.14)
0.73(0.16)
0.54(0.15)
0.41(0.15)
0.21(0.13)
0.79(0.17)
0.45(0.16)
0.13(0.13)
0.74(0.07)
0.55(0.06)
0.77(0.07)
0.74(0.07)
0.55(0.05)
0.34(0.05)
0.73(0.08)
0.74(0.07)
0.74(0.07)
0.55(0.06)
0.74(0.07)
0.84(0.06)
0.40(0.05)
0.74(0.07)
0.92(0.08)
0.76(0.07)
0.63(0.07)
0.74(0.07)
0.75(0.06)
0.61(0.07)
0.80(0.07)
0.74(0.07)
0.50(0.05)
0.46(0.05)
0.71(0.08)
0.60(0.06)
0.63(0.07)
0.75(0.06)
0.65(0.07)
0.59(0.06)
0.74(0.07)
0.55(0.05)
0.65(0.08)
0.65(0.07)
0.33(0.05)
0.35(0.06)
0.44(0.05)
0.55(0.06)
0.55(0.06)
0.55(0.06)
0.87(0.08)
0.65(0.07)
0.63(0.07)
0.55(0.05)
0.75(0.06)
0.57(0.05)
0.56(0.06)
Table 44 Normalized scores for supplier’s willingness and capabilities resulting from AHP, fuzzy AHP using FPP and BWM
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4.2.2 Supplier segmentation
In line with the final step of the proposed methodology (step 5), it is possible to divide the suppliers
into four segments, which can be seen in Figure 23, 24, 25. All the computations are done using
Microsoft Excel’s Solver (Microsoft, 2010).
It is important to notice that suppliers of Type 1 do not necessarily have a low level of willingness
and capabilities, but relatively lower willingness and capabilities compared to other suppliers. All the
suppliers have got scores above 3 for willingness and capabilities criteria, which indicates they are all
good suppliers. The scores have been normalized in the last step for the purpose of segmentation. In
supplier development phase, strategies will be designed to improve the willingness and capabilities
of suppliers of Type 1, 2 and 3 to even higher levels.
Supplier segmentation based on AHP
As can be seen in Table 45 and Figure 23, nine suppliers are assigned to Type 1 (low capabilities and
low willingness); five suppliers are assigned to Type 2 (low capabilities and high willingness);
seventeen suppliers are assigned to Type 3 (high capabilities and low willingness); fifty-six suppliers
are assigned to Type 4 (high capabilities and high willingness).
Segments
Type 1
Type 2
Type 3
Type 4
No. of suppliers
9
5
17
56
Supplier no.
11, 23, 29, 46, 53, 63, 64, 76, 77
15, 20, 24, 30, 75
5, 8, 27, 36, 38, 42, 50, 57, 65, 73, 78, 79, 80, 83, 84, 86, 87
1, 2, 3, 4, 6, 7, 9, 10, 12, 13, 14, 16, 17, 18, 19, 21, 22, 25, 26, 28, 31,
32, 33, 34, 35, 37, 39, 40, 41, 43, 44, 45, 47, 48, 49, 51, 52, 54, 55, 56,
58, 59, 60, 61, 62, 66, 67, 68, 69, 70, 71, 72, 74, 81, 82, 85
Table 45 Segments of suppliers based on AHP
Figure 23 Supplier segmentation based on AHP
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Application of supplier segmentation
Segmentation based on fuzzy AHP using FPP
According to fuzzy AHP using FPP, there are ten suppliers of Type 1 (low capabilities and low
willingness); four suppliers of Type 2 (low capabilities and high willingness); seventeen suppliers of
Type 3 (high capabilities and low willingness); fifty-six suppliers of Type 4 (high capabilities and high
willingness).
Segments
Type 1
Type 2
Type 3
Type 4
No. of suppliers
10
4
17
56
Supplier no.
11, 15, 23, 29, 46, 53, 63, 64, 76, 77
20, 24, 30, 75
5, 27, 36, 38, 42, 50, 57, 65, 67, 73, 78, 79, 80, 83, 84, 86, 87
1, 2, 3, 4, 6, 7, 8, 9, 10, 12, 13, 14, 16, 17, 18, 19, 21, 22, 25, 26, 28,
31, 32, 33, 34, 35, 37, 39, 40, 41, 43, 44, 45, 47, 48, 49, 51, 52, 54,
55, 56, 58, 59, 60, 61, 62, 66, 67, 68, 69, 70, 71, 72, 74, 81, 82, 85
Table 46 Segments of suppliers based on fuzzy AHP using FPP
Figure 24 Supplier segmentation based on fuzzy AHP
Segmentation based on BWM
As shown in table 44, the BWM method gives a range of value for the supplier scores, rather than an
exact value. To depict the suppliers in the segmentation, the scores of each supplier should be
compared with the cut-point 0.5. Since the cut-point is a crisp number and this research only focuses
on the position of the suppliers in the segmentation, the mid-point of interval numbers can be
simply used to compare with the cut-point 0.5 in order to decide the position of the suppliers. Hence
the segmentation based on BWM can be obtained as shown in Figure 25 and Table 47.
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Ten suppliers are Type 1 suppliers (low capabilities low willingness); three suppliers are Type 2
suppliers (low capabilities high willingness); twenty suppliers are Type 3 suppliers (high capabilities
high willingness); fifty-four suppliers are Type 4 suppliers (high capabilities high willingness).
Segments
Type 1
Type 2
Type 3
Type 4
No. of
suppliers
10
3
20
54
Supplier no.
11, 20, 23, 29, 46, 53, 64, 75, 76, 77
15, 24, 30
5, 8, 27, 36, 38, 42, 50, 57, 60, 63, 65, 67, 73, 78, 79, 80, 83, 84, 86, 87
1, 2, 3, 4, 6, 7, 9, 10, 12, 13, 14, 16, 17, 18, 19, 21, 22, 25, 26, 28, 31, 32,
33, 34, 35, 37, 39, 40, 41, 43, 44, 45, 47, 48, 49, 51, 52, 54, 55, 56, 58, 59,
61, 62, 66, 68, 69, 70, 71, 72, 74, 81, 82, 85
Table 47 Segments of suppliers based on BWM
Figure 25 Supplier segmentation based on BWM
4.2.3 Comparison of three methodologies
Segmentation difference
The results show that the company has 56 relatively good suppliers according to AHP and fuzzy AHP
using FPP, and 54 relatively good suppliers based on BWM. 31 and 33 suppliers lack willingness or
capabilities or both according to AHP & fuzzy AHP, and BWM respectively. Through comparing the
segmentations resulting from three different methods (see Figure 26 and Table 44), it has been
found that the results are generally in good agreement, while only 6 suppliers are in different groups
according to different methods. The normalized scores of supplier’s willingness and capabilities as
well as the groups they belong to according to different methods are illustrated in table 48, where ‘T’
represents ‘Type’.
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Application of supplier segmentation
Figure 26 Supplier segmentation based on AHP, fuzzy AHP and BWM
Although the suppliers are in different segmentations according to different methods, the difference
of their normalized scores resulting from different methods are minute. For example, supplier #8 is
assigned in Type 3 by applying AHP and BWM, but according to fuzzy AHP Supplier #8 is Type 4
supplier. Supplier #8’s three capabilities scores are all above 0.5, but its willingness scored 0.51
according to fuzzy AHP, which is very close to the results from the other two methods. The same
holds true for the Supplier #15, #20, #60, #63, #67. Therefore, such differences can be neglected,
which demonstrates the robustness of the segmentation.
Supplier
no.
8
15
20
60
63
67
Willingness
0.49
0.50
0.54
0.54
0.21
0.51
AHP
Capability
0.52
0.00
0.29
0.65
0.46
0.65
T
3
2
2
4
1
4
Fuzzy AHP
Willingness Capability
0.51
0.48
0.52
0.52
0.24
0.48
0.53
0.00
0.28
0.65
0.42
0.65
T
Willingness
4
1
2
4
1
3
0.48(0.16)
0.50(0.15)
0.49(0.15)
0.49(0.15)
0.30(0.14)
0.48(0.15)
BWM
Capability
T
0.50(0.07)
0.06(0.05)
0.33(0.05)
0.61(0.07)
0.50(0.05)
0.63(0.07)
3
2
1
3
3
3
Table 48 Different segmentations for the same suppliers due to minute difference in score according to different
methods
Data collection
To conduct AHP and fuzzy AHP, it is necessary to have n(n  1) / 2 pair-wise comparison to obtain a
completed matrix. BWM only requires 2n  3 pair-wise comparison. When there are too many
criteria or alternatives in the same level, a large amount of comparisons need to be conducted,
which indicates a considerable workload and a high chance that may lead to inconsistency of the
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Application of supplier segmentation
pair-wise comparison matrix. However, BWM requires less comparison data compared to AHP and
fuzzy AHP: n(n  1) / 2  (2n  3) . Table 49 shows the number of comparisons of different methods.
For example in our case there are n=8 main criteria of capabilities, hence more than twice pairwise
comparisons are conducted for AHP and fuzzy AHP than for BWM.
n
AHP &
Fuzzy AHP
BWM
2
1
3
3
4
6
5
10
6
15
7
21
8
28
9
36
10
45
1
3
5
7
9
11
13
15
17
Table 49 number of pairwise comparisons of different methods
Consistency improvement
The pair-wise comparison matrix A  (aij )nn is fully consistent if, for each i and j, aik  akj  aij .
When the consistency ratio is larger than 0.1, the comparison need to be revised. The improvement
of consistency for AHP and fuzzy AHP is complex, since the elements are interrelated. Once a single
element changes, other related elements also need to be adjusted to make sure a proper logic and
ratio. There is still no systematic method available to improve the consistency for AHP and fuzzy AHP
comparison matrix.
For BWM, the consistency check is more clear and simple. Using a table as shown in Table 50, there
are row 2 and row 3 showing aBj and a jW respectively. By multiplying the elements in row 2 and row
3 and compare the results with aBW , aBj and a jW can be revised to make the comparisons more
consistent.
aBj  a jW
aBW
Consistency
check
C1
C2
aB1
aB 2
…
1
…
aBW
…
aBn
a1W
a2W
…
aBW
…
1
…
anW
aB1  a1W
aB 2  a2W
…
1 aBW
…
aBW 1
…
aBn  anW
aBW
aBW
aBW
aBW
aBW
?
?
?
?
?
CBest
Cn
CWorst
Table 50 BWM Consistency check
4.3 Conclusion
In this chapter, the supplier segmentation methodology as presented in Chapter 3 has been applied
to Beijing Time High Technology Company’s supply base. Based on the company’s purchasing
strategy and long-term objectives, the company chose eleven sub-criteria from the capabilities list
(process capability, quality, product reliability, delivery, reserve capability, lead time, amount of past
business, after sales support, price/cost, availability of clean technologies, and management and
organization) and seven from willingness list (commitment to improvement in product and process,
supplier’s effort in improving ‘just-in-time’ principles, honest and frequent communication, open to
site evaluation, ethical standards, long-term relationship, commitment to quality).
By applying our five steps methodology, three segmentations have been obtained according to AHP,
fuzzy AHP using FPP, and BWM. The results show that the company has 56 relatively good suppliers
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Application of supplier segmentation
according to AHP and fuzzy AHP and 54 relatively good suppliers based on BWM. 31 and 33 suppliers
lack willingness or capabilities or both according to AHP & fuzzy AHP, and BWM respectively. The
differences between three segmentations are minute which can be neglected. This has
demonstrated the robustness of the segmentation. Besides, it is also found that BWM is superior in
data collection and consistency improvement compared to conventional AHP and fuzzy AHP, which
prove the ease of use of this new method.
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Chapter 5
Supplier development
5 Supplier development
Based on the result of supplier segmentation, the supplier development can be implemented to
promote the suppliers in different groups. To obtain the supplier development conceptual model, in
this chapter we will review all the supplier development strategies in the existing literature in
section 5.1. Followed by section 5.2, the strategies will be classified into three categories: strategies
to improve willingness, strategies to improve capabilities and strategies to improve both willingness
and capabilities. Then the conceptual model of supplier development will be formulated by mapping
the strategies to supplier segmentation to move suppliers from different segments to a better
quadrant. Last but not least, the interview will be done in our case company to learn its experience
on supplier development.
5.1 Supplier development strategies
Supplier development strategies vary widely, and may include supplier evaluation, feedback of
supplier performance, raising performance expectation, supplier recognition, education and training
for supplier personnel, placement of engineering and other buyer personnel at the supplier’s
premises, and direct capital investments by the buying firm in the supplier, etc. (Krause & Ellram,
1997a). In this section, the strategies reported in existing literature will be summarized.
5.1.1 Supplier assessment and feedback
Supplier assessment and feedback is one of the most important strategies not only in the academic
research but also in the real world application (DB, 2014; Infineon, 2014; RWE, 2014). With the
intention of putting pressure on suppliers, stimulating learning by experience, and providing
assistance for making improvements, buyers should evaluate their suppliers regularly (Wouters et al.,
2007). Traditional supplier assessment represents in-depth evaluations of suppliers’ quality, delivery,
cost, technical, and managerial capabilities (Krause et al., 2000). In this research, we propose that
supplier willingness is also a critical dimension for evaluating suppliers.
An important part of supplier assessment process includes providing evaluative feedback to
suppliers. The feedback ensures the suppliers are aware of their performance, clarifies the buying
firm’s expectation and provides the supplier with direction for improvement (Wagner, 2006).
This strategy can be applied along with “competitive pressure” and “supplier incentives”. The
assessment and feedback process could incorporate the competitive force of the market, in that a
buying firm will advise the supplier of its performance compared to its competitors, and encourage it
to improve its performance (Krause et al., 2000). Meanwhile, incentives can be awarded to suppliers
with good performance. From Section 2.5.2, it can be found that Infineon also combined “supplier
assessment and feedback” with “competitive pressure” and “suppler incentives”. During the
assessment process, suppliers are compared against competitors and markets, and the company’s
purchasing volume will be concentrated on the best suppliers.
5.1.2 Competitive pressure
A buying company can apply competitive pressure to its suppliers, when it uses multiple suppliers for
a purchased item or service, or is willing and able to switch to other alternate suppliers (Krause et al.,
2000). The firm applies the competitive force of the market by requesting competitive bids from
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Chapter 5
Supplier development
more than one supplier, and utilize fully developed bidding specifications and short-term contracts
to achieve a low purchase price (Krause et al., 2000).
A buying company can distribute the volume of business such that the best performing suppliers
gets higher volume of business, and the suppliers with poor performance may face the risk of being
replaced. This could motivate suppliers to improve its capabilities, keeping competitive in terms of
quality, delivery, or whatever supplier performance characteristic the buying firm deems important
(Modi & Mabert, 2007).
5.1.3 Knowledge transfer
According to the knowledge based view (KBV) of the firm, as a the key role of the firm is creating,
storing and applying knowledge (Grant, 1996). Since knowledge is important to a company, the
purpose of knowledge transfer is to increase the supplier’s capabilities by transferring specialized
knowledge to the suppliers (Lorenzoni & Lipparini, 1999).
According to the existing researches, knowledge can be distinguished as being of two types: (1)
explicit knowledge or information, which can be easily codified, (2) tacit knowledge or know-how,
which is impossible to codify, such as production knowledge (Modi & Mabert, 2007). “The emphasis
of KBV is on tacit knowledge, since in the form of know-how, skills and practical knowledge of
organizational members, tacit knowledge is closely associated with production tasks, and raises the
more interesting and complex issues regarding its transfer both within and between organizations”
( (Lorenzoni & Lipparini, 1999) p.377). The knowledge transfer between supplier and buyer is also
focusing on tacit knowledge. While the transfer of tacit knowledge can be time consuming and
extremely difficult since it resides within the individuals, can only be observed through application,
and acquired through practice (Grant, 1997; Lorenzoni & Lipparini, 1999).
Supplier development activities of knowledge transfer usually contain providing expert advice which
helps the suppliers to improve in the technological, product development, quality, and
manufacturing capabilities (Krause et al., 1998). Besides, clustering of individuals from both buying
firm and vendors can facility non-codifiable tacit knowledge to flow across organizational boundaries
of the involved firms, since tacit knowledge can transferred through organizational routines (Modi &
Mabert, 2007). So it is also very important to co-locate either buying firm or supplier firm employees,
which is associated with more frequent and more intensive communication, and the exchange of upto-date knowledge between the parties (Wagner & Krause, 2009).
The co-location of buyer or supplier employees may include (Modi & Mabert, 2007):
–
–
–
–
Direct “on-site” assistance to suppliers,
Bringing suppliers to the firm to observe the knowledge as applied in practice,
Conducting education and training of supplier personnel,
Exchanging employees from both companies in a short-term, etc.
All these activities involve direct contact and interaction between individuals from both parties,
allowing the employees to learn from each other and communicate face-to-face and share even
more tacit information during their residence with the other firm (Hunter, Beaumont, & Sinclair,
1996).
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5.1.4 Joint action
Joint action was defined by Heide and John as the degree of interpenetration of organizational
boundaries (Heide & John, 1990). In conventional procurement, the responsibility for a given task is
assigned to only one party. Nowadays, some focal activities are carried out by both parties in a
cooperative or coordinated way. Joint action is an important transaction-specific supplier
development (Wouters et al., 2007). It is a non-equity mode of governance in which both buyers and
suppliers cooperate on certain activities that are essential for improving the performance of both
parties (Humphreys, Li, & Chan, 2004). For example, suppliers may assist customers in product
development, value analysis and cost targeting, and long-term planning; buyers may participate in
the management of the supplier’s operations, and design of quality control and delivery system
(Heide & John, 1990). Such joint activities allow both parties to move toward closer relationships.
5.1.5 Plant visits to suppliers
As mentioned in “knowledge transfer”, site visit facilitates knowledge transfer, allowing both parties
to have a better communication, sharing culture and approach, and providing suppliers and buyers a
good opportunity to understand more about each other’s business (Krause, 1997). This process helps
to stimulate the knowledge flowing between two parities, as well as build and enhance
understanding and inter-firm relationship (Cousins et al., 2007).
Moreover, the visit of the buying company to suppliers can also be used to evaluate specific areas of
the suppliers, for example the amount of rework on the factory floor, so that the buyer could
achieve a more accurate supplier assessment (Sánchez-Rodríguez, 2009).
5.1.6 Making investments
Many companies invest in equipment for the suppliers or give financial support as a means for
supplier development (Wagner, 2006; Wouters et al., 2007). Such investments are considered as
transaction-specific investments, which could make suppliers more willing to make customized items
for customers. Past studies indicate that these transaction-specific investments reduce inventories,
improve quality, and speed product development (Dyer et al., 1998; Dyer, 1996). It also results in a
more efficient communication between both parties and hence leads to shorted product
development cycles and reduced procurement costs (Dyer, 1996).
Sometimes, the investments can be made by partly acquiring the supplier firm by the buying firm,
which may involve huge financial investments by the procuring firm (Modi & Mabert, 2007). For
example manufacturers such as Toyota and Nissan typically have a 20%-50% equity position in their
largest suppliers.
5.1.7 Two-way communication
“Communication is usually defined as the formal or informal sharing and exchange of meaningful
and timely information between a buyer and a supplier” (Yen, Wang, & Horng, 2011). The shared
information could contain information about costs, accounting, quality levels, financial data, etc.
(Sánchez-Rodríguez, 2009).
Effective communication helps to develop a common understanding of the message from both the
supplier’s and buyer’s perspectives. It makes both the buyer’s needs, expectations and the supplier’s
facilities, capabilities well known. Moreover, it also could result in improved forecasting by reduced
uncertainty, increasing understanding and conflict resolution between both parties (Humphreys et
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al., 2004). In turn, this could lower the partner’s perceived risk and improves trust. Suppliers become
more willing to get involved in a long term relationship with the buyer.
Effective communication also helps the buying company in product development. Through early
involvement and open channels of communication, suppliers become committed to the final product
and willingly share responsibility for its integrity and reliability (Spekman, 1988).
5.1.8 Long-term commitment
Commitment refers to the willingness of buyers and suppliers to exert effort on maintaining a good
relationship between each other. Such long-term relationship helps to reduce transaction costs and
risk (Abdullah & Maharjan, 2003). It helps the buying company to save time and cost in investigating
and screening the new supplier candidate (Abdullah & Maharjan, 2003).
Supplier development involves risk for both the buying firm and the supplier, since both parties have
to be willing to invest resources and time in dedicated assets for pay-offs that may only occur over a
relatively long time period (Krause & Ellram, 1997a). Hence only with a buyer’s commitment, the
supplier can be willing to make changes in its operation to accommodate the requirements of a
specific buyer (Humphreys et al., 2004). Without the supplier’s commitment, the buyer may be
unwilling to make any effort to develop that supplier. According to Krause and Ellram’s research,
“the majority of buying firms involved in supplier development perceive their suppliers as partners”
(Krause & Ellram, 1997a). Adopting a partnership strategy means that a buying company pursues a
long-term relationship with supplies.
To demonstrate commitment to a relationship, committing resources to the relationship is one of
the most frequently used, which may occur in the form of an organization’s time, money, facilities,
etc. These types of resources are often referred to as “asset specific” resources (Monczka, Petersen,
Handfield, & Ragatz, 1998).
5.1.9 Supplier incentives
Offering incentives is an effective way to motivate suppliers. These incentives are awarded according
to supplier performance (Wagner, 2010). The incentives may include giving consideration for
increased volumes, the sharing of achieved cost savings, future business, an opportunity for
worldwide purchase contracts, increased access to technical insight at the buyer, and recognizing
supplier improvements through awards (Krause et al., 2000; Modi & Mabert, 2007; Monczka, Trent,
& Callanhan, 1993a). Based on a desire for increased business with the buying firm, incentives are
able to motivate the suppliers to make improvement to give a better performance.
Supplier incentives are also given to suppliers who succeed in increasing performance and
capabilities in supplier development program (Hahn et al., 1990). Supplier incentives may serve a
least two roles (Krause & Ellram, 1997a): first of all, it is a motivating tool for suppliers, since
suppliers may strive for award status if it means recognition in the marketplace and allows them to
attract new business; secondly, supplier recognition may mark the culmination of the supplier
development effort with a particular supplier.
5.1.10 Emphasis on factors other than price
Traditional purchasing is focusing on low price, so the buyer-supplier relationship are usually
characterized by competitive bidding, frequent switching of suppliers, and short-term contracts
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(Krause & Ellram, 1997a). It is found that an overemphasis on price may result in poor-quality
products and higher costs over the long run.
Therefore, from a long-term perspective developing supplier capabilities would be the key to the
success of supplier development. Putting emphasis on other factors other than price helps the
supplier development efforts to focus on developing supplier future capabilities in technology and
product development (Humphreys et al., 2004).
5.1.11 Purchasing a large percentage of suppliers’ annual sales
Referred to as buyer leverage, the magnitude of the buyer’s annual purchases with the supplier is an
important factor that influences the supplier’s willingness to engage in development activities
(Krause & Ellram, 1997a). It is clear that the higher the percentage of supplier’s output purchased by
any buying firm, the more important the buyer is to the supplier, the more the buying company can
expect acquiescence to its needs (Krause & Ellram, 1997a). Without leverage, some suppliers could
be uncooperative in supplier development effort.
Therefore, rather than purchasing one product from several suppliers, reducing the supply base and
increasing the purchasing volume from certain crucial suppliers can help to increase these suppliers’
willingness not only for supplier development, but also for getting involved in long-term relationship
with the buying company.
5.1.12 Establishing higher supplier performance expectations
Increasing supplier performance expectations is an efficient way to motivate suppliers since
suppliers are reluctant to initiate programs to enhance their performance and capabilities
(Humphreys et al., 2004). Monczka et.al argued that most buying firms need to aggressively increase
the supplier performance goals, so that a buying company can expect supplier contributions and
capabilities to increase at an accelerated rate (Monczka, Trent, & Callanhan, 1993b). Firm should
maintain only those suppliers who are capable to satisfy the increasing performance expectation
levels (Monczka et al., 1993b).
5.1.13 Trust building
“Trust is defined as a willingness to rely on an exchange partner in whom one has confidence”
(Moorman et al., 1993). Customer trust is belief in the supplier’s honesty, goodwill, and competence
(Coote, Forrest, & Tam, 2003). From the definition of trust we can identify that there is a positive
relationship between trust and willingness: the higher the trust, the higher the level of willingness.
Trust plays a critical role in not only buyer-supplier relationship but also supplier development
programs. Transaction-specific investments resulting from supplier development increase both
parties’ dependence on the particular trading relationship and expose them to greater risk and
uncertainty. Therefore, to safeguard themselves against the hazards of opportunism, both parties
need to adopt some methods for safeguarding transaction (Johnsen, 2009; Li, Humphreys, Yeung, &
Cheng, 2012). Contracts serve as the primary formal means. However, trust is a more effective and
less costly means (Johnsen, 2009; Li et al., 2012). Trust is essential to developing and sustaining all
kinds of alliances, not only those in a supply chain context. Absent trust, transaction costs are
increased, and there is a high possibility that self-serving behavior will emerge and partners will be
unable to leverage each other’s capabilities (Spekman et al., 1999).
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5.2 Supplier development conceptual model
5.2.1 Strategy classification
The suppliers are segmented in to four quadrants with X and Y axis representing the level of
willingness and capabilities, respectively. Various strategies can be applied in order to develop the
suppler performance in their willingness and/or capabilities. For the purpose of mapping existing
strategies to supplier segmentation, these strategies are classified into 3 categories, which are
strategies to improve willingness, strategies to improve capabilities, strategies to improve both
willingness and capabilities simultaneously.
Strategies to improve willingness
According to Mortensen et. al’s research, company attractiveness is an important approach to
manage business relationships based on creation of voluntary motivation and commitment between
the relationship partners, which is different from the traditional approach of managing relations by
power (Mortensen, Freytag, & Arlbjørn, 2008). Therefore, to improve suppliers’ willingness to
cooperate with the buyer, the buying firm should make themselves more attractive to the suppliers.
Attraction was firstly defined by Halinen as “a company’s interest in exchange with another, based
on the economic and social reward-cost outcomes expected from the relationship overtime”
(Halinen, 1996). Later Morgan suggested that the basis for relational exchange should be expanded
to incorporate access to resources, since parties to a relationship need access to resources that they
don’t have to improve their competitiveness (Morgan, 2000). Consequently in this research, we
adopt Harries et al’s theoretical framework of attractiveness which contains three drivers of
attractiveness between two companies (Harris, O’Malley, & Patterson, 2003; Mortensen et al., 2008):
Economical
attractiveness
Attraction
Resourcebased
attractiveness
Socially based
attractiveness
Figure 27 Drivers of attractiveness
1. Economical attractiveness refers to the business volume offered, the level of profit, and the
stability of the business of the buyer.
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2. Resource-based attractiveness refers to the possibility of knowledge and resource transfer
from the buyer, the market and information access provided by the buyers.
3. Socially based attractiveness refers to the personal relationships between the individual
buyer and the supplier, the familiarity between the two parties and the ease of the dyadic
interaction.
According to Harries’ framework the following four strategies are categorized to the class of
strategies to improve supplier willingness.

Two-way communication:
Effective communication is a critical aspect of successful buyer-supplier relationships (Krause &
Ellram, 1997b), which has a positive effect on the level of cooperation between two organizations. A
sound communication system that enables both parties to collaborate more efficiently and discuss
their common interests in greater details can enhance trust in a business relationship (Coote et al.,
2003). Two parties get familiar with each other by sharing information and culture. Therefore,
effective communication could increase the socially based attractiveness of the buying company and
further improve the supplier’s willingness to work with the buyer.

Joint action
Organizational boundaries become penetrated by the joint activities as the supplier becomes
involved in the activities that are traditionally considered as the buyer’s responsibility and vice versa
(Heide & John, 1990). By carrying out joint action, both companies can increase their resource-based
attractiveness, since both parties can bring complementary skills/resources (e.g. clients, expertise,
etc.) to the alliance so that their needs will be profitably fulfilled by coalition (Harris et al., 2003).
Besides, joint action is a type of socialization mechanism, playing a positive role in establishing and
enhancing the relationship (Cousins & Menguc, 2006). As the extent and scope of joint activities
increase, the firms move toward closer relationship. Therefore, both parties have increased their
socially based attractiveness.

Plant visits to suppliers
Supplier visits serve as an important aspect of supply chain socialization, which offers a good
opportunity for both parties to have better communication, share culture, and understand more
about each other’s business (Cousins & Menguc, 2006). This strategy helps to increases the buyer’s
socially based attractiveness.

Long-term commitment
Long-term relationship orientation increases communication between the firms (Modi & Mabert,
2007) and leads to the establishment of trust between trading partners (Bensaou & Venkatraman,
1995). Such long-term commitment proves the stability of the business between both parties, and
increases the economical attractiveness of the buying firm.
Moreover, through long-term relationships, both buyer and supplier get increasing familiar with
each other over time (Abdullah & Maharjan, 2003). Therefore the companies’ socially based
attractiveness will be improved.
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
Supplier development
Purchase large percentage of suppliers’ annual sales
Purchasing a large percentage of supplier’s annual sales can definitely make the buying company an
important customer to the supplier and increase the buying company’s economical attractiveness.
This strategy has a positive influence on the supplier’s willingness to engage in the relationship.

Trust building
Previous studies have found that trust could increase the length of the relationship between buyers
and suppliers (Krause et al., 2007; Sako & Helper, 1998). A long-term relationship allows both parties
to get familiar with each other and guarantee the stability of the business, so that increases the
buying company’s socially based attractiveness as well as economical attractiveness.
Trust is the most efficient means for safeguarding both parties against the hazards of opportunism
when the transaction-specific investments expose them to greater risk and uncertainties (Johnsen,
2009; Li et al., 2012). Therefore, only based on trust can the buying company dare to make
transaction-specific investments. Trust also helps to increase the company’s resource-based
attractiveness, and furthermore stimulate the supplier willingness.
Figure 28 Correlation between supplier development strategies and drivers of attractiveness (class of strategies to
improve supplier willingness)
Strategies to improve capabilities

Competitive pressure
When the buying company use multiple suppliers for a purchased item or service, the competitive
pressure force the suppliers to improve its capabilities, keeping competitive in terms of quality,
delivery, or whatever supplier performance characteristic that the buying firm deems important
(Modi & Mabert, 2007). Otherwise, the suppliers with poor capabilities would be replaced by
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alternative suppliers or receive a reduced business volume. Thus competitive pressure is an effective
strategy to improve the supplier’s capabilities.

Emphasis on factors other than price
Putting emphasis on factors other than price motivate the suppliers to develop their other
capabilities like technical and product quality capabilities (Krause & Ellram, 1997a), and avoid the
suppliers from blindly lowering the cost and the deterioration of the product quality.

Establishing higher supplier performance expectations
Since the buying company only maintains relationship with those suppliers who are capable to
satisfy the increasing buyer expectation (Monczka et al., 1993b), the suppliers are stimulated to
increase their capabilities continuously. This is an efficient strategy for the buying company to
enhance its competitiveness by continuously achieving the improvement of supplier capabilities.
Strategies to improve both capabilities and willingness simultaneously

Supplier assessment and feedback
By regularly evaluating the current suppliers, the buying company knows well about the levels of
suppliers’ capabilities and willingness (Krause et al., 2000; Wouters et al., 2007). By providing
feedback to suppliers, the buying company clarifies its expectation and provides the supplier with
direction for improvement (Wagner, 2006). Wagner and Krause’s research has demonstrated the
positive relationship between the buying firm’s goal to improve a supplier’s capabilities, and the
buying firm’s effort to evaluate the supplier (Wagner & Krause, 2009).
From the perspective of attractiveness framework (Harris et al., 2003; Mortensen et al., 2008), the
feedback of supplier assessment result helps both parties to communicate the issues and
expectation, and furthermore improve the buying company’s socially based attractiveness.
Therefore, it is an effective way to improve both supplier willingness and capabilities.

Making investments
By investing in equipment for suppliers or giving financial support, the supplier’s capabilities could
be increased in terms of production, innovation, etc. Meanwhile, according to theoretical framework
of attractiveness, resource-based attractiveness is one of the three drivers and contains “possibility
of resource transfer from the buyer” as an important aspect (Harris et al., 2003). Therefore, relationspecific investments could lead to the increase of buying company’s resource-based attractiveness.
Besides, such investments show the buying company’s loyalty and willingness to get involved in a
long relationship with the supplier (Monczka, Petersen, et al., 1998). The stability of the business is a
critical part of “economical attractiveness” (Harris et al., 2003). Hence this also helps the buying
company to increase its economical attractiveness. Because of transaction-specific investments,
organizational boundaries between supplier and buyer begin to blur (Dyer et al., 1998). The partners’
destinies become tightly intertwined. Thus each party has strong incentives to help the other as
much as possible, because each party has made co-specialized investments that are of little value
outside of the relationship (Dyer et al., 1998). Therefore, this can lead to the increase of the
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familiarity between two parties; so that making investments has the potential to increase the
company’s socially based attractiveness.

Knowledge transfer
Wager and Krause have demonstrated that there is a positive relationship between supplier’s
capabilities improvement and the knowledge transfer from the buyer to the supplier (Wagner &
Krause, 2009). Besides, knowledge transfer is considered as human resource transaction-specific
investments (Dyer et al., 1998; Dyer, 1996), serving as another type of transaction-specific
investments made by the buying company. Similar to financial and physical investments mentioned
above, this kind of investments will also result in the increase of the resource-based attractiveness
and economical attractiveness of the buying firm. Both parties may get more relied on each other
since the relation-based investments have little value outside the relationship. Also, the process of
knowledge transfer needs to co-location of employees from both parties, which leads to frequent
and extensive communications, and increases the company’s socially based attractiveness.
Therefore, this is an effective way to improve both capabilities and willingness simultaneously.

Supplier incentives
The incentives awarded to the outstanding suppliers may include giving consideration for increased
volumes, the sharing of achieved cost savings, future business, and recognition/rewards for
improved performance (Krause et al., 2000; Krause & Scannell, 2002; Modi & Mabert, 2007).
Business volume offered by the buying company is a major aspect of economical attractiveness
(Harris et al., 2003; Mortensen et al., 2008). Thus by offering the supplier incentives, the buying
company increases its economical attractiveness.
Moreover, offering supplier incentives is also an important approach to drive supplier capabilities
improvement (Monczka et al., 1993a). The incentives can be used by the customer firms that
succeed in increasing suppliers’ performance and capabilities to recognize suppliers’ achievements
with ‘certified’ or ‘preferred’ status (Hahn et al., 1990; Krause & Ellram, 1997a). Therefore, this
action could motivate the suppliers to make continuous improvement on their capabilities.
Figure 29 Correlation between supplier development strategies and drivers of attractiveness (Class of strategies to
improve both supplier capabilities and willingness)
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Therefore, the classification of the strategies can be summarized in the following table:
Strategy to improve
willingness
Two way communication
Plant visits to suppliers
Long term commitment
Purchasing
a
large
percentage of suppliers’
annual sales
Joint action
Trust building









Strategy to improve
capabilities
Competitive pressure
Emphasis on factors other
than price
Establishing
higher
supplier
performance
expectations
Strategy to improve both




Supplier assessment and
feedback
Making investments
Knowledge transfer
Supplier incentives
Table 51 Supplier development strategies classification
5.2.2 Supplier development conceptual model
Based on the strategies classification, the strategies can be easily mapped into the supplier
segmentation.
–
Developing Type 1 suppliers
Type 1 suppliers are the worst suppliers as they have low capabilities and low willingness to work
with the buyers. Suppliers who do not handle their relationship with their customers effectively are
likely to be removed from their customer’s list of partnership (Dorsch, Swanson, & Kelley, 1998). In
general, buyers may be advised to replace these suppliers (Rezaei & Ortt, 2013a) or maintain an
arm’s length relationship with these suppliers (Rezaei & Ortt, 2013b). Here we make
recommendations on how to improve this type of suppliers.
To improve willingness
To develop suppliers in this segment, it is important to improve their willingness to cooperate before
increasing their capabilities. Only if the suppliers have a high level of willingness, could they be
willing to engage in the supplier development program and then further improve their capabilities.
However, “joint-action” is usually carried out in the case that both companies can bring
complementary resources to the alliance (Harris et al., 2003). Since Type 1 suppliers lack capabilities,
it is not recommended for the buying company to get involved in joint-action with this type of
suppliers. “Long-term commitment” and “purchasing a large percentage of the suppliers’ annual
sales” are based on the fact that the buying company is satisfied with the supplying products or
services and the supplier’s capabilities. Thus in these cases these strategies are inapplicable as well.
As a consequence, two way communication, plant visits and trust building to suppliers are
recommended to improve Type 1 suppliers’ willingness.
To improve capabilities
According to section 5.2.1, all strategies to improve supplier capabilities can be applied to Type 1
suppliers. “Competitive pressure” forces suppliers to improve their capabilities and performance as
the buyer desired (Modi & Mabert, 2007). “Establishing a higher performance expectation” ensure
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the continuousness of such capabilities improvement (Humphreys et al., 2004; Monczka et al., 1993a;
Terpend & Ashenbaum, 2012). “Emphasis on factors other than price” can be implemented in the
case that the buying company values not only price but also other capabilities like technical
capabilities, quality capabilities, etc. (Humphreys et al., 2004)
To improve willingness and capabilities simultaneously
Since transaction-specific investments (“making investments” and “knowledge transfer”) will cause
risks and uncertainties for the buying company (Johnsen, 2009; Li et al., 2012), these strategies are
not applicable to Type 1 suppliers who do not have a high level of willingness or capabilities.
Therefore, to improve Type 1 suppliers’ willingness and capabilities simultaneously, supplier
assessment and feedback can be utilized to inform the suppliers about their level of capabilities and
willingness (Krause et al., 2000; Wouters et al., 2007), clarify the buying company’s expectation, and
provide suppliers with the direction for improvement (Wagner, 2006). Moreover, if Type 1 suppliers
succeed in increasing its performance and capabilities, “supplier incentives” can be awarded to
motivate them to make further improvement (Hahn et al., 1990).
–
Developing Type 2 suppliers
To improve capabilities
Type 2 suppliers are very willing to work with the buyer but have a low level of capabilities. these
suppliers may benefit more from the relationship than the buyers (Rezaei & Ortt, 2013a). To improve
their capabilities, the buyer could adopt the strategies of “competitive pressure”, and “establishing
higher supplier performance expectation”, forcing the suppliers to make continuous improvement
on capabilities (Humphreys et al., 2004; Modi & Mabert, 2007; Monczka et al., 1993a; Terpend &
Ashenbaum, 2012). If the buying company values not only cost/price capabilities but other
capabilities, “emphasis on factors other than price” can be adopted to stimulate the suppliers to
improve capabilities like technical capabilities, quality capabilities, etc.
Besides, strategies to improve both supplier capabilities and willingness can be adopted as well,
which include “supplier assessment and feedback”, “making investments”, and “knowledge transfer”.
“Supplier incentives” can be given when the suppliers achieve capabilities improvement.
Different from Type 1 suppliers, Type 2 suppliers have a strong willingness to get involved with the
buying company in a long-term relationship. Such commitment enhances the trust between both
parties and reduces the risk induced by transaction-specific investments. Consequently, in this case
“making investments” and “knowledge transfer” are efficient approaches to help the suppliers to
improve their capabilities.
–
Developing Type 3 suppliers
To improve willingness
Type 3 suppliers have a high level of capabilities but are less willing to cooperate with the buyer. It is
likely that the suppliers benefit less, or the relationship is not that important for them to enter into a
close relationship with the buying companies (Rezaei & Ortt, 2013a). These suppliers are also
attractive to other buyers in the market place because of their high capabilities, hence it is necessary
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for the buyer to find the causes behind the supplier behavior and tighten the relationship (Rezaei &
Ortt, 2013a).
According to Lambert’s research, the motivation for most partnerships is that both parties must
believe that they will receive significant benefits in one or more areas and that these benefits would
not be possible without a partnership (Lambert, 1996). As a result, the most effective way to
improve the supplier willingness to work with the buyer is to increase the buyer’s own attractiveness.
Therefore, all the strategies to improve supplier willingness can be adopted, including “two-way
communication”, “joint action”, “supplier visits”, “long-term commitment”, “purchase a large
percentage of supplier’s annual sales” and “trust building”.
Meanwhile, strategies that improve supplier capabilities and willingness simultaneously can be
adopted, such as “supplier assessment and feedback”, “making investments”, “knowledge transfer”
and “supplier incentives”.
–
Maintaining relationship with Type 4 suppliers
Type 4 suppliers are best suppliers, as they have high willingness and high capabilities. Both the
buyer and supplier can benefit from working with each other. In these cases, the buyer is suggested
to maintain strong relationships with this type of suppliers.
In conclusion, the supplier development conceptual model can be obtained (see Figure 30).
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Type 2
Type 4
Group 1
Competitive pressure
Emphasis on factors other than price
Establishing higher supplier performance expectations
Supplier assessment and feedback
Group 4
Making investments; Knowledge transfer
Supplier incentives
low
Two-way communication
Plant visits to suppliers
Trust building
Willingness
Group 2
Group 1
Two-way communication; Plant visits to suppliers
Long-term commitment; Trust building
Purchasing a large percentage of supplier’s annual sales
Supplier assessment and feedback
Making investments; knowledge transfer
Supplier incentives; Joint action
high
Chapter 5
Group 1
Competitive pressure
Group 3
Emphasis on factors other than price
Establishing higher supplier performance expectations
Type 1
Type 3
low
Figure 30 supplier development conceptual model
high
Capabilities
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5.3 Validation (interview)
Based on the supplier segmentation obtained in Chapter 4, the CEO of Beijing Time High Technology
Company (BTHT) is interviewed about the company’s purchasing and supplier development
strategies. According to the CEO, the case company acquires parts and components through three
channels: imports, in-house production, and local purchasing.
We asked the CEO if the evaluation results comply with the company’s purchasing strategies. The
CEO indicated that BTHT focuses on supplier’s product quality and delivery as a buyer, and this has
been reflected by Table 20, 27, and 43 that the “product quality” owns the biggest weights.
Moreover, in time delivery is important for the company to ensure its production strategy of “justin-time” and minimization of waiting costs. Hence according to the weights calculation, “delivery
capabilities” serves as the second important criterion to the buying company (see Table 20, 27, and
43). Besides, the company is very careful in the selection of suppliers and controls the quality of its
suppliers in order to guaranty high quality of its own products. Hence all the suppliers being
evaluated receive a score higher than 3 (see Table 14).
In order to manage the supplier in an efficient way, currently BTHT classifies its suppliers into three
categories:
Type A: key suppliers (supply crucial components or services, which have major influences on
production or the quality of the final product)
Type B: important suppliers (supply important components or services, which have influence on
certain function of the final product)
Type C: normal suppliers
However, the company only considers the importance of the suppliers when doing supplier
classification but does not take into consideration of the characteristics of suppliers. In this research,
suppliers are evaluated and classified from the dimensions of willingness and capabilities.
Accordingly, the suppliers are categorized into four groups (Type 1 to Type 4).
Therefore, during the interview with the CEO, we examined:


What are the possible reasons that lead the suppliers to locate in different segments?
How did/will the company develop suppliers’ willingness and capabilities in different
segments?
Also we asked the CEO to give us several examples in each segment if possible. In the next step,
recommendation will be given after comparing the company’s supplier development practice with
our conceptual model.
Main strategies to develop Type 1 suppliers (low willingness, low capabilities)
When asked about how to develop Type 1 suppliers, the CEO indicated that it is advisable to improve
their willingness before improve their capabilities. “Willingness to improve performance” serves as
the most crucial important willingness criterion for the company to evaluate its suppliers’ willingness.
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If a supplier is unwilling to make change, the company prefers to replace this supplier by other
alternative suppliers.
When asked about the reasons behind the supplier behavior, the CEO mentioned that the reasons
could be various, but maybe mostly because of the location and business. For example, one plastic
mold company is located in the city of Zhuhai, south of China, which is around 2300 km away from
Beijing where BTHT is located. Since the distance is remote, this supplier does not have a high level
of willingness to cooperate with companies far in the North. Another stainless steel company has
low willingness because the business volume with BTHT only accounts for a small percentage of their
annual sales. Moreover, the buying company orders a wide range of stainless steel products, which
makes the supplier’s production process even more complex and less profitable business.
To improve the supplier willingness, the CEO said that currently they adopt strategies including
supplier visits, information exchange and long-term commitment. For example, send BTHT
employees to supplier site visits, explaining the buyer’s expectation, providing assistance in solving
production issues that the suppliers come across, and transferring knowledge to the suppliers if
necessary.
In order to develop the capabilities of Type 1 suppliers, the buying company sets clear goals to the
suppliers, which represents the buying company’s expectation. Suppliers who fail to reach the goal
will be replaced by other alternative companies. Such competitive pressures are mainly focusing on
cost capabilities and delivery capabilities, which the buying company values most. Besides, the
buying company also requests competitive bids from multiple suppliers in order to achieve a low
purchasing price through bidding specifications and short-term contracts. Moreover, the buying
company provides necessary assistance for product quality improvement, such as offering fixtures
and sealed samples. Last but not least, the buying company requires the suppliers to continuously
increase its capabilities.
Main strategies to develop Type 2 suppliers (high willingness, low capabilities)
When asked about how to develop suppliers with high willingness and low capabilities, the CEO says
“to develop this type of suppliers, first of all we identify the specific shortcomings of each supplier
and then adopt specific measures for improvement.”
There are only two suppliers that fall in this segment, which provide magnet-related products and
hardware molds respectively. One of the suppliers is a small scale company and the other one is
geographically isolated. There is a high level of willingness among these suppliers, which make it
worthwhile to make investments in developing this type of suppliers. Therefore, in order to help
these two suppliers to develop their capabilities, the CEO pointed out that the buying company may
offer assistance for quality improvement as what it does to improve Type 1 suppliers.
Besides, the knowledge transfer is also necessary. The engineers in BTHT will be sent to the suppliers’
production sites to give technical advices, and to communicate with the suppliers about the
customer requirements. Moreover, the buying company can co-construct laboratory with the
suppliers so that each party can access complementary knowledge and resources from the other
side.
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Additionally, the buying company may invite Type 2 suppliers to join BTHT for plant visits to other
suppliers. During this process, the Type 2 suppliers could gain useful knowledge and information
from the other outstanding suppliers.
Main strategies to develop Type 3 suppliers (low willingness, high capabilities)
This type of suppliers was identified through interview. Most of them are large-scale enterprises in
the leading position of industry. Compared to other competitors, these suppliers are strong in
capabilities and very attractive in market place. Since they are experienced in operation and have
complete management system, this type of companies tends to be more independent. They are
reluctant to accept the intervention from other parties in the term of external investments or
knowledge transfer.
To deal with these particular Type 3 suppliers, the BTHT CEO indicated that first of all the buying
company will show its loyalty and collaboration posture by making long term commitments to these
suppliers. Afterwards, the company may adopt the communication strategies to improve supplier
willingness, especially focusing on the communication with the suppliers’ top management
personnel. Through effective communication, shared value and goals are expected to be achieved.
Additionally, increasing the purchasing amount will also contribute to the willingness improvement.
One example within this group is an English-speaking supplier in England. The long distance leads to
time zone differences and communication inconvenience. The language barrier and culture
differences result in lack of effective communication or even misunderstanding sometimes. Hence
the relationship between two parties is never close. To solve this issue, the CEO suggests that
instead of purchasing department, the international trade department should be responsible for
communicating with this supplier, since employees working in international trade department are
skilled in English. By doing so, the communication between the two parties tend to more efficient
and effective, which results in a positive influence on buyer and supplier relationship.
Main strategies to maintain relationship with Type 4 suppliers (high willingness, high capabilities)
These suppliers are excellent suppliers from the perspectives of both capabilities and willingness. To
maintain a close relationship with this type of suppliers, the CEO mentioned that the buying
company mainly utilizes incentive strategies. For example, the buying company holds annual
awarding ceremony to recognize outstanding suppliers. Such recognition allows the supplier to
attract other customers in the market place. When designing a new product, the buyer would
consider outstanding suppliers’ products to be incorporated in the product design phase with high
priority level.
Besides, vice-presidents of the buying company visit the outstanding suppliers in person to have a
better communication and achieve a long term commitments with the suppliers. The outstanding
suppliers will be introduced to each other by the buyer, which allows them to exchange information,
experience or even knowledge.
By comparing the interview with the CEO and the conceptual model proposed in this research, it can
be found that the conceptual model was mostly supported by the experience of the company,
except two conflicts that are due to particular situations:
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1. In the conceptual model, the knowledge transfer and long-term commitment are not
recommended as means for the buying company to develop Type 1 suppliers (low
capabilities low willingness) in terms of capabilities or willingness. The reason is that without
a high level of supplier willingness, such activities could induce risks to the suppliers.
However, the case company adopted these strategies to develop this type of suppliers. Type
1 suppliers are the worst suppliers in the conceptual model, while to the case company
these suppliers are not suppliers with poor capabilities and willingness, but are relatively
below average suppliers compared to other suppliers. Thus it is worthwhile to making
investments or long-term commitment to develop suppliers in this segment.
2. To develop Type 3 suppliers (high capabilities low willingness), the conceptual model takes
strategies like knowledge transfer, making investments, and supplier incentives to increase
the buying company’s attractiveness. However, the case company does not adopt these
strategies to improve this type of suppliers. The reason behind the case company’s behavior
is that the suppliers in Segment 3 are big-sized companies and have low influence of the
incentives or the investments from the buying company.
Validation by supplier management in real world application
The applications of supplier management in real world (section 2.5) also validate our conceptual
model to a great extent. First of all, all those three companies are being through three steps to
manage their suppliers. Supplier development is based on the results of supplier segmentation,
which demonstrates the necessity of this research of linking supplier development to supplier
segmentation.
Moreover, the criteria for each company to evaluate the suppliers vary according to the company’s
business sector and company strategies. The supplier segmentation framework that this research
bases on reflects such flexibility, allowing the buying companies to choose freely from the
capabilities and willingness criteria lists according to particular situations.
Additionally, all the three companies adopt strategies of “supplier assessment and feedback”,
communicating assessment results internally and with the suppliers. In our supplier conceptual
model, this strategy is also considered as a very important activity that is recommended to apply to
all suppliers in every segment.
Last but not least, from RWE’s experience, it can be seen that the company actively supports good
supplier’s development, phases out poor performance suppliers or reduce their volume. To deal
with less good suppliers, the company let the supplier optimize themselves in line with jointly
defined objectives. The proposed conceptual also adopts a similar method. To improve Type 1
suppliers, the buying company commits no or only limited resources to a specific supplier, but uses
external market and communication approach to stimulate or force the suppliers to make
improvement. To improve type 2 and 3 suppliers, the buying company plays an active role and
dedicates human and/or capital resources to a specific supplier.
5.4 Conclusion
In this chapter, we reviewed all the supplier development strategies in the existing literature. With
the purpose of mapping strategies to our supplier segmentation, moving suppliers of Type 1, 2, and
3 to a better quadrant, we classified the strategies into three categories: strategies to improve
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capabilities, strategies to improve willingness and strategies to improve both capabilities and
willingness simultaneously. The class of strategies to improve willingness is based on Harries et al’s
theoretical framework of attractiveness, which contains three drivers of attractiveness: economical
attractiveness, resource-based attractiveness, and socially based attractiveness. The class of
strategies to improve supplier willingness includes “two-way communication”, “joint action”,
“supplier visits”, “long-term commitment”, “purchasing a large percentage of suppliers’ annual sales”
and “trust building”. Strategies to improve capabilities incorporate “competitive pressure”,
“emphasis on factors other than price”, and “establishing higher supplier performance expectations”.
“Supplier assessment and feedback”, “making investments and “knowledge transfer and supplier
incentives” has been identified to have the effect to improve both capabilities and willingness
simultaneously.
Based on the strategies classification, the supplier development conceptual model was obtained. To
develop type 1 suppliers, it is necessary to improve their willingness first. Hence “two way
communication”, “plant visits” and “trust building” can be used to develop supplier willingness.
When the buying company achieves higher suppliers’ willingness level, all the strategies to improve
supplier capabilities can be adopted. To improve both willingness and capabilities, “supplier
assessment and feedback”, “supplier incentives” can be used. Other strategies are not applicable in
these cases since this type of suppliers is low in capabilities, using other strategies will induce risks
and uncertainties to the buying companies.
Type 2 suppliers are willing to work with the suppliers but have a low level of capabilities. All the
strategies to improve supplier capabilities can be used, including “competitive pressure”,
“establishing higher supplier performance expectations”, and “emphasis on factors other than price”.
Unlike type 1 suppliers, type 2 suppliers have a strong willingness to maintain a long-term
relationship with the type 1 suppliers, which enhances the trust between two parties and reduces
the risk induced by transaction-specific investments. Hence in these cases besides “supplier
assessment and feedback” and “supplier incentives”, “making investments” and “knowledge transfer”
can be adopted to develop suppliers’ willingness and capabilities simultaneously.
Type 3 suppliers are high in capabilities but low in willingness. Hence it is important for the buying
company to increase its own attractiveness. All the strategies to improve supplier willingness can be
adopted, including “two-way communication”, “joint action”, “supplier visits”, “long-term
commitment”, “purchase a large percentage of supplier’s annual sales” and “trust building”.
Meanwhile, strategies that improve supplier capabilities and willingness simultaneously can be
adopted, such as “supplier assessment and feedback”, “making investments”, “knowledge transfer”
and “supplier incentives”. The conceptual model is illustrated in Figure 30.
At the end of this chapter, the CEO of our case company, Beijing Time High Technology Company
(BTHT), has been interviewed about the company’s supplier development strategies. The proposed
conceptual model is mostly supported by the experience of the case company except two conflicts
that are due to particular situation.
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Conclusion, recommendation, reflection and future research
6 Conclusion, recommendation, reflection and future research
6.1 Conclusion
In today’s competitive business climate most organizations focus on their core competencies and
outsource non-core products or services to external suppliers. Purchasing has become a key role in
organization’s effectiveness and efficiency since the raw materials and components parts account
for the major cost of a product and the company has to spend most of its revenue on procurement.
Hence effective supplier development has a direct effect on cost reduction, profitability, flexibility,
and competitive advantages of a company.
Traditional supplier development only adopts “one-size-fit-all” strategies and do not take into
consideration of supplier willingness. This research proposed a novel and effective approach for
developing suppliers by integrating supplier segmentation results as an important input factor to the
design of supplier development strategies. By applying the proposed conceptual model, limited
resources can be allocated more efficiently to deal with different types of suppliers. Additionally,
since supplier willingness is a critical factor that influences the success of supplier development and
buyer-supplier relationship, supplier willingness is considered as an important dimension of supplier
development besides supplier capabilities for the first time.
The supplier development process contains two phases. In Phase 1, the suppliers are evaluated and
segmented from two overarching dimensions: capabilities and willingness. These two dimensions
cover the relevant criteria that each buyer can choose for its own purpose. The relative weights of
each criterion are obtained by applying conventional AHP, fuzzy AHP using FPP, BWM. Two
aggregated scores are calculated and normalized for capabilities and willingness for each buyer.
Afterwards, the position of each supplier in terms of capabilities and willingness is illustrated by a
scatter plot, where the horizontal and vertical axes indicate the capabilities and willingness
respectively. By dividing each axis into two equal parts, four segments of suppliers are achieved.
Unlike other segmentation approaches, the segmentation adopted by this research allows the buyer
to examine the position of each supplier within a segment.
In this research supplier segmentation is based on Rezaei and Ortt’s supplier segmentation
framework. Compared to Rezaei and Ortt’s other researches on supplier segmentation, this research
further develops their conceptual model by classifying capabilities and willingness variables into
different categories according to the variables’ characteristics, which gives a clear impression of the
variables and helps the decision-maker with making selections of evaluation variables. Moreover,
this research is an extension of Rezaei and Ortt’s researches on supplier segmentation theory and
methodologies. The purpose of segmenting suppliers is to develop suppliers in a systematic way.
Hence this research mainly concentrates on formulating supplier development conceptual model,
and links supplier development to supplier segmentation.
Besides, this research adopted three multi-criteria decision-making methods and compared these
three methods from the aspect of ease of application. The similarity of three segmentations
resulting from different methods has demonstrated the robustness of the results. Moreover, the
strength and weakness of three methods can be identified. An advantage of using AHP to derive the
weights is that AHP is simple to implement yet powerful to deal with complex problem. In addition
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Conclusion, recommendation, reflection and future research
to the advantages of AHP, fuzzy AHP using FPP makes it possible to handle the vagueness of human
perceptions when the information provided is not precisely known, and guarantees the preservation
of the preference intensities. BWM is a superior methodology from the aspect of ease of application.
It uses less comparison data compared to AHP and fuzzy AHP, and remedies the inconsistency.
In the supplier development phase (Phase 2), the strategies in the existing literatures have been
reviewed and classified into three categories: strategies to improve supplier capabilities, strategies
to improve supplier willingness and strategies to improve both supplier capabilities and willingness
simultaneously. Compared to traditional classification of supplier development strategies which only
focus on the degree (low, high) of extent that the buying company gets involved in the supplier
development activities, this research proposes a new framework of classification which make a
direct link between the strategies and the supplier’s willingness or capabilities improvement.
Suppliers in different segments are treated differently. Type 1 suppliers are low in both capabilities
and willingness. “Two way communication”, “plant visits” and “trust building” can be used to
develop supplier willingness. When the buying company achieves higher suppliers’ willingness level,
all the strategies to improve supplier capabilities can be adopted. To improve both willingness and
capabilities, “supplier assessment and feedback”, “supplier incentives” can be used. Other strategies
are not applicable in these cases since this type of suppliers is low in both capabilities and
willingness, using other strategies will induce risks and uncertainties to the buying companies.
Type 2 suppliers have a strong willingness to maintain a long-term relationship with the buying
company, which enhances the trust between two parties and reduces the risk induced by
transaction-specific investments. As a consequence, all the strategies to improve supplier
capabilities and strategies to improve both supplier capabilities and willingness can be used to
develop type 2 suppliers. Type 3 suppliers are high in capabilities but low in willingness. Hence it is
important for the buying company to increase its own attractiveness. All the strategies to improve
supplier willingness and strategies to improve both supplier capabilities and willingness can be
adopted.
The proposed methodology of supplier segmentation and development has been applied in a high
tech test instruments manufacturing company, Beijing Time High Technology Company. Eleven
criteria for capabilities and seven criteria for willingness are selected and considered for evaluating
and segmenting suppliers. The interview with the CEO of the company mostly complies with our
conceptual model except two conflicts which are caused by particular situation. The experience of
the case company demonstrates that the proposed supplier development conceptual model is
generally applicable. In real-world application, specific strategies are being further tailored to
develop different supplier segments in accordance to the specific situation of the case company.
Research questions
RQ 1: Why is it important for
companies
to
develop
suppliers?
Answer to research question
Purchasing play a key role in organization’s effectiveness and
efficiency since the raw materials and components parts account for
the major cost of a product and the company has to spend most of
its revenue on purchasing. Additionally, in today’s competitive
business climate most organizations focus on their core
competencies and outsource non-core products or services to
external suppliers. Hence effective supplier development has a
direct effect on cost reduction, profitability, flexibility, and
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Conclusion, recommendation, reflection and future research
RQ2: Why is it necessary to
link supplier development to
supplier segmentation?
RQ3: Why should the
company consider supplier
willingness in addition to
supplier
capabilities
for
supplier segmentation and
development?
RQ4: How can a buying
company achieve its supplier
segmentation?
RQ5: What are the strategies
to
improve
supplier
willingness, capabilities, and
both the willingness and
capabilities simultaneously?
RQ6:
How
to
improve
competitive advantages of a company.
Supplier development needs buying company to invest resources
which are scarce commodity in any company and should be
allocated more efficiently and strategically (Dyer et al., 1998). Hence
to optimize purchasing effectiveness, buying company should
strategically segment their suppliers into different groups and adopt
different strategies in order to allocate different levels of resources
to each group.
A strong and close supplier-buyer relationship, to a great extent
depends on supplier willingness, is also crucial to the buying
company to achieve a lead position in the market place. Hence high
levels of willingness from both supplier and buyer result in mutual
trust and increase the length of the relationship (Krause et al., 2007;
Sako & Helper, 1998), which has a major impact on the buying firms’
competitive advantages. For example, trust in long-term
relationships can overcome the difficulties in relationships in the
supply chain, such as conflicts, abuse of power and low profitability
(Rezaei & Ortt, 2012a; Sullivan & Peterson, 1982). It also can help to
maintain the stability of the supply chain in the long term (Chen &
Paulraj, 2004).
Rezaei and Ortt’s conceptual model has been recognized as the
most robust supplier segmentation framework as it covers multiple
variables and companies are flexible to choose variables according
to their own perspectives. A five steps method can be employed to
obtain the supplier segmentation. To calculate the relative weights
of each criterion, three multi-criteria decision making methods were
adopted in this research, including conventional AHP, fuzzy AHP
using FPP, and BWM. It is also found that BWM is superior in data
collection and consistency improvement compared to conventional
AHP and fuzzy AHP. The final segmentation is a 2×2 matrix (see
figure 6), containing four categories of suppliers: low willingness,
low capabilities (Type 1); high willingness, low capabilities (Type 2);
low willingness, high capabilities (Type 3); high willingness, high
capabilities (Type 4).
Strategies to improve supplier willingness
 Two-way communication
 Joint action
 Plant visits to suppliers
 Long-term commitment
 Purchasing a large percentage of supplier’s annual sales
 Trust building
Strategies to improve supplier capabilities
 Competitive pressure
 Emphasis on factors other than price
 Establishing higher supplier performance expectations
Strategies to improve both supplier capabilities and willingness
 Supplier assessment and feedback
 Making investments
 Knowledge transfer
 Supplier incentives
Type 1 suppliers are low in both capabilities and willingness. It is
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Conclusion, recommendation, reflection and future research
suppliers in different supplier necessary to improve their willingness before increasing capabilities.
segments?
Type 2 suppliers have a strong willingness to maintain a long-term
relationship with the type 1 suppliers, which enhances the trust
between two parties and reduces the risk induced by transactionspecific investments. To develop type 3 suppliers, the buying
company should increase its own attractiveness. Type 4 suppliers
are good suppliers, with whom the buying company should maintain
a good relationship. The detailed strategies can be found in Figure
28 and Section 5.2.2.
Table 52 Answers to research question
6.2 Recommendation (RQ 7)
By interviewing the CEO of the case company, we have obtained an overview of their supplier
development strategies. Through comparing their strategies with our conceptual model, some
recommendations can be given, not only to help the case company but also companies in general to
achieve an effective and efficient supplier development.
Supplier segmentation:
–
–
The methodology adopted in this research can be used to evaluate and segment the supplier
base. To calculate the weights of each criterion, BWM is recommended from user-friendly
perspective.
The supplier evaluation and segmentation should be repeated regularly. If the company’s
purchasing strategy does not change, the weights of criteria for evaluating suppliers are not
necessarily to be recalculated over time. While the scores of the suppliers may change over
time since the behavior of suppliers may change, so regular calculating the scores is
necessary for the buying company to know well about its supplies’ exact levels of willingness
and capabilities, and adjust its development strategies applied on each supplier. The
evaluation intensity and frequency of suppliers could be different according to strategic
significance of the products or services that the suppliers provide.
Supplier development:
–
–
–
When switching cost is considerable and the setting up manufacturing internally results in
huge investments, it is more feasible to carry out supplier development. The supplier
development strategies should be designed based on the supplier segmentation, so that the
resources could be allocated in a more efficient and effective way.
The support and involvement of top management is crucial to the success of the supplier
development, not only because the supplier development program is usually initiated by the
top management (Krause & Ellram, 1997a) who have the desire to improve the firm’s
competitive position or to meet specific competitive challenges in the marketplace (Hahn et
al., 1990), but also because purchasing management needs the encouragement and support
from top management to expend their resources within a supplier’s operation (Humphreys
et al., 2004).
Apart from top management involvement, cross-functional teams have been proved to be a
crucial contributor to the success of suppler selection and evaluation, cost reduction,
product design, Just-In-Time manufacturing, etc. Since supplier development deals with a
wide range of supplier problems, expertise from various functions are required (Krause &
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–
–
–
Conclusion, recommendation, reflection and future research
Ellram, 1997a). A cross-functional team can be organized by the material to be purchased or
by the supplier to be developed (Hahn et al., 1990) to carry out the supplier development
program. This team is ultimately responsible for driving the change, representing their
constituencies in the organization when planning changes, communicating to employees
about the change process, incorporating employee suggestions and concerns into the
decision-making process, and evaluating and the outcomes.
The case company uses “supplier incentives” as a method only to main a strong relationship
with Type 4 suppliers. However, it is also an effective strategy to improve the performance
of suppliers in other segments. When the suppliers succeed in increasing performance and
capabilities, the incentives serve as a motivating tool could lead the suppliers to make more
effort on developing themselves.
Communication is a critical element in supplier development. Almost all of the strategies
need effective communication to be carried out efficiently.
From the conflicts between the supplier development conceptual model and the experience
of the case company, it can be concluded that in real world application the conceptual
model is generally applicable, while the specific strategies dealing with specific suppliers
need to be further tailored in accordance to the specific situation of the buying company.
6.3 Reflection
In addition to summarizing research results, answering research questions and giving
recommendation to suppliers, reflection on the research itself is also given to maximize the output
of this research. Critical remarks regarding the process are described here.
–
–
–
–
The first point of reflection is that the strategic importance of the suppliers is not taken into
consideration in the supplier development conceptual model. According to the supplier
segmentation in the real world application (see Section 2.5 and 5.3), most companies tend
to consider the importance of the supplier and the products it supplies. The strategic
importance of the supplier may have an influence on the strategies that the buyer adopts. In
this research, we assumed that all the suppliers to be segmented and developed are of the
same strategically importance to the buyer. Hence the importance of the suppliers cannot
be reflected by the conceptual model.
Moreover, Type 4 suppliers with high level of both willingness and capabilities are also
significant to the buying company’s success in competition with other competitors. This
research mostly focuses on the improvement of Type 1, Type2 and Type 3 suppliers, while
pays less attention on managing Type 4 suppliers.
Because of time constrains, the validation of the supplier development conceptual model is
based on the CEO’s subjective experience in company operation, which lacks of objective
evidences. It would be more convincing to reassess the suppliers after the company adopts
the conceptual model and examine if the suppliers in different segments have been
improved as predicted.
Since the case company is located in China, the distance and time difference lead to
inconvenience to communication. Face-to-face communication could have resulted in more
fruitful discussion. Because of the distance, it is also impossible to interview the employee of
the case company’s suppliers, which may bring in more valuable inputs to the formulation of
the supplier development conceptual model.
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6.4 Future research
After evaluating, concluding and reflecting on the complete research, it is possible to define
recommendation for future research:
–
–
–
–
In order to incorporate the importance of the suppliers as an input, in addition to two
dimensions (capabilities and willingness) it is possible to develop a third dimension while
doing supplier segmentation and development, representing the strategic importance of the
suppliers. The strategies could be different based on the different importance of the
suppliers.
In Figure 26 it is found that most suppliers are located in Type 1 and Type 4, which imply a
possible positive relationship between supplier capabilities and willingness. The direction of
future research is to investigate whether if there is a correlation between supplier
capabilities and willingness, or if such positive relationship is caused by common method
bias.
Because of the significance of Type 4 suppliers to the buying company, another interesting
future direction could be how to manage this type of suppliers effectively and efficiently.
Three multi-criteria decision making methods have been employed in this research. The
comparison between these three methods is from the user-friendly perspective. Further
comparison on the mathematical model of the three methods could reveal more insights
and shall be the future work. Besides, as shown in Table 1 there are still tens of algorithms
that can be used to calculate the weights respect to each criterion. Hence other multicriteria decision making methods are suggested as a future research direction.
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