A model for supplier selection and total cost of purchasing

The role of purchasing and its importance within organizations has grown during the past decades along with the development of strategic purchasing. In the financial area, science has also tended to focus on strategy, which has resulted in drawbacks when exploring the complexity of financial measurement systems. The purchasing department at Emhart Glass Sweden strives towards more strategic assignments and more value adding activities. One part of this development is to focus on the total cost of purchasing to show what aspects and how these aspects influences the total cost of purchasing. In the current purchasing situation at Emhart Glass, the purchaser generally selects the supplier that offers the lowest price mainly because it is hard to motivate another decision. Thereby, the purpose is to create a model that calculates the total cost of purchasing from the best available supplier. The total cost perspective aims to take focus away from price and to motivate strategic decision-making conforming to the corporate mission. The delimitations were to keep the present sourcing strategy with single sourcing and to use existing data from the present supplier base. After studying financial literature, including activity-based costing and total cost of ownership as well as science related to strategic purchasing and supplier selection problems the literature was complemented with interviews and a questionnaire. This resulted in a suggested total cost model in two parts. The first part uses the analytical hierarchy process for evaluation and selection of the best supplier. The foundation of the process is pair wise comparisons between the main criterion of quality, delivery, agility, environmental performance and its sub-criterion. The latter part is calculation of the total cost of purchasing including the estimated costs of poor quality and inventory costs. The total cost model was tested on three sets of suppliers for separate commodities. The results showed that agility is by far the most valued supplier feature and reflects the present characteristics of Emhart Glass’ business. The process for supplier selection was easily conducted with decision-making software ExpertChoice and the resulting charts provided possibilities to observe strengths and weaknesses among the evaluated suppliers. The result from the calculations of the total cost of purchasing was difficult to relate to since the total purchasing price differed among the suppliers. Therefore, an indicator was calculated which shows the relationship between the purchasing price and the other elements in the model. By implementing the suggested model for supplier selection and calculation of the total cost of purchasing, the purchaser can motivate the selection of a certain supplier based on the criteria in the analytical hierarchy process. The total cost of purchasing motivates the selection further and takes focus away from price and towards total cost. Emhart Glass is recommended to use the analytical hierarchy process to form a future purchasing strategy. By weighting the criteria in the analytical hierarchy process at different departments, the strategy can be based on the expectations of all internal customers. Finally, the new indicator is preferably implemented as a KPI in addition to purchasing price variance. The indicator evaluates the purchasing department and the relationship between the supplier and Emhart Glass Sweden.Validerat; 20101217 (root