Customized Supplier

Selection Methodology:
An Application of Multiple
Regression Analysis
Nikhil Chandra Shil
East West University
nikhilacc@yahoo.com

Sophisticated manufacturing process demands a strong supplier base for

satisfying customers with a quality product at a cheaper price. Thus,
supplier selection has been shown to be significant in supply chain
management literature, where many research studies have been conducted.
Technology-led and sophisticated production processes and bitter
competition may be the reasons that attract practitioners to select from a
dedicated list of promising suppliers. Most of the previous studies on this
subject have concentrated on the selection of either the criteria or methods
used to choose the right supplier(s). This paper also addresses these two
issues. It focuses on the methodology of selecting the right supplier(s) from
a list of suppliers. Criteria have been chosen in line with the requirements
of the firm and a multiple regression analysis has been used as a statistical
tool to choose the right supplier(s). Here, criteria have been translated into
three different indexes from different perspectives, and ultimately supplier
selection is based on the index values and their interrelationships. This is
the addition to the current state of knowledge in which suppliers'
perspective is also considered strategically at the time of selecting the right
suppliers. This paper concludes that suppliers' performance largely depends
on experience and satisfaction. Additionally, buyers should pay close
attention to these two factors to select the right supplier. This paper
considers these two factors through the development of two different
indexes comprising relevant criteria under each of the factors in which the
practitioners enjoy enough flexibility to make it customized.

Introduction
The supplier is one of the five
forces of competitive position,
because of its bargaining power, as
described by Porter's (1980)
Competitive Forces Model. The
study on supplier selection even
started long before that during
1960s. The business strategy
previously used by suppliers
became so unpredictable that a
new technology, just in time (JIT),
was
developed
so
that
manufacturing plants could own
their suppliers or that suppliers
were outsourced under the

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memorandum of understanding
(MoU) that they would always be
ready to supply the materials
required by the manufacturing
plant at the time they needed them.
Still, JIT is a dream for most of the
manufacturing units across the
globe and the dependency on
suppliers increased to a greater
extent due to the scarcity of
varieties and quality of raw
materials. Greater dependence on
suppliers increases the need of
managing suppliers effectively.
Three
dimensions
underlie
supplier management: (1) effective
supplier selection, (2) innovative

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supplier development strategies,

and (3) meaningful supplier
performance
assessment
mechanisms.
Traditionally, the selection of a
supplier is often based on price.
The cheapest supplier is usually
selected without taking into
consideration additional costs this
supplier may introduce into the
value chain of the purchasing
organization. Thus, the costs
related to unreliable delivery,
limited quality of goods supplied,
and poor communication usually
are not involved in the selection
process. However, many studies
conducted in the area of criteria
identification
conclude
that
supplier selection is based on
different interactive criteria, and
multi-criteria
decision-making
techniques become commonplace
in supplier selection methodology.
Supplier selection decisions are
complicated by the fact that
various criteria must be considered
in the decision-making process.
The analysis of criteria for selection
and measuring the performance of
suppliers has been the focus of
many academicians and purchasing
practitioners since the 1960s. In his
seminal work, Dickson (1966)
suggests, "From the purchasing
literature, it is fairly easy to
abstract a list of at least 50 distinct
factors (characteristics of vendor
performance) that are presented by
various
authors
as
being
meaningful to consider in a vendor
selection decision" (p. 5).
During recent years, supply chain
management (SCM) and the
supplier/vendor selection (VS)
process have received significant
attention in business management
literature (Verma & Pullman, 1998).
SCM can be defined as a set of
approaches used efficiently to
integrate suppliers, manufacturers,
warehouses, and stores so that
merchandise can be produced and
distributed at the right quantities
to the right locations and at the
right time in order to minimize
system-wide costs while satisfying
service level requirements. The
introduction of products with short
life
cycles
and
heightened

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expectations of customers have

forced business enterprises to
invest in and focus attention on
their supply chains, probably due
to the vigorous competition in
today's global market. In addition,
the development of technology
actually plays an important role in
motivating the evolution of the
supply chain and of the techniques
to manage it. In general, a supply
chain consists of suppliers,
manufacturing
centers,
warehouses, distribution centers,
retail outlets, as well as raw
materials,
work-in-progress
inventory, and finished products
that flow between the facilities.

Suppliers' performance
largely depends on
experience and
satisfaction.

Individual businesses no longer

compete as autonomous entities
but rather join a supply chain
alliance due to the current state of
highly
competitive
business
situations. Therefore, suppliers,
manufacturers, logistic companies,
and retailers in the SC always forge
stronger alliances, vertically or
horizontally, to compete against
other supply chains (Lin & Chen,
2004). A supply chain is an
integrated process wherein a
number of various business entities
(i.e., suppliers, manufacturers,
distributors, and retailers) work
together in an effort to: (1) acquire
raw materials/components, (2)
convert
these
raw
materials/components
into
specialized final products, and (3)
deliver these final products to
retailers'' (Beamon, 1998, p. 281).
One of the competencies essential
to supply chain success is an
effective purchasing function
(Cakravastia & Takahashi, 2004;
Giunipero & Brand, 1996; Porter &
Millar, 1985). In most industries raw

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materials and component parts

constitute the main cost of a
product; in some cases it can
account for up to 70% of the total
cost (Ghobadian et al., 1993). In
high-technology
companies,
purchased materials and services
represent up to 80% of the total
product cost (Burton, 1988; Weber
et al., 1991). The raw material
purchased for most U.S. firms
constitutes 40-60% of the unit cost
of a product. For large automotive
manufacturers,
the
cost
of
components and parts purchased
from outside vendors may total
more than 50% of sales. Coal
purchases for large electric
utilities, such as TVA, approach $1
billion annually (Bender et al.,
1985). Savings in cost of materials
purchased
may
be
very
insignificant
if
considered
separateby, but it may bring
competitive advantage in market
place by ensuring 'value for money'
to the consumers.
The current research aims to
evaluate how to select the right
vendor from a list of vendors within
a corporate set up. The author was
privileged to have the scope of
using the internal database of a
multinational corporation (MNC) to
apply the methodology. The name
of the MNC is intentionally hidden
and a hypothetical name, Company
X, is used for reference. Company X
is a subsidiary of a UK company
that operates in Bangladesh and
holds 43% of the market share in
the thread industry. It is a
recommended, by one and all,
threads manufacturer and market
leader in supplying industrial
sewing thread. It imports basic raw
materials such as yarn, dyes and
chemical, plastic cones, spare
parts, and machineries for the
purpose of producing thread. The
company maintains a list of both
local and foreign suppliers; this
study is based on the record of 38
suppliers from their database.
This paper analyzes vendor
selection methodology used in a
company based on different
indexes. The indexes are designed
from criteria to make the number of
parameters manageable. Different
criteria (similar in nature) have

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been grouped under the same

index. The indexes are used to form
a regression equation and statistics
are used to make the equation
generalized within the company for
every
supplier.
Traditionally
regression analysis helps to
identify the relationship among
variables. Similar to supplier
selection we depend on criteria,
which are considered here as
variables, and a logical relationship
among the variables is established.
The initial model considered the
maximum database of the company
and so the result of the model may
be used as a reference point for
other
similar
situations.
X
Company can use the model in the
future by putting the index values
into the model. The higher the
value is, the more effective the
performance of the vendor is. The
methodology as applied here is
rarely used in the supplier
selection in literature so this paper
adds to the current knowledge.
Additionally, the methodology
offers a strategic use because it
shows a way to customize so that
everybody has a sufficient scope to
adjust to the typical requirements
of an agent under consideration
that is very much situational and
considers contextual variables like
cost, quality, timings, commitments
and so on.

formal decision models can assist

purchasers in a variety of ways
when selecting suppliers. Their
study, however, involved buyers'
receiving
explanation
and
assistance while using the models
and little is known about what
actually happens if formal methods
are applied incorrectly.
Without any doubt, supplier
selection is one of the decisions
that determine the long-term
viability of a company (Thompson,
1990). However, as mentioned in
the introduction, different actors
from varying perspectives look
differently at formal supplier
selection
methods.
These
differences could lead to a number
of problems, namely identifying (1)
the criteria or the basis of how the
suppliers are tested for ultimate

selection and (2) the suitable tools

or models to be used for selecting
the supplier.
Dickson (1966) has become a
reference for the majority of papers
dealing with supplier or vendor
selections. Dickson's study was
based on a questionnaire sent to
273 purchasing agents and
managers selected from the
membership list of the National
Association
of
Purchasing
Managers. Twenty-three criteria
were ranked with respect to their
importance observed during the
early 1960s. At that time, the most
significant criteria were quality of
the product, on-time delivery,
performance history of the
supplier, and the warranty policy
used by the supplier. Weber et al.
(1991) presents a classification of

Table 1

Criteria for Vendor Selection (Author's Personal Compilation)

Brief Literature Review

Supplier selection has attracted
significant
attention
from
academics and practitioners alike
because
of
its
perceived
importance, its visibility (at least in
the sense that the ultimate
outcome is identifiable), and its
suitability for formal, mathematical
modeling. Many academic papers
describe and compare various
formal decision methods, decision
elements, and quantitative and
qualitative decision criteria for
supplier selection, for example, De
Boer et al. (1998), Narasimhan
(1983), and Weber and Current
(1993). De Boer et al. (2001) present
a review of decision methods
reported in the literature for
supporting the supplier selection
process. De Boer and Van der
Wegen (2003) conclude on the basis
of four empirical experiments that

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all the published papers (since

1966), according to the studied
criteria. The result, based on 74
papers, shows that price,
delivery,
quality,
and
production capacity and location
are the criteria most often
addressed in the literature. Overall,
the 23 criteria presented by
Dickson still cover the majority of
the criteria presented in the
literature until today.
Ellram (1990) proposes three
principal criteria: (1) the financial
statement of the supplier, (2) the
organizational culture and strategy
of the supplier, and (3) the
technological state of the supplier.
For each one of these three criteria,
the author presents several subcriteria.
In
another
study
Barbarosoglu and Yazgac (1997)
distinguish three principal criteria:
(1) the performance of the supplier,
(2) the technical capability and
financial strength of the supplier,
and (3) the quality system of the
supplier, and propose some subcriteria such as those discussed in
Ellram (1990). A list of vendor
selection criteria with reference to
different research work is given in
Table 1.

approach
(Ghodsypour
&
O'Brien, 1998; Weber & Current,
1993; Weber et al., 1991)
3. Probabilistic methods (Soukup,
1987)
4. Other methods: activity-based
cost approach (Roodhooft &
Konings, 1996), total cost of
ownership (Degraeve et al.,
2000), transaction cost theory
(Qu & Brocklehurst, 2003), fuzzy
logic approach (Bevilacqua &
Petroni, 2002), integrated AHP
and
linear
programming
(Ghodsypour & O'Brien, 1998),
visual
interactive
goal
programming Karpak, Kumcu, et

al.,
1999),
expert
system
approach (Vokurka et al., 1996;
Yigin et al., 2007), genetic
algorithm (Kubat & Yuce, 2006)
The problem of supplier selection
is not new. Before supply chain
management became a buzz
phrase, supplier selection was
discussed under the term vendor
selection. In addition to Weber et al.
(1991), Ghodsypour and O'Brien
(1998) also provide a short but
insightful overview of the supplier
selection research. Interested
readers should refer to these two
papers for more information. In this

Table 2

Summary of Supplier Selection Research (Author's Personal

Compilation)

Once the criteria are selected and

set, it becomes necessary to select
suitable approaches. Most of the
approaches as used in supplier
selection are quantitative in nature.
Weber et al. (1991) grouped the
quantitative
approaches
to
supplier selection into three
categories:
linear
weighting
models,
mathematical
programming
models,
and
statistical/probabilistic
approaches. However, to solve the
supplier
selection
problem,
existing methods can be broadly
classified into four principal
categories. A method, of course,
can be the combination of the
elementary methods presented
following.
1. Elimination methods (Crow et al.,
1980; Wright, 1975)
2. Optimization methods
a) Without constraints: AHP
(analytical hierarchic process)
approach (Golden et al., 1989)
b) Subject to a set of constraints:
mathematical
programming

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paper, supplier selection research is

classified into four major categories;
a few representative publications are
listed in Table 2.
In Table 2, one can see that quite a
few researchers treat supplier
selection as an optimization
problem, which requires the
formulation of an objective function.
Because not every supplier selection
criterion is quantitative, usually only
a few quantitative criteria are
included in the optimization
formulation.
Ghodsypour
and
O'Brien (1998) recognize the problem
and proposed an integrated method
using AHP and linear programming to
deal with both qualitative and
quantitative criteria.
Most of the supplier selection
literature focuses on the buyer's
perspective. Choi and Hartley (1996)
consider the influence of a buyer's
position in the supply chain on
supplier
selection.
Other
perspectives such as those of the
supplier, the researcher, and the
government are considered to a
lesser extent. The government
perspective, for instance, is often
seen just as a constraint in the
selection of suppliers. Munson and
Rosenblatt (1997) describe local
government rules and develop
models to select suppliers while
satisfying these rules. Thus, this
research is intended to fill up the gap
by bringing the suppliers' point of
view into consideration to make the
final decision more accurate and
worthy. Suppliers themselves will be
more serious when they become
aware that their performance also
depends on their activities. Earlier
research dealt with the selection of
criteria
affecting
suppliers'
performance and the use of those
criteria for developing models to
supplement the selection process. In
this research, a relationship among
the criteria has been made and
tested through the model. It
indicates which users to select based
on the strength of variables that
produce significant results.

Table 3

Indexes with Respective Criteria

Table 4

Different Forms Filled Up by Different Persons

perspective. Secondary objectives

are to identify different criteria,
grouping related criteria to form
three different indexes, establishing
relationships among the indexes
through regression, and using the
results of regression and index
values to choose the best supplier
from a list of candidates. To achieve
the objectives, both primary and
secondary data have been used. A
detailed literature survey was
conducted to identify the criteria and
available tools used for vendor
selection. On the basis of the
selected criteria, three different
indexes were formed and used for a
statistical model. The indexes with
the respective criteria are given in
Table 3.
A total of 16 criteria have been
considered in the study: seven
criteria are used for the vendor
performance index (VPI), five for the
vendor satisfaction index (VSI), and
the remaining four for the vendor
experience index (VEI). To collect
information, three different forms
have been used with different
persons being responsible for filling
in the forms to avoid response bias
(see Table 4).

A total of 38 suppliers have been

selected randomly from the list of
vendors for the study. Initially two
hypotheses were tested:
H1: Foreign suppliers are more
efficient and have a more
satisfactory performance than local
suppliers.
H2: Among local suppliers, more
experienced and satisfied ones have
better
performances
than
inexperienced and dissatisfied ones.
In line with the hypotheses as
identified, the researcher developed
three different forms with different
questions and criteria that ultimately
led to developing three different
indexes. These indexes have been
used for all 38 suppliers selected for
the study. SPSS 15.0 was used for
data manipulation and frequency;
test of association and regression
analysis were used as tools for
analysis.

Analysis and Findings

Criteria Considered
Types of vendor: This survey was
conducted on two categories of
vendors: local and foreign. Local
vendors are locally registered

Methodology
The primary objective of this paper
is to develop a supplier selection
methodology from an agent's

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Bangladeshi companies and foreign

vendors are those registered in
foreign country but operate in
Bangladesh through their local
branch office.
These results show that most of the
respondents included in the survey
were local vendors because they
were easy to get in touch with.
However, a number of foreign
vendors, around 26%, were also
included in the survey.
Product
knowledge:
Product
knowledge is an important factor for
better performance. About 32% of
the vendors considered in the study
have
satisfactory
product
knowledge. If the vendor's knowledge
of the product is poor, it will cause a
lot of trouble for the buyers in terms
of cost and quality.
Proactiveness in handling issues:
Buyers want suppliers to address
any problematic issues as quickly as
possible. Otherwise, buyers will lose
trust and confidence in the level of
commitment of the supplier. Around
30% of the respondents in the study
agree that suppliers should be
speedy enough to handle any query
of the buyer.
Completion timeliness: The time
required to ship the goods to the
buyer on receiving the order (lead
time) is an important yardstick to
evaluate vendor performance. The
lower the lead time is, the better the
performance is. This is an important
criterion to consider when placing an
order.
Satisfaction in dealing with
vendor staff: The interpersonal
qualities and professional skills of
the vendor staff carry a lot of
meaning when selecting vendors.
Some studies have considered this
behavioral criterion from different
perspectives (Buffa & Jackson, 1983;
Monczkaet al., 1981; Soukup, 1987)
like firm characteristics, vendor's
characteristics, value of the order,
risks attached in dealings etc.
Access to vendor: At a time of
emergency, the buyer needs an easy
and sometimes informal access to
the vendor just to reduce the lead
time. According to the researchers,
many factors affect this easy access
such as geographical location
(Ansari & Modarress, 1986; Burton,
1988; Dickson, 1966), service
(Bernard, 1989), communication

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system (Dickson, 1966), desire for

business (Soukup, 1987), and so on.
Vendor's ability to resolve problems:
Very often problems occur regarding
product specifications, delivery date,
payment terms, and so on. A
vendor's ability to solve such
problems is considered as an
important criterion of vendor
performance. Many researchers
consider problem solving important
about issues such as technical
capability (Hahn et al., 1986; Soukup,
1987), labor relations record
(Dickson, 1966; Monczka et al., 1981),
training aids (Dickson, 1966),
operational controls (Burton, 1988),
production facilities, and capacity
(Bragg & Hahn, 1989; Browning et al.,
1983).
Quality of product and services of
the vendor: This criterion requires
no clarification and justification.
Almost every researcher (almost
98%) considers this criterion an
important measure for evaluating
vendor performance. Buyers are
always concerned about quality
because of the huge pressure from
the end consumers.
Pricing: Similar to quality, pricing is
also a common criterion considered
in most of the studies (Ansari &
Modarress, 1986; Bender et al., 1985;
Bernard, 1989; Buffa & Jackson, 1983;
Cardozo & Cagley, 1971; Dickson,
1966). Vendors who charge the least
often ultimately get the order. This is
due to the need to minimize the cost
of production.
Overall satisfaction with the
vendor: Considering all perceived
criteria, the overall satisfaction level
of the buyer with reference to each
vendor under the study was
analyzed. This criterion is used to
test the response bias of the
respondents. The ultimate result
concludes that the respondents were
not biased when responding to the
questions.

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Overall satisfaction of vendor

with the buyer: In this study, the
researcher was privileged to be able
to include the vendors' perspective
in the ultimate selection process.
Vendor
performance
is
also
determined by billing, payment
procedure, behavior, time to receive
money, terms and conditions, and so
on. All of these criteria lead to the
development of a VSI that is used in
the model formulation.
Experience
of
the
vendor:
Experience in terms of years, number
of orders handled, number of
problems resolved, and annual
turnover are also important issues
that set the performance level. The
researcher also considers all of these
factors related to experiences to
develop the VEI used in the model.
Test of Association between
Different Variables
A test of association between
different variables has been made to
determine the important factors of
vendors'
performance.
A
contingency table is constructed to
test the degree of association
between
different
important
variables. Even though the statistical
significance of the association is
commonly measured by a chi-squire
statistic, a chi-square test could not
be used in this analysis because
almost all the elements in
contingency table are higher than 2 x
2 tables. Therefore, a contingency
coefficient was used here because it
can assess the strength of
association in a table of any size. The
following information shows a
contingency coefficient of some of
the important variables that were
copied from the SPSS output (crosstabulation is intentionally avoided).
In every case, the contingency
coefficient shows a high association

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between variables except in the last

one. Even though it is assumed that
there would be a strong relationship
between proactive in handling issues
and problem resolution, these
findings show a moderate relation
between
the
two
variables.
Therefore, it cannot be concluded
that those vendors who are
proactive are also good in problem
resolution. The ability to resolve
problems may also depend on a
vendor's amount of human and
capital resource and the experience
and expertise of the staff.
Regression Analysis
In line with the hypotheses to be
tested, a multiple regression analysis
with one dependent and three
independent
variables
was
conducted. The list of variables with
their operational definitions is given
in Table 5.
Considering the previous variables'
definitions
and
notations,
a
regression model is presented as
follows:
Y = 0 + 1 X1 + 2 X2 + 3 X3 +
.. (eq. 1)
Here, 0 is the intercept of the
regression line, 1, 2, 3 are the
coefficient of respective independent
variables, and represents the
random error with the mean zero.
Assumptions of the model: The
model is based on the assumption
that other variables that have
influences on the VPI, such as
economic
condition,
political
situation, labor productivity, and so
on, is constant. To use an ordinary
least-square
method,
further

assumptions were made regarding

some standard clauses that are
known as a classical group of
assumptions, as shown in the
following:
1. X 's fixed or X 's independent of 's.
2. 's random variables with mean = 0.
3. V( ) = [ - ( )]2 = 2
is constant.

VPI for foreign vendors (1) is 0.864

higher than for local vendors. If the
VEI increases by 1, on an average, the
VPI will increase by an additional
0.371 (2), and if the VSI increases by
1, on an average, the VPI will increase
by an additional 0.702 (3). Except
for VEI, the other two independent
variables have a strong relationship
with VPI.
Hypothesis Testing

4. 's are independent of each other.

5. There is no set of nonzero constant
C0 , C1 ,, C such that, C0 + C1 X1 +
CX = O. So, X1,, X are linearly
independent.
Regression model: Data was
collected on the 38 vendors through
different means like questionnaire
survey, interviews etc. as mentioned
in Table 4 and have been
manipulated and analyzed using the
SPSS program, resulting the following
regression equation:
Y = -1,45 = 0,864X1 + 0,371X2 +0,702X3
.. (eq. 2)
As per the model, the intercept of the
line (0 ) becomes - 1.45 means, and if
all the independent variables take
the value zero, the VPI will be -1.45. If
other things remain the same, the

In this section of regression analysis,

the methodology of hypothesis
testing is used to test a null
hypothesis to find out whether the
combination of all the variables is a
useful predictor of the dependent
variable. Other tests of hypothesis
for partial regression coefficients
(that is, H0: j = 0) are used to
determine if a specific independent
variable is conditionally important in
the multiple regression model. By
using the student's t statistics and pvalue it is concluded whether or not
a particular predictor variable is
conditionally significant, given the
other variables in the regression
model. The following two tables
provide the required value for the
hypothesis test and interval
estimation.

Table 5

Identification of Variables and Notations with Respective

Definitions

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Test of significance for the whole

regression: A null hypothesis is
tested to find out whether the
independent variables are useful
predictors of the dependent variable
aggregately.
Null Hypothesis Hn : 1 = 2 = 2 = 0
Alternative Hypothesis Ha : At least
one j = 0 (j = 1, 2, 3, 4, 5)
Decision Rule: Null hypothesis will
be rejected if Fcal > Ftab
Fcal = 5.88
Ftab = Fk,n-k-1, = F3,38-3-1,0.05 = F3,34-1,0.05
= 2.90

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Here, Fcal > Ftab and therefore the

null hypothesis that all coefficients
are zero against the alternative
hypothesis at a 5% level of
significance is rejected. The p-value
or the smallest significance level at
which the null hypothesis can be
rejected is 0.0023. So, the entire
variable as a whole can predict the
dependable variable and the
combined effect of these variables
do improve the model.
Test of hypothesis for each of the
coefficients: Four null hypotheses
have been tested for four different
variables and the result is given in
the following table. Among the four
hypotheses, two are not rejected
and two others are rejected.

4. The null hypothesis regarding 3

is rejected against the alternative
hypothesis at a 5% level of
significance; however, the p-value
or the smallest significance level
at which the null hypothesis can
be rejected is 0.03. This indicates
that the vendor's satisfaction
status is a statistically significant
variable for predicting vendor's
performance.
Confidence interval
Another way of determining
whether a specific independent
variable is important in the
multiple regression models is to
find the confidence interval. This

hypothesis that the coefficient is

0 is rejected. Based on this
confidence interval, it can be
concluded that the vendor's
experience is a statistically
significant predictor variable in
the multiple regression model.
4. The coefficient for X3 has a 95%
confidence interval 0.09< 3
<1.32. As the confidence interval
does not include 0, the two-tail
hypothesis that the coefficient is
0 is rejected. Based on this
confidence interval, it can be
concluded that the vendor's
satisfaction is a statistically
significant predictor variable in
the multiple regression model.
Analysis of Residual
The normality plot indicates an
approximate linear relationship,
thus, it is impossible to reject the
assumption of normally distributed
residuals (see Figure 1).
Findings

1. The null hypothesis regarding

intercept (0 ) is not rejected
against
the
alternative
hypothesis at a 5% level of
significance with the two-sided
test but the p-value or the lowest
level of significance at which the
null hypothesis can be rejected is
0.59.
2. The null hypothesis regarding 1
is not rejected against the
alternative hypothesis at a 5%
level of significance. Therefore,
the customer type is not a
statistically significant predictor
of the dependent variable (VPI);
however, the p-value or the
smallest significance level at
which the null hypothesis can be
rejected is 0.21.
3. The null hypothesis regarding 2
is rejected against the alternative
hypothesis at a 5% level of
significance; however, the p-value
or the smallest significance level
at which the null hypothesis can
be rejected is 0.04. This indicates
that the vendor's experience
status is a statistically significant
variable for predicting vendor's
performance.

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section estimates confidence

intervals at 95% for 0, 1 , 2 , 3 .
1. The 95% confidence interval for
the Y-intercept (0 ) ranges from 6.90 to 3.99. Here the 95%
confidence interval for 0
includes 0, and thus the two-tail
hypothesis that the intercept
coefficient is 0 cannot be
rejected.
Based
on
this
confidence interval, it can be
concluded that the intercept is
not a statistically significant
predictor in the multiple
regression model.
2. The coefficient for X1 has a 95%
confidence interval -0.51< 1
<2.24. Here the 95% confidence
interval for 1 includes 0, and
thus the two-tail hypothesis that
this coefficient is 0 cannot be
rejected.
Based
on
this
confidence interval, it can be
concluded that vendor type is
not a statistically significant
predictor variable in the multiple
regression model.
3. The coefficient for X2 has a 95%
confidence interval 0.05< 2
<0.79. As the confidence interval
does not include 0, the two-tail

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65

Hypothesis tests of the coefficients

of this model indicate that the
independent variables VEI and the
VSI are significant whereas another
independent variable, the dummy
variable, is not statistically
significant. The confidence interval
analysis also supports these
findings. Therefore, the findings
indicate
that
a
vendor's
performance is positively related
with a vendor's experience and
satisfaction. However, the findings
also indicate that there is no clear
distinction between local and
foreign vendors in terms of their
performance. Thus, it is imperative
for the supply chain managers of
the company to include suppliers'
experience and satisfaction as
important factors for the final
model. Supplier selection should be
based on the performance. And as
per the model, performance
becomes a function of experience
and satisfaction. Thus, every
prospective candidate for selection
should be required to complete the
two indexes, the VEI and the VSI.
Later on, the value should be put in
the model so that it ends up with a
value indicating the performance
level. The higher the value of
performance is, the more the

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Figure 1

Analysis of Residuals

vendor will be selected. The

company may also run the general
regression in regular interval to
test whether there are any
changes in variables and their
interrelationships and adjust the
model accordingly.

Limitations
This study is conducted from a
buyer's
perspective.
The
assumption is that the buyer has a
certain number of years of
experience with several suppliers.
Only then, the buyer may use such
a method for selecting the best
supplier from the list of suppliers.
The success of regression analysis
depends on the availability of data
covering a large period of time.
Again, the linear relationship
among the variables is assumed
here to make the methodology
simple. In this study, a total of 16
criteria were used to form three
different indexes and then a
relationship was made among these
three indexes through a regression
model.
Other than the two
independent variables included in
this model, there may be some
other variables that have been
omitted that are important
predictors of VPI. Omitting them
from this model causes speciation
bias, which may be the reason for
the poor explaining power of this
model. The calculation of VPI, VEI,
and VSI is somewhat controversial
because the dimensions of each
variable are chosen arbitrarily and

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An International Journal

the weights to each variable are

also given arbitrarily. Moreover,
there may be some other omitted
dimensions that are useful to
measure these variables. The
model may be an illustrative one
and any buyer may customize it by
including
different
criteria
depending on the situation. For this
specific buyer, it is informative that
vendor
performance
largely
depends on vendor experience and
satisfaction. Therefore, the buyer
should
give
more
weight
considering these two factors when
selecting the right vendor for the
maximum
performance.
One
positive element of the study is that
vendors' satisfaction is also
considered as an important
predictor for evaluating vendors'
performance, which is rare in the
vendor
selection
literature.
Inclusion of new variables,
formation of new indexes, and
explaining non-linearity are some
areas for future research opened by
this study.

Conclusion
Supplier selection essentially deals
with the selection of the right
supplier and the quota allocation
(Kaur et al., 2008), which also needs
to consider a variety of vendor
attributes such as price and quality
(Junyan et al., 2008). Thus, it
becomes a common issue in the
multi-criteria
decision-making
process of every company. With the
development
of
twenty-three

Vol. 11 - N2 - 2010

66

criteria by Dickson (1966) in the

1960s, further research extended
the list. Criteria on the basis of
what the vendor selection rests
ultimately depend on the company
and the product in perspective.
This paper, for example, deals with
the identification of the right
supplier from a dedicated list of
suppliers on the basis of their
experience and satisfaction with
the buyers. It is statistically proved
that suppliers' performance is
explained by experience and
satisfaction. This paper also rejects
the
hypothesis
that
the
performance of foreign suppliers is
better than local suppliers.
There is sufficient scope for
researchers to identify the subcriteria of the experience and
satisfaction; for example, the paper
proposes four sub-criteria for
experience and another five subcriteria for satisfaction. These are
ultimately considered as criteria for
defining the level of performance of
suppliers in the form of different
indexes and interrelationships.
Whatever may be the criteria
selected or methodology used, this
paper considers the suppliers'
perspective at the time of selection.
It proved that the performance
level of suppliers also depends on
the extent of their satisfaction with
the buyers. Some suppliers may
have different performance level
expectations for different buyers
due to the changes in satisfaction
across the buyers. Thus, it is also
imperative that to enjoy maximum
performance from the suppliers the
buyers should try to keep them
highly satisfied. It is important that
a company has a more fully
committed and dedicated supplier
base than its competitors, however
insignificant may be the savings, in
terms of cost of material, for
example.
The
personnel
responsible for the supplier
selection
will
benefit
from
incorporating this issue into their
current
vendor
selection
methodology.

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About the author

Nikhil Chandra Shil completed a BBA and an MBA from the Faculty of Business Studies, University of Dhaka, with a specialization in accounting and
information systems in 1999 and 2001, respectively. He is also an associate member of the Institute of Cost and Management Accountants of Bangladesh
(ICMAB) and the Association of Accounting Technicians, Bangladesh (AATB). He has co-authored a text on income tax titled Bangladesh Income Tax:
Theory and Practice, published by Shams Publications, Dhaka, Bangladesh that is used as official text in Bangladesh in a number of universities and
institutions. He has published scholarly articles in national and international journals. His research interests are in the areas of cost and management
accounting practices, financial accounting, value chain analysis, TQM, Six Sigma, supply chain management, customer satisfaction, 5S, ISO and other
quality related issues.

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