Use of Intelligent System for Supplier Selection

George Uyoga O. Rabar ABSTRACT

With the increase in business competitiveness and the view to make maximum use of the available resources, it has become important for a business to select the right supplier. Failure in this can lead to significant operational and financial consequences. This paper will discuss the application of intelligent decision support system using Decision Trees to quickly and accurately assist management in narrowing in on the correct supplier while taking into cognizant all the relevant qualification factors. Keywords: Decision Tree, Supplier Assessment, Intelligent Systems, Selection Criteria

BACKGROUND
Traditionally most businesses have been selecting suppliers based on the price and geographical locality. Ghodsypour and O'Brien(1998) agreed that cost, quality and service are the three main categories when deciding on supplier selection parameters. This revealed that the supplier selection process usually made on the basis of cost and quality has been recognized as a major decision making process. The advantage of this method is its simplicity and practicality. This selection method however does not provide information on the diversity of the performance of the supplier, nor can it indicate the business environment of the supplier. The supplier selection was also heavily influenced by human perception of the decision makers. Pearson and Ellram (1995) argue that quality, cost, current technology and design capabilities are the most important selection criteria. However, Briggs (1994) (cited in Choy & Lee 2003) states that joint development, culture, forward engineering, trust, supply chain management, quality and communication are the key requirements of a supplier partnership, apart from optimum cost. 1. INTRODUCTION In todays increasingly competitive global economy, business are continuously striving to seek and develop long term strategic relationships with suppliers and collaborate with them in non-core process in order to improve on organizational performance and generate long term competitive advantage. Leender et al. (1994) state that, influenced by core competency thinking, many companies have been attempting to reorganize their value chains so as to focus on their core activities in which they can achieve and maintain a long-term competitive advantage and outsource all other activities where they do not have world-class status. Yang, and Xu (2004) state the businesses have to now collaborate with suppliers as partners outside their organisational boundaries. The success of any business is a question of value chain and no more of individual organisations alone. In a recent study(Weber & Current 1993) it was stated, that supplier selection criteria is complicated further by the fact that some criteria are quantitative (price, quality, etc.), while others are qualitative (service, flexibility, etc.). The level of uncertainty inherent in the selection process and decisionmaking becomes difficult when the available information is also incomplete or imprecise.

2. PROBLEM STATEMENT
In this era of global markets and suppliers, businesses have to now consider several external factors and attributes in the selection of supplier. These factors and supplier attributes will need to be assessed and gauged within an acceptable timeframe, accuracy and fairness. Use of the external environment to reference, places a crucial role

3. SUPPLIER SELECTION
Bhutta & Huq (2002) stated that, in industrial buying research, explicit criteria such as quality, service, delivery and price have been found to dominate supplier selection. Implicit criteria such as reputation and location have also been found to be important but their relative importance is the subject of debate. Supplier qualification assessment is considered as the critical step of a supplier

selection process. Carr and Pearson (1999) observed that firms with a strategic approach to purchasing were more involved in supplier evaluation than other firms. It was also shown that supplier evaluation systems had a positive effect on the buying firms financial performance and may benefit various departments of the buying company. 3.1 Supplier Selection Criteria Objective Screen out supply applicants who do not meet the basic requirements to such a degree that any further detailed assessment of their applications would be unnecessary. Provide feedback information to an applicant about where it should improve in order to be qualified as a supplier. Establishing minimal capacities below which a vendor will not be considered Ensure that all the suppliers are gauged and judged like for like Ensure transparency and limit human biasness for future accountability 3.2 Suppliers Criteria Traditionally supplier selection has been price and quantity oriented. With time the criteria has changed to reflect business and competitive environment. Factors that should be considered should now include both quantitative (price, quality, etc.), while others are qualitative (service, flexibility, etc.). The selection criteria should also be in tandem with internal and external buying policies. Table 1: Supplier Selection Attributes and Criteria Attribute Relationship Test Customer base Customer Satisfaction Commercial Factors Legal Entity Current Products and Processes Geographical Location Production Facilities and Capacity Quality Accreditation Electronic Data Interchange Capability Ability to modify Product/ Service Technical Support After Sales Service Accreditation Durability Ergonomic quality Reliability Delivery Lead Time Development Speed Source : Adopted from Mohamed Garfamy 2004

Organization

Service

Quality

Cycle Time

4. DECISION TREE APPROACH To assist the management in the choice of supplier in a structured and unbiased fashion, the recommended intelligent solution is the decision tree approach using the ID3 algorithm. Advantages of Decision Trees Leaning They generate easily understandable rules as they mimic natural language Classification of new instances is done using already exiting et of rules therefore not requiring much computation The data can be either discrete or categorical variables.

They also provide a clear indication of which fields or attributes are most important for prediction or classification.

4.1 Decision Tree Approach Steps Step 1: Predefine the classes for the selection criteria The best classify will be the attribute that need to be tested at each decision node. The goal is to select the attribute that is most useful for classifying examples. The supplier selection attributes are Relationship, Organization, Service, Quality and Cycle Time. Step 2: Select the output value of the selection class The will all have the score of either good or poor as values Step 3: Construct a training set from already existing data or by consensus Table 2 . Training set for the Target concept of Select Supplier No 1 2 3 4 5 6 7 8 9 10 Relationship Good Good Good Good Good Poor Poor Poor Poor Poor Organization Good Good Good Good Poor Poor Poor Poor Poor Poor Service Good Good Good Poor Poor Poor Good Good Good Poor Quality Good Good Poor Poor Good Good Poor Poor Good Good Cycle Time Good Poor Good Poor Good Poor Good Poor Good Poor Result Pass Pass Pass Pass Fail Fail Fail Fail Pass Fail

Step 4: Rank the attributes Information gain is the statistical property used to rank the attributed. This measure is used to select among the candidate attributes at each step while growing the tree. Entropy is the measure used to define information gain. Information gain is actually the reduction in entropy Entropy (S) =(4+, 6-) = -(4/10)log2(4/10) (6/10)log2(6/10) = 0.97 Gain ( S, Relationship) = Entropy(S) 3/10Entropy(Rel.Good)- 1/10 Entropy(Rel.Poor) = 0.111 Gain ( S , Organisation) = Entropy(S) 4/10Entropy(Org.Good)- 1/10 Entropy(Org.Poor) = 0.256 Gain ( S , Service) = Entropy(S) 4/10Entropy(ServiceGood)- 1/10 Entropy(ServicePoor) = 0.124 Gain ( S , Quality) = Entropy(S) 4/10Entropy(QualityGood)- 1/10 Entropy(QualityPoor) = 0.046 Gain ( S , C.Time) = Entropy(S) 4/10Entropy(C.TineGood)- 1/10 Entropy(C.TimePoor) = 0.126 Organisation has the highest gain so will be the root in the decision tree Step 5. Grow the tree Step 6: Construct the rule set The decision tree approach has been used to construct the following rule set
If Relationship = Good and Organization = Good and Service Good and Quality = Good and Cycle Time = Good then Shortlist Supplier or if Relationship = Good and Organization = Good and Service = Good and Quality = Good and Cycle Time = Poor then Shortlist Supplier or if Relationship = Good and Organization = Good and Service = Good and Quality = Poor and Cycle Time = Good then Shortlist Supplier or if Relationship = Poor and Organization = Poor and Service = Good and Quality = Good and Cycle Time = Good then Shortlist Supplier

Else Disqualify

Step 7: Eliminate unnecessary rule antecedents to simplify the rules. To simplify a rule, eliminate antecedents that have no effect on the conclusion reached by the rule. Attempt to replace those rules that share the most common consequent by a default rule that is triggered when no other rule is triggered. Step 8; Construct contingency tables Construct a contingency table for each rule consisting of more than one antecedent. Rules with only one antecedent cannot be further simplified, so we only consider those with two or more. Step 7: Test for independence A conclusion's independence from an antecedent is verified using a test for independency, which is a chi-square test if the expected cell frequencies are greater than 10. Yates' Correction for Continuity when the expected frequencies are between 5 and 10. Fisher's Exact Test for expected frequencies less than 5. In the event of a tie, use some heuristic tie breaker to choose a default rule. 4.2 Issues of Decision Tree Method It is less appropriate for estimation tasks where the goal is to predict the value of a continuous attribute. It is prone to errors in classification problems with many classes and where there is a relatively small number of training examples. Determining how deep to grow the decision tree Handling attributes with differing costs The process of growing a decision tree is computationally expensive. At each node, each candidate splitting field must be sorted before its best split can be found. Pruning algorithms can also be expensive since many candidate sub-trees must be formed and compared. Overfitting the data 4.3 Support Needed to Implement System Adequate infrastructure Senior management sponsorship and commitment Realistic scope and expectations User learning training Regular and update from external environment Complete keying of all fields Accurate and correct data input Available human and financial resources

5. CONCLUSIONS
Machine learning using the Decision tree reasoning approach is used to assess the supplier attributes . Their applications to supplier assessments both quantitative and qualitative are included and need to be treated both simultaneously and rationally. Using conventional decision methods, one may need to provide precise number for each assessment, which could be difficult from time to time.. Traditional methods may only be able to generate average numbers, where bad performances may be averaged out by good performance thereby missing opportunities to identify areas for improvement, which is indeed the very purpose of conducting such assessments in most cases.

6. RECCOMENDATIONS
The solution will provide easy to use functions to build assessment models, organise and manage knowledge, conduct analysis and generate results. Enhancements to improve the system would be availability of automatic update or access to a global database of all suppliers therefore reducing he amount of data input by the assessor

Suppliers should also have access to the online database to key in and verify and update the information held about their attributes.

REFERENCES
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