Eva Labro

A review of methods supporting supplier selection

this paper we present a review of decision methods reported in the literature for supporting the supplier selection process. The review is based on an extensive search in the academic literature. We position the contributions in a framework that takes the diversity of procurement situations in terms of complexity and importance into account and covers all phases in the supplier selection process from initial problem definition, over the formulation of criteria, the qualification of potential suppliers, to the final choice among the qualified suppliers. Moreover, we propose decision methods and techniques that previously have not been suggested in a purchasing context. The proposed methods specifically accommodate for buying situations for which few or no decision models were published so far. This paper extends previous reviews by Weber et al. (Eur. J. Oper. Res. 50 (1991) 2), Holt (Int. J. Project Mange. 16 (1998) 153) and Degraeve et al. (Eur. J. Oper. Res. 125 (1) (2000a) 34) in that it classifies the models in a framework developed by De Boer (Ph. D. Thesis, University of Twente, Enschede, The Netherlands, 1998) which recognises more steps in the buying process than only the final among qualified suppliers and accommodates for the diversity of procurement situations.

An evaluation of vendor selection models from a total cost of ownership perspective

Abstract Many different vendor selection models have been published in the purchasing literature. However there has been no systematic approach to compare the relative efficiency of the systems. In this paper we propose to use the concept of Total Cost of Ownership as a basis for comparing vendor selection models. We illustrate the comparison with a real life data set of the purchasing problem of ball bearings at Cockerill Sambre, a Belgian multinational company in the steel industry. From a Total Cost of Ownership perspective mathematical programming models outperform rating models and multiple item models generate better results than single item models for this specific case study.

On bringing more action into management accounting research: process considerations based on two constructive case studies

About a decade ago, the constructive research approach (CRA) was proposed by Kasanen et al. (1993) as a specific opportunity for management accounting researchers to engage in solving problems relevant to managers. While the advocates of the CRA have argued in favour of its theoretical contribution potential and have shown that it satisfies the requirements of valid applied research, only very few studies using this particular approach have been published in major research journals. Our objective is to discuss the CRA methodology, both from a descriptive and from a prescriptive or normative perspective. We examine the research processes in two very different CRA studies, Degraeve et al. (2000b) and Tuomela (2000a), using the seven-step model suggested by Lukka (2000). We give practical exemplary methodological guidance for other researchers who wish to try out the CRA or obtain a better understanding of this methodology. While so doing, we also show that the CRA can provide researchers with interesting results obtained in a reliable and valid manner. In this way, we enhance the legitimacy of the CRA.

Total cost of ownership purchasing of a service: The case of airline selection at Alcatel Bell

Abstract The multiple objective problem of purchasing for business falls into two broad categories: the purchasing of components for manufacturing and the purchasing of services. Several supplier selection models have been suggested in the literature for the purchasing of production-related components. To our knowledge, no supplier selection model for the purchasing of services has been published. In this paper we elaborate on a mathematical programming model that selects suppliers of a multiple item service and simultaneously determines market shares of the suppliers selected. The methodology is based on the collection of total cost of ownership (TCO) information, quantifying all the costs associated with the purchasing process throughout the entire value chain of the firm. We apply this methodology to the real life case study of selecting airlines for 56 destinations at Alcatel Bell and have obtained TCO savings of 19.5%.

Constructing a Total Cost of Ownership supplier selection methodology based on Activity-Based Costing and mathematical programming

Abstract In this paper we elaborate on a Total Cost of Ownership (TCO) supplier selection methodology that we have constructed using real life case studies of three different industrial components groups in a firm. These case studies are presented in this article. Analysing the value chain of the firm, data on the costs generated by the purchasing policy and on supplier performance are collected using Activity-Based Costing (ABC). Since a spreadsheet cannot encompass all these costs, let alone optimise the supplier selection and inventory management policy, a mathematical programming model is used. For a specific component group the combination of suppliers is selected that minimises the TCO. TCO takes into account all costs that the purchase and the subsequent use of a component entail in the entire value chain of the company. The TCO approach goes beyond minimising purchase price and studies all costs that occur during the entire life cycle of the item in the organisation. Possible savings of between 6% and 14% of the total cost of ownership of the current purchasing policy are obtained for the three cases. ABC is not an optimisation tool as such, but provides important accurate input to the optimising mathematical program, whereas the Operations Research literature usually only distinguishes between variable and fixed costs. We show that the integration of both delivers better results in the setting we have studied.

The Cost Effects of Component Commonality: A Literature Review Through a Management-Accounting Lens

In this paper I review the component commonality literature through a management-accounting lens, focusing on the cost effects of an increase in the use of the same version of a component across multiple products. The bulk of this literature is of a theoretical nature, for example, analytical models, programming models, or conjectures based on casual observations of practice. Some of this literature purports, especially in introductions to the topic, that cost generally decreases with increasing commonality. However, based on a review of the theoretical literature using an activity-based costing framework and distinguishing between cost-driver and cost-rate effects, I conclude that the cost picture is more subtle. In other words, it is too early to make any general statement about the effect of increasing commonality on total costs. Moving to the limited empirical literature on the topic, consisting of case studies (sometimes combined with simulation) and empirical research on larger data sets, the conclusion that there is even more room for future research becomes evident.

Is a focus on collaborative product development warranted from a cost commitment perspective

Purpose – Supplier involvement in cost reduction efforts has been concentrated mainly in the product development phase of the life cycle of the product. Often this concentration on the early phases of the product life cycle is defended with referral to the 80/20 rule that says that 80 per cent of the manufacturing costs are determined or committed during product design and development. The purpose of this paper is to look for empirical evidence that supports this rule and discuss the limited literature on joint buyer/supplier cost reduction programmes beyond the product development stage of the product life cycle.Design/methodology/approach – An extensive literature survey on both the cost commitment rule and collaborative cost reduction programmes beyond the product development stage was conducted.Findings – It was found that empirical evidence in the literature for the 80/20 rule on cost commitment in product design is only anecdotal. Even more surprisingly, compared to the literature on cost reduction ...

Management by the Numbers: A Formal Approach to Deriving Informational and Distributional Properties of “Un-managed” Earnings

We explore the theoretical relation between earnings and market returns as well as the properties of earnings frequency distributions under the assumption that managers use unbiased accounting information to sequentially decide on real options their firms have and report generated earnings truthfully, with the market pricing the firm based on those reported earnings. We generate benchmarks against which empirically observed earnings‐returns relations and aggregate earnings distributions can be evaluated. This parsimonious model shows a coherent set of results: reported losses are less persistent than reported gains, decision making diminishes the S‐shaped market response to earnings and earnings relate to returns asymmetrically in the way documented by Basu [1997]. Furthermore, the implied frequency distribution of aggregate earnings is neither symmetric nor necessarily single‐peaked. Instead, it may exhibit a kink at zero and look similar to the plots reported by Burgstahler and Dichev [1997]. However, within our model, none of these phenomena are due to reporting noise, bias, or some undesirable strategic managerial behavior. They are the natural consequences of using past earnings as the basis for value increasing managerial decision making that in turn generates the future earnings on which future decisions will be based.

Management Accounting Information Properties and Operations Management

This monograph introduces Management Accounting to Operations Management researchers and illustrates how unleashing this accounting information perspective into the world of Operations Management can improve our understanding of topics of interest to Operations Management researchers and practitioners. We start by offering a crash course in accounting terminology and then introduce the three important properties of accounting information (i.e. imperfect nature, endogenously determined, and multi-purpose). Next, we address four different areas in Operations Management: capacity acquisition and allocation, inventory management, production scheduling, and product design. For each of these areas, we describe the approaches used in Operations Management and Management Accounting and spend considerable attention on how using an accounting approach can spur progress in Operations Management.

Obtaining Informationally Consistent Decisions When Computing Costs with Limited Information

We demonstrate the need to view in a dynamic context any decision based on limited information. We focus on the use of product costs in selecting the product portfolio. We show how ex post data regarding the actual costs from implementing the decision leads to updating of product cost estimates and potentially trigger a revision of the initial decision. We model this updating process as a discrete dynamical system (DDS). We define a decision as informationally consistent if it is a fixed-point solution to the DDS. We employ numerical analysis to characterize the existence and properties of such solutions. We find that fixed points are rare, but that simple heuristics find them often and quickly. We demonstrate the usefulness and robustness of our methodology by examining the interaction of limited information with multiple decision rules (heuristics) and problem features (size of product portfolio, profitability of product markets). We discuss implications for research on cost systems.