The FMCG market largely reflects the many opportunities of the globalized world. The competition is sharp and the ultimate goal is an optimised supply chain that fits with the company's unique product lines. Therefore, many suppliers are being tested on the way to the target. This trial-and-error methodology largely influences the supplier selection process in FMCG industries, but also in companies with strong growth. Contrary to popular belief, the student's thesis shows that this process can be optimised using a new mathematical model.
The model means that both supplier selection becomes more qualitative and the working time around supplier selection will be reduced. The mathematics in the model hierarchically structures a company's preferences for a future supplier as well as the company's supply chain strategy and risk management strategy. This means that it is not necessarily the provider with the best performance that is the best choice, but the one, that is most appropriate for the company's strategies.
The model, Strategically Enhanced Analytical Hierarchy Process (SEAHP), has been empirically tested in collaboration with a large Danish FMCG company. Using SEAHP, the company selected a successful supplier, which is estimated to deliver savings up to 217,230 DKK a year.
Together with PA Consulting, a number of interviews were conducted to test the model. This revealed that the model is efficient in established markets with high transparency, as it competes on price and quality between suppliers. The SEAHP model saves working hours by using all the supplier information available to identify suppliers and rank them in order of suitability. The organisation is then able to review the list of suppliers and discuss the best option.
The SEAHP model's mathematics is an extension of the Analytic Hierarchy Model (AHP) formulated by Thomas L. Saaty. SEAHP includes risk management in the supplier selection process to ensure that a supplier works with the company's desired supply chain structure in relation to risk management.
The first step towards incorporating risk is to measure the probability and effect of the supply chain risks that must be taken into account when choosing supply chain strategy. In this way, you will find a strategy based on the risk scenarios you face. Supply chain strategies naturally lead to more defined risk strategies.. In the SEAHP model risk strategies are given a multiplier value based on the supplier selection criteria. The weighting of this value has been found in cooperation with PA Consulting.
Through the analysis of a larger Danish company, based on the formulation and implementation of the model, it is estimated that the model saves 300 hours in the supply chain department for the company. It is also estimated to deliver20,800 DKK in profit after two years of implementation. In addition, it’s believed the strategic pairing of supplier selection and strategy will bring a number of benefits to organisations.
In cooperation with PA Consulting
The thesis was written in collaboration with PA Consulting through the PA Master Thesis Mentoring Program. Professional sparring was given by Steen A. Rasmussen, who is a sourcing and procurement expert in Operational Excellence.