A meta-model for choosing a supplier selection technique within an EPC company

Journal of Purchasing & Supply Management 19 (2013) 5–15

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Articles

A meta-model for choosing a supplier selection technique within an EPC company Donato Masi 1, Guido J.L. Micheli n, Enrico Cagno 2 Politecnico di Milano, Department of Management, Economics and Industrial Engineering, Via Lambruschini, 4/b, 20156 Milano, Italy

a r t i c l e i n f o

abstract

Article history: Received 12 April 2011 Received in revised form 22 June 2012 Accepted 21 July 2012 Available online 2 September 2012

The literature proposes numerous supplier selection techniques; these, however, are not all equally useful in different buying situations. A description of the link between the buying situation and the most appropriate selection technique is lacking. The investigation into the buying process within an engineering, procurement and construction (EPC) environment shows how buying situations are distinctly heterogeneous and render necessary the use of varied supplier selection techniques. The proposed meta-model allows for the choice of the most appropriate supplier selection technique in relation to a specific buying situation within an EPC environment. In order to develop the meta-model, it was necessary, above all, to introduce a ranking for the various buying situations. In order to accomplish this, the contextual factors that condition the selection criteria within EPCs had to be singled out. These contextual factors were then grouped under two macro-factors: the degree of difficulty in managing the purchase and the impact of the purchase on the project. The two identified macro-factors thus allowed for the definition of a two-dimensional space in which four different buying situations were identified. For each of these, the current supplier selection techniques were analyzed, as well as the links characterizing the practice within the industry and the scope for improvement. Based on these observations and on the knowledge of existing techniques, it is now possible to determine the optimum selection technique. & 2012 Elsevier Ltd. All rights reserved.

Keywords: Supplier selection EPC companies Optimal supplier selection techniques

1. Introduction EPC (engineering, procurement and construction) companies deal with the production of complex industrial goods such as industrial plants, processing plants and large infrastructures. Procurement plays a decisive role in competitiveness in this area of activity: the average volume of acquisitions represents a considerable percentage of billing and has remained substantially unchanged in past years, reaching peaks of 97% (Cagno et al., 2006). During recent years, furthermore, we have witnessed increased competition on the outlet markets as well as a request for better services and higher quality from clients. The purchasing department buying decisions have thus achieved an ever higher degree of importance necessitating a systematic and formal approach to the various activities that characterize procurement, and in particular supplier selection (De Boer et al., 2001). Given the importance of the supplier selection process, numerous

n Corresponding author. Tel.: þ39 02 2399 4056/þ 39 3402293229; fax: þ 39 02 2399 4067. E-mail addresses: [email protected] (D. Masi), [email protected] (G.J.L. Micheli), [email protected] (E. Cagno). 1 Tel.: þ39 02 2399 3933/ þ39 346 5394050; fax: þ39 02 2399 4083. 2 Tel.: þ39 02 2399 4054; fax: þ39 02 2399 4067.

1478-4092/$ - see front matter & 2012 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.pursup.2012.07.002

techniques have been described in the literature allowing for the selection of the best supplier according to diverse criteria; these techniques are more or less appropriate depending on the buying situation. However, the appropriateness of the different supplier selection techniques in different purchasing situations has not been explored adequately. Moreover, the literature concerning procurement and in particular supplier selection is prescriptive rather than descriptive; indeed, despite numerous techniques having been proposed and tested for the selection of suppliers, the ordinary way of selecting suppliers and the issues characterizing these activities in the industrial practice have not been examined satisfactorily. In light of the above, this paper aims to propose the optimal supplier selection technique for the different purchasing situations characterizing an EPC company. In order to attain this result, six EPC companies were analyzed through a multiple-case study; as such, the identification of the optimal technique is the result of the comparative analysis of the suggestions from the literature and the needs underlined by practitioners. The paper is structured as follows: paragraph 2 describes the theoretical and empirical background of the study; paragraph 3 presents the purpose of the research; paragraph 4 explains the research methodology; paragraphs 5 and 6 describe the results; and finally, in paragraph 7, conclusions are reached.

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2. Background of the problem Supplier selection is a theoretical and applied research area that continually receives significant attention in the literature from both academics and professionals. Several researchers have emphasized the importance of the supplier selection process (Banker and Khosla, 1995; Burton, 1988; Dobler et al., 1990) and the benefits deriving from a systematic and formal approach to supplier selection (Vonderembse and Tracey, 1999; Weber et al., 1991). Consequently, several studies in the literature deal with supplier selection. It is possible to identify two main groups: on one hand, studies proposing supplier selection techniques, and on the other, studies proposing portfolio approaches that provide managerial indications for different purchasing situations. Supplier selection techniques have different degrees of accuracy and complexity, since a higher level of accuracy generally implies greater complexity of the technique. Considering the most often-cited techniques, it is possible to identify three different groups: the first group includes supplier selection techniques characterized by low accuracy and low complexity, the second group includes supplier selection techniques characterized by medium accuracy and medium complexity and the third group includes supplier selection techniques characterized by high accuracy and high complexity. The techniques included in the first group are the Scoring Model (SM) and the Categorical Methods (CMs). A simple SM combines weights and ratings on different criteria and selects the supplier with the highest overall rating; CMs sort suppliers into different categories, after having rated their performance through ‘‘positive’’, ‘‘neutral’’ or ‘‘negative’’ judgements. Ratings are based on historical data and the buyer’s experience (De Boer et al., 2001). The techniques included in the second group are the Analytic Hierarchy (AHP) Process, the Analytic Network Process (ANP) and Data Envelopment Analysis (DEA). The Analytic Hierarchy Process (AHP) selects suppliers through qualitative statements regarding the relative importance of one criterion versus another criterion and similarly regarding the relative preference for one supplier versus another regarding a criterion. This technique was introduced by Saaty (1977) and has been applied to supplier selection by several authors (Barbarosoglu and Yazgac, 1997; Masella and Rangone, 2000; Narasimhan, 1983; Nydick and Hill, 1992). There is also a variety of extensions of the AHP approach, which can increase its usefulness for decision makers (Akarte et al., 2001; Chan, 2003; Chan and Chan, 2004; Chan et al., 2007; Hou and Su, 2007; Liu and Hai, 2005; Muralidharan et al., 2002). The ANP is a more sophisticated version of the AHP that includes a number of interdependent relationships among the various factors and evaluation criteria that do not exist in the AHP. It was first applied to evaluate and select the best supplier by Sarkis and Talluri (2002), along with similar other approaches that use the same core procedure (Bayazit, 2006; Gencer and Gurpinar, 2007). DEA defines the efficiency of a supplier as the ratio of the weighted sum of its performance to the weighted sum of its costs; suppliers are thus classified into efficient and inefficient ones. The technique was first developed by Charnes et al. (1978) and applied to supplier selection firstly by Weber and his colleagues (Weber and Desai, 1996; Weber et al., 1998) and then by their researchers (Liu et al., 2000; Narasimhan et al., 2001; Papagapiou et al., 1997; Ross et al., 2006; Saen, 2007; Talluri and Narasimhan, 2004; Talluri et al., 2006; Wu et al., 2007). In the third group, it is possible to include techniques such as the Total Cost of Ownership (TCO), the Fuzzy Set Theory (FST) and the Mathematical Programming (MP) models. The TCO is the sum of pre-transaction, transaction and post-transaction costs;

the related technique selects the supplier proposing the lowest TCO (Ellram, 1993, 1994, 1995). The TCO is suited to those situations in which cost is accorded high priority and detailed cost data are available to make comparisons. Some of the benefits of adopting a TCO approach are that it provides a clear quantitative evaluation and selection rule, it helps in identifying costs that otherwise may remain hidden and it changes the focus from the purchase cost to the total cost; the most relevant disadvantages are that the TCO is complex, requires extensive tracking and maintenance of cost data and is often situation-specific (Bhutta and Huq, 2002). There are other selection approaches that are closely aligned with the TCO, such as life-cycle costing (Handfield and Pannesi, 1994), cost-based supplier performance evaluation (Monczka and Trecha, 1988) and the risk efficiency-based supplier selection approach (Micheli, 2008; Micheli et al., 2009). However, the TCO remains the methodology that has received the most support in the literature and in practice. The FST provides a mathematical framework in which vague conceptual phenomena can be precisely and rigorously studied. Several authors have proposed systematic approaches to solve the supplier selection problem under a fuzzy environment (Chen et al., 2006; FlorezLopez, 2007; Sarkar and Mohapatra, 2006). MP models formulate the supplier selection problem in terms of a mathematical objective function that subsequently needs to be maximized or minimized. Following the classification introduced by Ho et al. (2010), MP models include Linear Programming (Ng, 2008; Talluri and Narasimhan, 2003, 2005), Integer Linear Programming (Hong et al., 2005; Talluri, 2002), Integer Non-Linear Programming (Ghodsypour, O’Brien, 2001), Goal Programming (Karpak et al., 2001) and Multi-Objective Programming (Narasimhan et al., 2006). Fig. 1 summarizes the features of the techniques in terms of complexity and accuracy. The second main group of studies dealing with supplier selection is represented by portfolio models. Portfolio models provide differentiated strategic actions for heterogeneous categories of objects or subjects (Turnbull, 1990). Kraljic (1983) introduced the first portfolio approach for use in purchasing and supply management. He suggested a matrix that classifies the purchased items into four categories on the basis of their profit impact and supply risk (Fig. 2). Some authors have used Kraljic’s basic ideas for the development of similar models (Bensaou, 1999; Elliott-Shircore and Steele, 1985; Gelderman, 2000; Lilliecreutz and Ydreskog, 2001; Olsen and Ellram, 1997; Syson, 1992; Van Weele, 1994). All these purchasing portfolio models aim to develop and implement differentiated purchasing strategies. Other authors have proposed some different specific applications, for instance supplier involvement in product development (Wynstra et al., 1999), supplier development (Handfield et al., ¨ 2000), specification processes (Nellore and Soderquist, 2000) and inter-organizational competence development situations (Møller et al., 2000). These models analyze relevant situation-related factors

Fig. 1. Characteristics of supplier selection techniques (see also Smytka and Clemens (1993)).

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adequately categorized, it seems to be difficult to establish a common rule for the choice of the best supplier. The presented approaches seem to be adequate for a manufacturing context, characterized by a major repetition of purchased items. Third, in some cases, the buyers have to face dynamic and complex markets, in which it is possible to ignore relevant risk factors characterizing the suppliers. Fourth, the final customer often intervenes in the selection, and a formalized selection technique is a useful tool in the negotiation and drafting of the contract. Indeed, EPC companies’ customers are generally equipped with high contracting power and use this power to intervene in the selection of vendors, often requiring the selection of suppliers that are privileged for political reasons.

and provide a useful indication that could be used in conjunction with the selection technique. Commenting on the literature dealing with supplier selection, it is possible to highlight two main gaps. First, the ordinary method for selecting suppliers and the issues characterizing this activity in industrial practice have not been adequately explored. Such a study is important in order to verify the applicability of the techniques proposed in the literature to a broad range of situations. Second, an analysis of the most appropriate supplier selection techniques in a set of typical purchasing situations is missing from the literature. Such an analysis is important if we consider that companies do not manage unique purchasing situations, but often have to deal with a set of different purchasing situations that have to be managed with different instruments. These gaps are particularly relevant for EPC companies. Several factors underline the need for an analysis of the most appropriate supplier selection techniques in the purchasing situations arising in ordinary practice. First, the presence of different purchasing situations and of different categories of items is the rule. The definition of these categories is not immediate and cannot be made solely on the basis of the cost, as suggested for instance in ABC analysis. Second, despite the relevance of procurement and the presence of different categories of items, formalized selection techniques are not used. The selection is often performed in a qualitative way and the only formalized aspect seems to be the sequence of the stages that the buyer must follow. Indeed, because of the presence of several items that have not been

3. Objectives On the basis of the above, this paper aims to propose the optimal supplier selection technique for the different purchasing situations characterizing an EPC company. In order to achieve this main objective, the requirements and needs of practitioners as well as the suggestions of the literature have been analyzed. The research questions for the study are the following: – How can the purchasing situations within the EPC industry be characterized? – How is supplier selection currently performed in these purchasing situations? – What is the optimal way to select suppliers in these different purchasing situations? The adjective ‘‘optimal’’ means that the technique is able to maximize the effectiveness of the selection while respecting, at the same time, the amount of human, technological and economic resources that characterize the procurement function within an EPC company.

4. Research methodology In order to answer the research questions, a multiple-case study has been performed, in light of the suggestions of Yin (2009), who recommended the use of case studies when the research focusses mainly on ‘‘how’’ and ‘‘why’’ questions. The preliminary interviews showed how the different purchasing situations could be characterized through a limited number of factors affecting the supplier selection process. Consequently, the core set of questions asked was: How is supplier selection managed in your company? Can you describe the factors conditioning the supplier selection process? How does your purchasing behaviour vary with different levels of these factors? The respondents were procurement officers from six EPC companies

Fig. 2. Krajilic’s portfolio matrix (Kraljic, 1983).

Table 1 Industrial sector and revenue of the companies under scrutiny. Industrial sector Environmental and desalinization Company Company Company Company Company Company

1 2 3 4 5 6

Billing [Mh] Electric power

Oil & gas

Petrochemical & chemical

Iron and steel works

Telecommunications

Transport

Other

X X X X X

X X

X X X

X

X

X X

X

X X X

10,100 20 461 1673 (Group) 16,908 (Group) 23,000 (Group)

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that had been successful on the market during recent decades. The sectors and the sizes of the six companies are shown in Table 1. Each interview lasted between 60 and 90 minutes, and was conducted within the interviewee’s office. The interviews were tape recorded, with the agreement of the participants. In some situations, the interview location was noisy, in which case the interviews were also recorded by hand. All the recorded material was fully transcribed, verbatim. The transcribed interviews were then analyzed using the structured method outlined by Miles and Huberman (1994) involving a three-stage approach consisting of data reduction, data exploration, and conclusion drawing and verification. The first phase involved the physical organization of the data, subdividing them into categorical collections corresponding to the interview questions. The second phase involved searching for emerging themes and patterns within and between themes. The third step consisted of drawing conclusions, achieved by constructing explanations based on the combinations of concepts that emerged, and interpretations of the data. The conclusion drawing was an iterative process, involving continual verification of the conclusions by checking back among the data and by comparing the results with the existing knowledge in the field. First, the factors that condition the supplier selection process within EPC companies were singled out: these factors are described in subparagraph 5.1. The factors were grouped into two macro-factors on the basis of the implications they have for the supplier selection process; this phase is described in subparagraph 5.2. The two identified macro-factors allowed for the definition of a two-dimensional space in which four different buying situations were singled out, each of them characterized by a different supplier selection process; this phase is described in subparagraph 5.3. Once the four buying situations had been singled out, the analysis aimed to identify the optimal selection technique by following three different steps for each of the identified buying situations. First, the features of the purchasing situation and the features of the current selection technique were analyzed. Second, the features of the optimal selection technique were summarized on the basis of the results of the previous step. Third, the features of the optimal selection technique were matched with the features of the existing techniques; the existing technique that maximizes the number of optimal features was chosen as optimum. The identification of the optimal selection technique is detailed in paragraph 6. The steps of the research are summarized in Table 2. The model used in this study lies within the positivist tradition (Behling, 1980; Cook et al., 1979), in which four criteria are commonly used to assess the rigour of field research: internal validity, construct validity, external validity and reliability (Campbell, 1975; Campbell et al., 1963). These criteria have been adapted for use in case studies by Yin (2009) and others (Campbell et al., 1963). In order to enhance the internal validity, three measures were adopted (Gibbert et al., 2008). First, a clear research framework was formulated, as shown in Table 2. Second, the empirical findings were compared among them. Third, theory triangulation was used to verify the findings; indeed, some of the identified factors had already been mentioned in the literature. In order to ensure construct validity, a chain of evidence was established; this chain of evidence is described for the different purchasing situations. With respect to external validity (or generalizability), it should be considered that multiple-case studies do not allow for statistical generalization; however, they allow for analytical generalization (Gibbert et al., 2008). The number of cases seems to be adequate, considering that Eisenhardt (1989) suggested that a cross-case analysis involving four to ten case studies may provide a good basis for analytical generalization.

Table 2 Research steps. Step 1 Ranking of buying situations

Step 2 Definition of the optimum selection technique for the various buying situations

Gathering of factors into n-macro-factors Definition of an n-dimensional space Singling out the relevant buying situations in relation to the selection modes Singling out the current supplier selection modes for the various categories of goods Singling out the characterizing links within industrial practice Singling out the scope for improvement Singling out the optimum selection technique

Reliability was guaranteed through transparency and replication. Transparency was ensured through documentation of the research procedures. Replication was accomplished by putting together a case study database, which includes the case study documents and the narratives collected during the study.

5. Step 1: ranking of buying situations 5.1. Identifying the conditioning factors of the supplier selection process within EPC companies The buying function operators in the surveyed companies revealed a series of factors that condition the supplier selection process. These factors are product critical points, market critical points, complexity of the contractual management of the supply, legal implications, economic factors, risk factors, strategic relevance of the purchase and plant quality dependence on the items bought. The factors are described below, evidencing the subfactors that make them up and the manner in which the latter influence the supplier selection process. We strived to identify independent factors; however, the factors are partially interconnected, in certain cases in a rather strong fashion. It is also necessary to evidence how the indicated sub-factors are not intended to describe, in an exhaustive manner, the factors to which they have been aggregated; among the numerous subfactors that contribute to the definition of one main factor, we singled out those that directly influence the supplier selection process on the basis of the indications that emerged during the interviews. 5.1.1. Product critical points The critical points of a product are determined by its technological complexity, by its delivery times and by its novelty. Both complexity and novelty have already been quoted by Olsen and Ellram (1997) as factors for defining the degree of difficulty in buying management. Technological complexity has a bearing on the supplier selection process because as the technological complexity increases, so does the number of parameters to be aligned in order to make the offers comparable from a technical point of view. The product’s technological complexity also restricts the scope of the group of suppliers within which the selection will be made; furthermore, greater technological complexity means higher costs in the post-order phase related to inspection and/or expediting controls. The ‘‘technological complexity’’ sub-factor thus influences the supplier selection process through the number of links to be respected during selection and the amount of data to be evaluated. Delivery times affect the supplier selection process because lengthy delivery times mean that the item needs to be purchased well in advance of the projected activity’s actual initiation, with all the ensuing difficulties, and all the post-order

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costs need to be evaluated accurately. Product novelty has a bearing on the supplier selection process in the case of new products, in that the company has no data available related to prior purchases, and it is therefore harder to monitor supplier performance.

end-client to evaluate the EPC company’s performance. The two sub-factors described determine the impact of the purchase on the overall project and, therefore, also the modes in which the suppliers are, more or less accurately, selected.

5.1.2. Market critical points The critical points related to the market are defined by the scope of the supplier group, the saturation degree, the supplier capability and the raw material availability. A limited number of suppliers reduces the possibility of identifying suppliers who correspond to all the standards set by the EPC company for the qualifying phase. The supplier saturation degree confronts the number of acquired job orders with the production capacity; this is important, because if a supplier has already acquired an appropriate number of job orders, the risk of late delivery and non-conformity is high. The available supplier production capacity has a bearing on buying management modes, as it may be difficult for an EPC company to find suppliers with a capacity matching its own requirements. Raw material availability has a heavy bearing on the price offered by suppliers and on delivery times; thus, it places further demands on selection.

5.1.6. Risk factors The risk factors consider the damage to the project in the case of non-conformity of supplies. The non-conformities evidenced, which are recurrent, are related to delivery times, costs and quality. Possible late deliveries may have negative consequences for the whole project, because of the strong binds linking the various phases of the project. Non-conformity related to cost occurs when the EPC company disburses any amount higher than forecasted in the budget; such non-conformity has a considerable impact on the project, particularly in the case of expensive products. Non-conformity related to quality occurs when an item’s quality does not correspond to the project requirements. These factors influence the supplier selection process as they are related to the impact the purchase has on the project. The impact of non-conformity on the project is considerable, whether it is a critical or a non-critical item, because even a non-critical item might cause a production halt and, therefore, loss of working hours, subsequent dimensional controls, rework, etc.

5.1.3. Complexity of supply contracting management The complexity of supply contracting management is determined by the number of clauses to be negotiated, by the project vendor list and by the contract’s standardization level. The number of clauses under negotiation directly influences the number of selection criteria. The project vendor list is directly negotiated with the end-client and affects both the scope and the quality of the supplier group within which the selection will take place. The standardization level of the contract varies, as, while for certain categories of products contracts may be repetitive and standardized, for more complex ones contracts adapted to the specific situation are developed. All these sub-factors have a bearing on the supplier selection process through the number of data to be managed and the links to be taken into consideration during the selection process. 5.1.4. Legal links Further to the contractual links, legal links emerge for certain product categories, generally related either to safety measures or to environmental protection that the supplier must abide by. Such links vary according to the site’s geographic location and it may thus become difficult to single out suppliers that are able to interpret and apply local norms correctly. 5.1.5. Economic factors The economic factors are determined by the monetary value of the purchase and by the impact of the purchase on the plant lifecycle cost. The fundamental reasons for the importance of the monetary value of the purchase are various. The margin that can be earned by the EPC company is linked to the monetary value of the purchase: the materials of high monetary value have considerable relevance from the profitability aspects of the contract. A high monetary value further implies high risk exposure for the EPC company at the time at which the order is issued. Further to the monetary value of the purchase, a life-cycle costing analysis allows the critical products that may impact on the plant’s lifecycle to be identified. While the EPC company is to limit itself to abiding by the contractual agreements and is in no way directly related to the plant’s entire life-cycle, the latter is, nonetheless, of considerable relevance. The EPC company must, in fact, while respecting its own budget obligations, aim to produce the best possible result for its end-client; the plant’s performance in terms of the life-cycle cost is a fundamental criterion adopted by the

5.1.7. Strategic importance of the purchase The supply strategy within EPC companies is markedly dynamic and dependent on the project characteristics; once a supply strategy has been defined, it is necessary to understand which items are relevant in order to implement the strategy. One recurrent strategy is cost minimization, which must become effective while warranting acceptable levels of quality; therefore, the materials appropriate for implementing such a strategy are those characterized by a low risk level associated with quality non-conformity. Another condition for implementing this strategy is that the price differences among the various suppliers justify the efforts deployed to obtain cost minimization. Another adopted strategy is the maximization of local content. In this case, it is above all necessary to evaluate whether the item under consideration can be obtained at a convenient level of quality and economic conditions on the local market. In case the strategy forecasts the duplication of supplies, it will be necessary to evaluate for which categories of goods buying from the same supplier may be an advantage vs. various other selection criteria: not all categories of goods are, in fact, characterized by relevant economies of scales, and, in certain cases, the market dynamics might render it more convenient to buy from a new supplier. The potential implications of the purchase for the final outcome of the project vary in relation to the strategic relevance.

5.1.8. Plant quality dependence on the purchased items Lastly, it is necessary to consider the plant quality dependence on the purchased items. The quality and final performance of the plant are strongly influenced by the quality of the items bought: EPC companies are able to act on the quality of the items bought through the selection of suppliers that are able to warrant an adequate quality level. If one considers the distinction made between processing plants and industrial ones, it is possible to observe how plant quality dependence on the items bought is particularly related to industrial plants in which basic processing technology is found within the machinery itself rather than on the production line flow that the machines make up. The relevance of items in terms of quality reflects the resources dedicated by the EPC company to supplier selection.

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5.2. Factor aggregation The factors described in subparagraph 5.1 were grouped into two macro-factors on the basis of their impact on the supplier selection process. The critical levels of the product, the market and the supplies contracting management as well as the legal binds all have a bearing on the supplier selection process, fundamentally through the number of links to be respected during selection and through the quantity and quality of the data to be evaluated, which eventually modify the level of difficulty of buying management. These factors were thus added to the ‘‘level of difficulty of buying management’’ macro-factor. The difficulty of buying management has already been used as a matrix axis by Olsen and Ellram (1997) in their portfolio approach to supplier relationships. The economic, risk, strategic and technological factors within the item all have a bearing on the supplier selection process, in as much as they measure the influence of the buying on the project and, consequently, the accurateness of the selection and the quantity of internal resources dedicated to the buying. Such factors were thus aggregated to the impact macrofactor of the buying on the project. Such a macro-factor is specifically referred to as project-oriented contexts and, as such, is new to the literature. Such a macro-factor may also be considered as an equivalent of the profit impact concept commonly considered in other portfolio approaches (Van Weele, 1994). The structure of the macro-factors, factors and sub-factors that condition the supplier selection process is summarized in Table 3. 5.3. Definition of a Bi-dimensional space and identification of relevant buying situations related to selection modes The two identified macro-factors allowed for the definition of a bi-dimensional space in which the axes are the level of buying management difficulty and the purchase’s impact on the project. A qualitative analysis of the interviews showed how the variability of the two identified macro-factors is described in sufficient detail to provide for two levels for each factor: the purchase’s impact on the project and the level of difficulty of buying management may be either high or low. Thus, the two axes defined determine four quadrants, as illustrated in Fig. 3. It is thus Table 3 Macro-factors, factors and sub-factors that condition the supplier selection process. Difficulty of buying management Product critical level

Market critical level

Supply contractual management complexity Legal binds

Impact on project Economic factors Risk factors

Strategic relevance of purchase

Plant quality dependence on items bought

Technological complexity Delivery times Product novelty Scope of supplier group Supplier saturation level Supplier capacity Materials availability Number of clauses open for dealing Project vendor list Contract standardization Environmental management Safety Local norms Monetary value of purchase Purchase impact on plant life-cycle Non-conformity of delivery Non-conformity of cost Non-conformity of quality Possibility of cost minimization Possibility of maximizing local content Possibility of supply duplication In-item process technology

Fig. 3. Bi-dimensional space quadrants.

possible to identify four different situations in the defined space bearing different characteristics in relation to the supplier selection process.

6. Defining the optimum selection technique for the various buying situations Having defined the four buying situations, we identified the optimal selection technique. The steps leading to the optimum selection technique definition are summarized in the following paragraphs. The analysis of each buying situation is organized in four different subparagraphs, describing respectively the features of the purchasing situation, the features of the current selection technique, the features of the optimal selection technique and the matching of the features of the existing techniques and the optimal technique. As stated in the Methodology paragraph, the existing technique maximizing the number of optimal features was chosen as optimal. An exception is situation 3, which was analyzed in a less structured way because of its simplicity. 6.1. First situation (S1): a high level of buying management difficulty and a high impact on the project 6.1.1. Features of the purchasing situation The first buying situation is characterized by a high level of buying management difficulty and a high impact on the project. Typically, in this situation, we find purchases of critical items, such as heat exchangers, processing compressors and turbines. It is important to note how the above-mentioned materials/items do not constitute an exhaustive list of items entering such a situation; only the macro-factor evaluation allows purchases to enter the matrix. The high level of buying management difficulty implies a high number of selection criteria; such criteria are complex, difficult to standardize and linked to a particular situation. The decision maker has to express judgements, taking into account, in some cases, complex quantitative data. Consequently, the optimal supplier selection technique has to guarantee the possibility of including complex criteria. The high impact of these items on the project implies a strong relationship between the performance of the supplier selection and the performance of the overall project. Even minor errors in the supplier selection can imply great deviations from the planned phases of the project; indeed, small errors are amplified by the

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numerous connections among the different activities of an EPC project and the purchase of these items. Consequently, the optimal selection technique has to guarantee high accuracy. The high impact on the project that characterizes this buying situation implies high importance of the costs involved in the purchase of the items. Indeed, the importance awarded to the supplier selection criteria in EPC companies (see Fig. 4) shows the tendency of EPC companies to maximize their profit, and consequently minimize the costs, while at the same time conforming to the specifications. There are different kinds of costs, ranging from the selling price to pre- and post-transaction costs. The complexity that characterizes the buying situation makes the relevant costs exceed the mere selling price, including the pre- and post-transaction costs. This implies that the optimal selection technique should emphasize not only the mere selling price, but also all the monetary criteria describing the performance of the suppliers in the whole procurement process. 6.1.2. Features of the current selection technique The current selection technique partially matches the features of the purchasing situation. As for technical selection criteria, the tendency of an EPC company is to align the performance of the suppliers. This happens because an EPC company is only interested in conformity to the specification of the end-client, while any further contribution in terms of technical quality represents an avoidable cost. When suppliers’ performance is not aligned with technical criteria, the decision maker is able to estimate in economic terms the differences among suppliers’ bids. The final selection is thus undertaken in two steps. In the first step, suppliers’ performance is summarized through an economic tabulation; this tabulation summarizes supplier performance in relation to direct monetary criteria. In the second step, the selection is performed by choosing the lowest sum of costs. Such a tabulation is used also because of the invasive intervention of the end-client in the selection process. Indeed, the selection technique has to provide monetary data to be presented to the end-client in the case that the latter decides to modify the selection, preferring a more costly solution, thus having to pay the EPC company a sum equivalent to the difference between the price offer made by the supplier chosen by the end-client and that made by the supplier chosen by the EPC company. The optimal selection technique has to take this aspect into account, and consequently it has to be easily understandable by the end-client, in order to facilitate the agreement between the EPC company and the endclient. The current selection technique has some limitations. Indeed, the current economic tabulation is not able to take into consideration all the relevant cost components present in the various existing buying phases. The economic tabulation, in fact, merely summarizes the supplier performance in relation to direct monetary criteria, avoiding the monetary performance evaluation of non-monetary criteria and delegating such evaluation to the preceding phases of the selection process. 6.1.3. Features of the optimal selection technique Summarizing, the optimal selection technique is characterized by a high level of accuracy, an emphasis on monetary criteria, the possibility of including complex criteria and a high degree of understandability by the end-client. 6.1.4. Matching features of the existing techniques and the optimal technique The selection techniques with a high degree of accuracy are the TCO, FST and MP. The selection techniques giving emphasis to monetary criteria are the lowest price and TCO. The techniques able to include complex criteria are all the techniques with medium and high accuracy; indeed, these techniques have inputs

Fig. 4. Importance awarded to supplier selection criteria in EPC companies; average preferences expressed by six operators from six EPC companies (variable scale from 1 to 4, where 4 indicates maximum importance and 1 minimum importance).

able to describe properly the complexity of the selection criteria. Finally, two groups of techniques are easily understandable by the end-client. The first group includes the simplest techniques, such as the SM and CMs: they can be easily understood because of their simplicity. The second group includes techniques using cost measures, such as the lowest price and TCO: they can be easily understood because cost measures are commonly used in any industrial context, differently from other measures or algorithms. The performances of the selection techniques are shown in Table 4. The supplier selection technique with the highest number of optimal features is the TCO, which consequently results as the optimal selection technique for the first purchasing situation. 6.2. Second situation (S2): a low level of buying management difficulty and a high impact on the project 6.2.1. Features of the purchasing situation The second buying situation is characterized by a low level of buying management difficulty and a high impact on the project. This situation involves bulk materials such as tubing, valves, joints and, in general, all the products that are bought in large quantities. The low level of buying management difficulty has a direct impact on the supplier selection criteria. The criteria are not complex, easy to standardize and unchanged in relation to the buying condition. Indeed, criteria other than price are often defined by means of conformity to standards and the corresponding suppliers’ performance can be described through Boolean variables, i.e. by subdividing the suppliers into acceptable ones and unacceptable ones. Consequently, the optimal selection technique has to guarantee an emphasis on Boolean criteria. Considering that the selection criteria are easy to standardize and remain unchanged in relation to the buying condition, historical data provide useful information for the selection, and consequently the optimal technique should give emphasis to historical data. The low level of buying management difficulty also implies that a complex selection technique is not necessary. In order to optimize the allocation of resources of the procurement function, the optimal selection technique has to be characterized by high simplicity. The high impact on the project that characterizes the buying situation implies, as in the previous purchasing situation, high importance of the costs involved in the purchase of the items. However, because of the simplicity of the purchasing situation, the relevant costs do not include pre- and post-transaction costs but are

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limited to the mere selling price. Consequently, the optimal selection technique has to give an emphasis to price.

6.2.2. Features of the current selection technique In order to describe the current selection technique, it is necessary to distinguish two different steps. In the first step, suppliers are evaluated according to selection criteria other than price. Indeed, the selection criteria other than price are a sort of preliminary filter and are therefore evaluated first. Considering the features of the criteria involved in this first step of the selection, the features of the optimal selection technique are high simplicity, an emphasis on Boolean criteria and an emphasis on historical data. In the second step, from the interviews it emerged that in almost all cases the tender is won by the supplier having offered the lowest price. Exceptions happen in particular circumstances that make the purchase migrate from situation S2 to situation S4. It is important to note that the term ‘‘price’’ does not simply refer to the direct cost of the item supplied, but is also used in relation to the transaction costs (Ellram, 1995), which are all the costs sustained from the issuing of the order until the item has been delivered. Considering the features of the criteria involved in this second step, the features of the optimal selection technique are high simplicity and an emphasis on price. The scope for optimization of the existing selection technique may be identified considering that in categorical evaluations the final evaluation based on price is not included within a rigorously formalized technique or process. On the basis of the above, in this purchasing situation it is not possible to identify a unique optimal selection technique, since the two different steps have to be considered separately.

6.2.3. Features of the optimal selection technique Summarizing, in order to define the optimal selection technique, it is necessary to consider the two steps of the selection separately. The optimal technique in the first step of the selection is characterized by high simplicity, an emphasis on Boolean criteria and an emphasis on historical data. The optimal technique in the second step of the selection is characterized by high simplicity and an emphasis on price.

6.2.4. Matching features of the existing techniques and the optimal technique The selection techniques with high simplicity are the lowest price, the SM and CMs. The selection techniques emphasizing Boolean criteria are CMs and DEA, since both of them subdivide the suppliers into acceptable and unacceptable. The techniques giving emphasis to historical data are CMs and the TCO. Indeed, CMs make explicit use of historical data for the definition of threshold values, while the TCO requires extensive tracking and maintenance of the cost data. The supplier selection techniques with the highest number of optimal features are the CMs, which consequently result as the optimal selection technique for the first step of the second purchasing situation. In the second step, high simplicity and an emphasis on price can be found by applying the lowest-price selection technique. The performances of the selection techniques in this situation are shown in Table 5. In order to apply CMs, it is necessary to determine which criteria are relevant other than price. These criteria can be subdivided into two groups: exclusion criteria and optimization criteria. Exclusion criteria are typically legal requirements for or essential technical characteristics of the product in question; the definition of the acceptability threshold in relation to such criteria is both immediate and objective. The optimization criteria, on the other hand, do not imply the supplier’s direct exclusion and provide for an often qualitative and subjective judgement; in relation to such criteria, it may not be possible to define an acceptability threshold in an objective manner and it is therefore necessary to revert to the buyer’s sensitivity. The criteria having been defined, a categorical type of judgement is expressed that subdivides suppliers into acceptable and unacceptable in relation to the exclusion and optimization criteria. At this point, the suppliers who overcome these two filters are evaluated only on the basis of price: the supplier offering the lowest price is selected.

6.3. Third situation (S3): a low level of buying management difficulty and a low impact on the project The third buying situation is characterized by a low level of buying management difficulty and a low impact on the project. Within this category, there are non-critical items such as nonproject materials and standard materials bought in small quantities. Examples are paper, books, instruments, small amounts

Table 4 Comparison of supplier selection techniques with respect to the criteria defining the optimal selection technique for S1. Features of the optimal selection technique for S1 High accuracy Emphasis on monetary criteria Possibility of including complex criteria High understandability by the end-client

Lowest price

SM

CM

AHP

ANP

DEA

X X X

X

X

X

X

TCO

FST

MP

X X X X

X

X

X

X

Table 5 Comparison of supplier selection techniques with respect to the criteria defining the optimal selection technique for S2. Features of the optimal selection technique for S2 - First step

Lowest price

SM

CM

High simplicity Emphasis on Boolean criteria Emphasis on historical data

X

X

X X X

Features of the optimal selection technique for S2 - First step

Lowest price

SM

CM

High simplicity Emphasis on price

X X

X

X

AHP

ANP

DEA

TCO

FST

MP

FST

MP

X X AHP

ANP

DEA

TCO

X

D. Masi et al. / Journal of Purchasing & Supply Management 19 (2013) 5–15

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Table 6 Comparison of supplier selection techniques with respect to the criteria defining the optimal selection technique for S4. Features of the optimal selection technique for S4

Lowest price

SM

CM

High simplicity High flexibility Emphasis on the subjective perception of the buyer

X X

X X X

X X

of electric equipment and so on. In this situation, the selection is generally qualitative and relies on the buyer’s sensitivity. The most evident characteristic of such materials is their heterogeneity, whether in terms of product typology or in terms of economic importance. However, economic relevance, though variable, does not have a great impact on the project. Considering the characteristics of these materials, it is possible to assert that the optimum selection technique is oriented towards the minimization of administrative costs. Given the heterogeneity of the products and, consequently, of the selection criteria, it is not possible to define a unique technique that minimizes the administrative costs; what is more, the reduced impact on the project of such product typology makes it hardly convenient to use a rigorously formalized selection technique improved through repetitive practice. 6.4. Fourth situation S4: a high level of buying management difficulty and a low impact on the project 6.4.1. Features of the purchasing situation The fourth buying situation is characterized by a high level of buying management difficulty and a low impact on the project. This is a transversal situation compared with the others: in fact, purchases initially ranked in other categories, by approximation, may drift into this matrix quadrant. Purchases generally so ranked may be designated ‘‘bottlenecks’’. In this situation, we can find all the other selection techniques, depending on the ‘‘original quadrant’’. An example of a bottleneck is bulk material purchasing in small quantities in order to compensate for a shortage of material at the construction yard. In such a case, the level of difficulty of buying management increases because of the stringent binds related to the delivery time; furthermore, the size of the lot is not large enough to render the purchase critical. The characteristics of the products are markedly heterogeneous: this is reflected in the selection criteria, which can be monetary or non-monetary, objective or subjective. Flexibility is thus an essential feature of the optimal selection technique. The reduced impact on the project exerted by materials ranked as ‘‘bottlenecks’’ excludes the use of complex techniques such as the TCO; indeed, the resources of the procurement function are limited and, considering the high number of purchases, the effort has to be limited for items of reduced impact on the project. The optimal technique, consequently, has to be characterized by high simplicity. 6.4.2. Features of the current selection technique In this purchasing situation, it is not possible to distinguish a unique selection technique. However, it is possible to describe some typical situations, allowing for the identification of features of the optimal selection technique. First, it is possible to consider the situation described previously, in which bulk material becomes difficult to purchase because of the delivery time. In this case, the importance awarded to supplier selection criteria is not the only change, because new selection criteria are generally considered. For instance, the stringent delivery time can imply new criteria related to the punctuality of the supplier. Second, it is possible to consider the purchase of complex measurement

AHP

ANP

DEA

X X

X X

X

TCO

FST

MP

equipment. The technical complexity of the item implies a high level of difficulty of buying management. However, such an item has a limited impact on the project and consequently the selection is not structured. Moreover, such a purchase is likely to be unique, so the buyer cannot ground his decision on historical data. Consequently, the buyer quickly has to understand the relevant features of the item and formulate a judgement grounded on his perception of the purchasing situation. In both the two situations described, the buyer has to express judgements mainly relying on his own sensitivity or experience. The optimal technique has to consider this aspect, by giving emphasis to the subjective perception of the buyer. 6.4.3. Features of the optimal selection technique Summarizing, the optimal selection technique is characterized by high simplicity, high flexibility and an emphasis on the subjective perception of the buyer. 6.4.4. Matching features of the existing techniques and the optimal technique The selection techniques with high simplicity are the lowest price, SM and CMs. The techniques characterized by high flexibility are the simplest and the ones with medium complexity. Indeed, these techniques do not require highly structured input data, as in the case of complex techniques. The techniques giving emphasis to the subjective perception of the buyer are the techniques with a score as input, such as the SM, the AHP and the ANP. Indeed, these techniques are not grounded on historical data and are able to translate the subjective judgements of the decision maker effectively. The performances of the selection techniques are shown in Table 6. The supplier selection technique with the highest number of optimal features is the SM, which consequently results as the optimal selection technique for the fourth purchasing situation. From the interviews, it appeared that the principal limit to the Scoring Model application comes from the complexity of weight tare determination. Weight calibration must, however, be carried out with extreme accurateness in the case of a high impact level on the project; those items having a low impact level on the project make less accurate calibration acceptable, even considering that all the information available for critical items is not so for bottlenecks. Even if one applies the Scoring Model with a less accurate weight calibration, it is still possible to benefit from the advantages of a formalized selection technique vs. a purely qualitative approach. A summary of the optimum selection technique matrix is provided in Fig. 5. 6.5. Item positioning In order to position the items within the matrix, the levels of management difficulty and impact on the project must be evaluated for each category of goods; the evaluation must be carried out taking into account the various factors described that contribute to the definition of the two macro-factors. In order to summarize the judgements related to the various factors, it is possible to adopt the Analytical Hierarchy Process

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Fig. 5. Optimum selection technique matrix.

(Saaty, 1977): this technique is able to organize the problem in a hierarchical fashion. In the case under examination, the hierarchy may be set up by putting either the level of management difficulty or the impact on the project at the very top, and all the criteria and sub-criteria that contribute to the definition of those two macro-factors at two lower levels. Thus, by expressing judgements in a series of couple confrontations, it is possible to determine the level of buying management difficulty or impact on the project for each product under consideration.

7. Conclusions and managerial implications This study proposes a meta-model for choosing the optimal supplier selection technique in the buying situations that characterize an EPC industry. It is possible to summarize the results by considering the initial research questions of the paper. As far as the first research question, ‘‘How can the purchasing situations within an EPC industry be characterized?’’ is concerned, we can conclude that: there are four different purchasing situations within an EPC industry, which can be identified on the basis of the level of buying management difficulty and the purchase’s impact on the project. From a theoretical point of view, the proposed classification adds new contents to the existing theory for two different reasons. First, the existing classifications do not focus on the EPC industry. Second, the proposed classification is specifically oriented to the definition of the optimal supplier selection technique, differently from existing models. Practitioners can use this classification as support in the supplier selection process and in other decisions dealing with procurement, such as the definition of the procurement strategy and the organization of the procurement function. As regards the second research question, ‘‘How is supplier selection currently performed in these purchasing situations?’’, we can conclude that: in the first situation, characterized by a high level of buying management difficulty and a high impact on the project, the selection is currently performed through an economic tabulation. In the second situation, characterized by a low level of buying management difficulty and a high impact on the project, the selection is currently carried out through a non-formalized process consisting of a series of categorical evaluations followed by a final evaluation based on a single criterion. In the third buying situation, characterized by a low level of buying management difficulty and a low impact on the project, the selection is qualitative and relies on the buyer’s sensitivity. In the fourth buying situation, characterized

by a high level of buying management difficulty and a low impact on the project, the selection can be made using all the other described techniques. From a theoretical point of view, the knowledge of the ordinary method of selecting suppliers in the EPC industry can add new information on the needs and challenges characterizing the industrial practice. In relation to the third research question, ‘‘What is the optimal way of selecting suppliers in these different purchasing situations?’’, we can conclude that: in the first situation, the optimal selection technique is the Total Cost of Ownership. In the second situation, the optimal selection technique is the successive application of a categorical selection technique and a price minimizationbased technique. In the third buying situation, the optimal selection technique is each technique oriented towards the minimization of administrative costs. In the fourth buying situation, the optimal selection technique is the Scoring Model. From a theoretical point of view, the proposed techniques fill the gap in the literature concerning the missing link between the supplier selection techniques and the various buying situations. Practitioners could benefit from the proposed techniques because they meet the specific needs of an EPC industry, while the major part of the existing studies is addressed to manufacturing industries. Among the limitations of this study, it has to be underlined that the proposed model is intended for EPC companies and thus for a specifically project-oriented context. Moreover, the considered companies all come from the Italian plant market. Consequently, further research may consider the extension of the metamodel to a context that is not specifically project-oriented and generic; this extension may involve companies selected in an international dimension.

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