21/10 2016
Summary This report aims to examine and solve the problem of making the right supplier decision by using the Analytic Hierarchy Process (AHP). At a glance the report covers a brief understanding of the medical devices and its safety concerns; this is followed by a background of the company, its current position and challenges it has been facing. The report begins with analysing the main problem; selection of the right supplier. After a thorough analysis of XYZ’s background, three potential suppliers have been selected for evaluation. It has been observed that all three suppliers meet up the necessary safety standards required by the FDA, yet differ in characteristics considered for the four areas of the criteria. XYZ has adopted MCDM as the tool to solve the problem of supplier selection, on the basis of several different criteria. AHP has been chosen as the model to be applied. AHP derives and calculates relative weights of the multiple criteria by pair-wise comparison. Central in the method is the pair-wise comparison matrix. Ratio scale can be used for adoption into the comparison matrix if quantities of the criteria are not available. Application of the model takes considerations of safety, quality, cost and sustainability. An AHP model has been developed evaluating the thirteen criteria. Each supplier's performance is evaluated in matrixes for each criterion. The weights and the supplier's performance in each criterion is transferred to a matrix which helps to determine the best out of the available suppliers. The report continues with a thorough analysis and a discussion regarding the case, which results in the final selection of one supplier, based on the weight of the criteria and the suppliers’ performance on the criteria. The matrix shows that the company is prioritizing safety and quality before cost and sustainability. Suppliers receive scores in accordance to their performance on the heavily weighted criterions. This report has shown how the AHP model can provide quantitative material to a qualitative situation where the company needs to make a decision. In this case, it is a decision between suppliers. However, AHP model could be well used in other situations.
Introduction Industry A medicinal device is any material, instrument, device, apparatus, or other article (whether utilized alone or as a part of blend, and including the product necessary for its legitimate application) intended, to be utilized for people with the end goal of treatment, diagnosis, monitoring, investigation or modification of a physiological process or the anatomy. Medicinal devices are utilized on people and have helpful advantages, by and large have a physical or mechanical impact on the body or are utilized to screen or measure elements of the body (Bowsher, 1991).
Medicinal devices range from a Band-Aid that one would put on a wound to high hazard items, for example, pacemakers that are embedded in your body. Examples include Orthodontics, syringes, MRI scanners, blood pressure monitors, X-ray scanners, etc. Human elements is an order that tries to enhance human performance in the utilization of devices and equipment with the help of software and hardware design that is suitable with the capacities of the users (Runciman, et al., 2006). Patient deaths or injuries can be caused by errors in the design of medical devices. A user's conduct is directly impacted by operating attributes of the medical device; UIs that are deluding or strange can initiate blunders by even the ablest users, potential errors occur due to the inaccuracy of measurements in equipment or the user interfaces. Medical devices are utilized as a part of numerous situations, including operating theatres, laboratories, emergency rooms, x-ray departments, research centres, clinics, facilities, and homes. Execution regularly is compromised by poor lighting, glare-creating surfaces, heat, noise, dirt, inappropriate cleaning items. Ineffective systems, stress, fatigue, can likewise affect execution negatively. A therapeutic gadget can be viable and utilized safely only if the connection between the working environment, user abilities, stress levels, and the design of the device is considered when the device is designed by the manufacturer (Davis, 2012). The company FDA (Food and Drug administration) is the US federal agency responsible for the regulation and supervision of “food, drugs, cosmetics, animal food, dietary supplements, medical devices, biological goods and blood products” (U.S. Food and Drug administration, 2015). Whenever a company wants to market one of these products in the US, it has to notify the FDA and may need to get its approval before selling it. The FDA will have to check the quality of the product and guarantee it meets standards of safety for consumers.
XYZ is a medical devices manufacturer, founded in 1992 in Portland, Oregon by a group of doctors with the aim to create a highly innovative company in this sector. During the first ten years, the company succeeded in positioning itself as a market leader by successfully launching on the market many innovative medical devices. This success attracted the attention of many financial investors that decided to provide the company with new capital to continue the research, design and manufacturing of new products. The injection of additional capital was granted under the condition that the company would meet high levels of sales and profit.
XYZ initially seemed to show a good performance, but problems started appearing when new international competitors entered the US market. The new competitors took parts of the company’s market share, decreasing sales and therefore profits. Lower perspectives on future profits meant the loss of new capital, and this lead the management of XYZ to change strategy.
The new strategy intended to drive the competitors out of the market by significantly lowering the selling price of medical devices. However, the strategy required the company to drastically cut down its operational costs, in order to avoid losses. XYZ started to cut down costs on research & development and raw materials (components for the medical devices) by purchasing lower quality ones. However, the strategy wasn’t successful. Competitors stayed in the US market that was still attractive and XYZ became in few years a laggard, lacking innovation and seeing its products removed from the market by the FDA. The company faced crisis until a new management was nominated to run the business. The new management decided to relaunch the company building on the values that made it successful during the first years of the activity: innovation and quality. Therefore, XYZ now had to create the new generation of medical devices.
Main problem: Supplier selection Central role to implement the new strategy is the supplier selection. FDA approval when placing on the marketplace the products and regaining customers trust will be fundamental and therefore finding a reliable supplier is extremely important. As we can indeed see from the “Quality Service Line” matrix (Appendix 1, McKinsey study), supplier quality is among the factors needed in order to implement Quality strategy.
The problem anyway is that the company is still recovering from a period of crisis and for this reason attention also has to be given to costs. XYZ will need to balance different aspects and choose the best supplier of components for the new generation of medical devices.
The company’s background check regarding the suppliers has provided three possible suppliers for evaluation. All the suppliers meet up the necessary safety standards required by the FDA, but each of them has some different characteristics in the four areas of the criteria.
The first supplier is the least expensive one. Because of the lower price they cannot provide products with as level high quality and safety as the other suppliers. But they are well aware of the importance of the sustainability in today’s business environment and try to use that as a competitive advantage.
Quality and safety are of most importance for supplier number two. The supplier is focusing on delivering a good product to its customers while still maintaining good overall sustainability in production. With regards to this, the price is a bit high compared to other alternatives on the market.
Supplier number three’s business goal is to manufacture the best quality products on the market. The product should be easy to use and have a long life cycle. The safety is the next
Figure 1. Pairwise comparision matrix
priority for supplier number three, with best quality and good safety the prices go up which turns supplier number three to the priciest supplier on the market. Furthermore, supplier number three is so focused on manufacturing the best product that they lack in sustainability in both production and use of their product.
How to solve the problem When a company are choosing among different options, the MCDM model is useful to use. XYZ needs to evaluate and choose between many suppliers on the basis of some relevant criteria that differentiate each possible supplier. Multi Criteria Decision Making Multi-criteria decision making (MCDM) is one of the most popular strategy to make decisions. MCDM uses different criteria’s and put up a decision matrix to rank and evaluate different alternatives (Triantaphyllou, 2000). One popular MCDM model used in the decision making of supplier is the analytic hierarchy process method (AHP)
Criteria
Different criteria that are of value for the company are set up. The criteria are used to rank the different options. Criteria’s often have different weights; the weights contribute to weight important criteria’s over not so important criteria’s (Triantaphyllou, 2000). For example, criteria’s cost and quality. If cost, get a weighted score of 0.3 and quality get a weighted score of 0.4 the company values quality over costs.
Decision Matrix
A good way to visualize the decision process is to set up a decision matrix. A decision matrix (m x n) consists of alternatives Ai (for i= 1,2,3,…,m), criteria’s Cj (for j=1,2,3,…,n) and weights for the criteria’s Wj(for j=1,2,3,…,n), see figure 1.
The method was developed by T. Saaty and is one of the best known and most widely used. The method is a useful tool for analysing and making a decision by providing a clear picture
where the principles behind the decision are decomposed and compared (Parthiban, et al., 2012). Analytic Hierarchy Process (AHP) derives and calculates relative weights of the criteria by pair-wise comparison. By this way, AHP applies a compensatory decision making rule. Central in the method is the pair-wise comparison matrix. Ratio scale can be used for adoption into the comparison matrix if quantities of the criteria are not available. The scale stretching from one to nine with five subscales: 1. Equal importance. 3. Somewhat more important. 5. Much more important. 7. very much more important. 9. Absolutely more important. The numbers between the subscales are intermediate values (Zolfani, et al., 2012).
Application of the MCDM model The company needs a good and easy model that does not take ages to complete and gives a reliable and accurate result. The model also needs to be flexible and easy to reuse if the conditions on the market change. The AHP model fulfils all these criteria; it is easy to use, simple and flexible (Ho, et al., 2010).
The different criteria in the AHP model have been catechised into the groups: cost, quality, safety and sustainability.
Cost Enquiring cost (transportation, purchase price): indicates the costs the company will face to purchase and bring to its production facility the components. Usage: maintenance costs. End life cycle cost: indicates the costs the company will face when components are no longer usable.
Quality Precision/Correct measurement/efficacy indicates how much the component will influence the ability of the medical device to accurately and effectively measure the condition by which the patient is affected. Comfort indicates the level of pain/discomfort the patient will suffer when the medical devices are being used on her. Durability: indicates how much time it takes before the single component/whole device (in case the component is an essential part of it) will need to be substituted. Design indicates an overall judgement on the aesthetics and physical characteristics (weight/size/fit with other devices) of the device built with a suppliers’ components.
Safety
Ease of use: indicates how much intuitive to use the device is. The more the device is intuitive, the less whoever will use it will need to be educated and trained before being able to use it. Safety for the patient: indicates the level of risk the patient will suffer when being treated with the device. Safety for the doctor: indicates the level of risk the doctor will suffer when using the device.
Sustainability Development: environmental impact during the production process of components. Use: indicates the energy consumption and environmental impact of the device while being used. Recycling: indicates the environmental impact of the component/device at the end of its life cycle.
The criteria used in this model have been developed and defined by the company’s needs and priorities but also looking at the research paper “The business case for Medical Device Quality” by McKinsey&Company. One main point of this case is that “quality” referred to medical devices is not a meaningful criterion itself. It was, therefore, necessary to use many different criteria in order to have a more comprehensive analysis. The case also refers to a market research in which a survey has measured which are the “main drivers of purchasing decisions among physicians and patients” (efficacy, durability and ease of use). These results have been taken into account in the evaluation of criteria for the MCDM model.
An AHP model has been developed evaluating the thirteen criteria. Each supplier's performance is evaluated in matrixes for each criterion seen in figure 2 below:
Figure 2. Comparison matrix for the supplier’s performance in Durability.
The weights of each criterion have been determined by comparing them pairwise in a matrix involving every criterion. See Appendix 2.
The weights and the supplier's performance are transferred to a matrix giving the result of who is the best supplier. The result matrix is shown in figure 3 in the analysis.
Analysis and Discussion The result is shown in figure 3. The model suggest that the company should choose supplier 3.
Figure 3 Result matrix with weight of each criterion and the suppliers’ performance.
Important for the result is the weight of the criteria and the suppliers’ performance on the criteria. It could be seen from the matrix that the company are prioritizing safety and quality before cost and sustainability. Cost receive a low weight because the manufactured product is seen to have a long life cycle. Suppliers receive a high score if they their performance is good on the heavily weighted criterions. S3 has the core 0.423, and S2’s score is 0.415. They have the highest score because both suppliers are prioritizing quality and safety.
When evaluating the different supplier's everything is based on assumptions that were taken to successfully apply and use the AHP model. To get more accurate results, real numbers needs to be given. For example, if actual costs for the suppliers could be established the results for the cost criterion would be much more reliable.
Furthermore, even though a lot of criteria has been taking into consideration, there is still criteria that are missing. Supplier number three was chosen because of the main criteria was fulfilled, but criteria such as respond to market change or management of the company were not evaluated. To be more accurate, a bigger analyses need to be applied to the suppliers. When using more criteria, the criteria needs to be divided into sub-criteria and main criteria. This is a way of structuring and organising the criteria in order to use them to get an accurate result. Using sub criteria also enables to get an adjusted weight of the main criteria. The adjusted weight can then be multiplied with the supplier weight in order to get the results for each supplier.
This result was developed by input to the model which was relevant at the time. The performance for different suppliers in different criteria could change. The sensitive analysis
would be done by investigating different scenarios by changing relevant parameters for the scenarios (Yuzegev, 2013). The sensitive analysis would provide a deeper understanding where better decisions could be based upon.
In this case, it is a decision between suppliers that needs to be done. The AHP model could be well used in other situations, for example, to determine a location for a new manufacturing plant (Chang & Lin, 2015).
Conclusion This essay has shown how the AHP model can provide quantitative material to a qualitative situation where the company needs to make a decision.
Supplier three receive the highest score because in total they perform best in criteria of safety and quality. However, supplier number two had almost the same score as supplier number three, and they are operating on a lower cost base and can offer the product at a lower price than supplier number three. Our company has been struggling with lower profit margins and need to try to lower the overall costs. The first recommendation is, therefore, to do a sensitive analysis to evaluate different possible future scenarios. It would provide a deeper understanding of the results and the situation. Because of the close score between supplier number two and supplier number three the second recommendation is to contact both suppliers and negotiate with both of them to see which one can offer the best terms for purchasing and usage of the product. If there is no room for negotiation with either of them, the choice for the company would then be supplier number three.
To have a successful relationship with the supplier, the company needs to continuously work with the supplier and achieve collaboration and mutual interests. This is achieved by a lot of interaction and different activities that can take place between the company and the supplier.
Even though everything is working perfectly with the selected supplier the company needs to be aware that conditions can change, the price can go up or the quality go down. Because of this reason the company needs to now and then evaluate different suppliers out on the market to be prepared and ready to change quickly if the conditions change.
References
Bowsher, C., 1991. Medical Devices. Society, 28(6), pp. 74-78.
Chang, P.-Y. & Lin, H.-Y., 2015. Manufacturing Plant Location Selection in Logistics Network. Journal of Industrial Engineering and Management, 8(5), pp. 1547-1575.
Davis, K., 2012. Decreasing time to market for a medical device: New methods for the product development process, S Grasman & E Cudney, ProQuest Dissertations Publishing.
Fur, G., Pai., 2013. The business case for Medical Device Quality, McKinsey&Company, McKinsey center for Government.
Ho, W., Xu, X. & Dey, P. K., 2010. Multi-criteria decision making approaches for supplier evaluation and selection: A literature review. European Journal of Operational Research, 202(1), pp. 16-24.
Parthiban, P., Zubar, H. A. & Garge, C. P., 2012. A Multi Chriteria Decision Making Approach for Suppliers Selection. Procedia Engineering, 38(1), pp. 2312-2328.
Runciman, WB., Williamson, JAH., Deakin, A., Benveniste, KA., Bannon, K. & Hibbert, PD, 2006. An integrated framework for safety, quality and risk management: an information and incident management system based on a universal patient safety classification. Quality & Safety in Health Care, 15(suppl 1), p. i82.
Triantaphyllou, E., 2000. Multi-Criteria Decision Making Methods: A Comparative Study. 2nd ed. Philiadelphia: Springer.
U.S. Food and Drug administration, 2015. U.S. Food and Drug administration. [Online] Available at: http://www.fda.gov/AboutFDA/Transparency/Basics/ucm192695.htm [Accessed 10 10 2016].
Yuzegev, E., 2013. Supplier Selection Model Using Fuzzy Logic and AHP. IIE Annual Conference, Procedings, 95(3), pp. 3886-3895.
Zolfani, S. H., Chen, I.-S., Rezaeiniya, N. & Tamosaitiene, J., 2012. A Hybrid MCDM Model Encompassing AHP and COPRAS-G Methods for Selecting Company Supplier in Iran. Technological and Economic Development of Economy, 18(3), pp. 529-543.
Appendix
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