Vendor selection in outsourcing

  • Authors:

  • Vijay Wadhwa;A. Ravi Ravindran

  • Affiliations:

  • Department of Industrial and Manufacturing Engineering, The Pennsylvania State University, 310 Leonhard Building, University Park, PA 16802, USA;Department of Industrial and Manufacturing Engineering, The Pennsylvania State University, 310 Leonhard Building, University Park, PA 16802, USA

  • Venue:
  • Computers and Operations Research
  • Year:
  • 2007

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Abstract

In any large organization, millions of dollars are spent on outsourcing. Most large organizations are outsourcing those activities that are either not cost efficient if done in-house or not core to their businesses. One of the most critical steps in outsourcing is vendor selection, which is a strategic decision. We model the vendor selection problem as a multi-objective optimization problem, where one or more buyers order multiple products from different vendors in a multiple sourcing network. Price, lead-time and rejects (quality) are explicitly considered as three conflicting criteria that have to be minimized simultaneously. A pricing model under quantity discounts is used to represent the purchasing cost. We present and compare several multi-objective optimization methods for solving the vendor selection problem. The methods include weighted objective, goal programming and compromise programming. The multicriteria models and the methods are illustrated using a realistic example. Value path approach is used to compare the results of different models.