Analytic hierarchy process and Supply Chain Management for dummies

The analytic hierarchy process (AHP) is a mathematical tool for complex problems of decision-making. It does not lead a decision-maker to make a ‘correct’ decision but allows him/her to interactively find an option that best matches his/her understanding of the nature of the problem and the requirements for its solution. The analytic hierarchy process is widely used in practice and is actively implemented by CEOs from all over the world, especially when it comes to the improvement of logistics and supply chain managements.

In its basis, this method allows you to intelligently and rationally structure a complex decision-making problem in the form of a hierarchy, for comparing and quantifying alternative solutions. The analysis of the problem begins with the construction of a hierarchical structure that includes the goals, the criteria, the alternatives, and other factors that operationally affect a choice. This structure reflects the understanding of the problem by the decision-maker: Each element of the hierarchy actually represents different aspects of the solving problem, just as both the material and nonmaterial factors, the measured quantitative parameters and the qualitative characteristics, and the objective data which is usually taken into account. In other words, the analysis of the decision-making situation here is reminiscent of the procedures and methods of argumentation, which are used intuitively in most cases.

A further step in the analysis is to determine the priorities that represent the relative importance or preferability among the elements of the constructed hierarchical structure by using the paired comparison procedure. Dimensionless priorities, for instance, allow reasonable comparison of heterogeneous factors, which is a distinctive feature of the analytic hierarchy process. At the final stage of the analysis, the synthesis of the priorities in the hierarchy is performed as a result of which the priorities of the alternative solutions relative to the main goal are calculated. The best option is the one with the highest priority value.

How useful is this method regarding the supply chain? Well, if we consider that most of the problems detected in small and medium-sized enterprises around the world are derived from the lack of optimization in the operation the organizations’ supply chains, then this method is beyond suitable. After all, SMBs require a number of great advantages to be competitive in the market for goods and services: Operational flexibility, innovation capacity, adaptation to change, more direct communication between internal and external customers, among others. Unlike the large companies, in which the flow of materials and information has another type of speed, the conditions of implementation of optimization mechanisms have another type of dynamics which are attributed to different factors such as organizational culture, or size.

Read also: How to improve the quality control of your supply chain, by David Kiger

The application of the analytic hierarchy process in the supply chain is carried out in its different stages: Supply (selection of suppliers, analysis of raw materials, etc.,) internal logistics (analysis of production methods, waste treatment, evaluation of projects, and the distribution logistics (selection of distribution channels, potential markets, etc.) Hence, this type of analysis is of vital importance within an organization since it allows the elimination of subjective judgments to make objective decisions and to contribute optimizing the overall functioning of the whole Supply Chain.

In the first stage of supply, it is commonly selected one of the many decisions that contribute to the supply of raw material, in the case of a manufacturing organization. Given the different offers from different providers, the selected criteria must maintain certain objectivity. The type and degree of control applied to the supplier and the product purchased must depend on the impact of the product purchased on the subsequent realization of the product (or on the final product.) The organization must then evaluate and select suppliers based on their ability to deliver products in accordance with the requirements of the organization.

User Journey Map_Mental Model_logistics_supply chain management
Image courtesy of Luis Alveart at Flickr.com

In internal logistics, the decision is affected by the processes of a productive nature. The decision focuses on the choice of processes, resources, and technological changes as well as operational practices. From a comprehensive vision, at the moment of making the decision, a global vision must be taken into account not only those factors that affect the operational level. In this way, the decisions that are taken into consideration are of the productive type, and of preventive, mitigation, and corrective operational practices. The production decisions may involve processes, the selection of resources, the allocation of jobs, etc.

In general, the type of solution that you get, in normal conditions, really depends on the work team and the type and size of the organization. For example, if the cause ‘labor’ is attributable to an operational problem that has been deeply analyzed, the sub-causes or decision criteria could be attributed to operational errors, lack of personnel, or interpersonal relationships. In consequence, the alternatives of the final decision could be the training, the changes of methodologies regarding work, or the ergonomics, among others.

If you wish to keep researching on this topic, take a look at this text: Decision Making for Leaders: The Analytic Hierarchy Process for Decisions in a Complex World

* Featured Image courtesy of Christian Pierret at Flickr.com

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