PURDUE UNIVERSITY

A frame Work for Selecting

Green and Reliable
Suppliers Using
Combinatorial Auctions
IE590 Final Report

Cretier, Philippe
Gopalan, Haresh
Min, Yohan
Natarajan, Prashanth

11/20/2012













TABLE OF CONTENTS
Contents
ABSTRACT ........................................................................................................................................................ 4
INTRODUCTION ............................................................................................................................................... 5
PROBLEM DEFINITION ..................................................................................................................................... 7
LITERATURE REVIEW ........................................................................................................................................ 8
FUNCTION DEVELOPMENT ............................................................................................................................. 11
4.1 BID COST ............................................................................................................................ 11
4.2 OPERATIONAL COST .............................................................................................................. 11
4.2.1 Capacity Score ..................................................................................................................................... 11
4.2.2 Lead time Score ................................................................................................................................... 12
4.2.3 Quality Score ....................................................................................................................................... 12
4.3 ENVIRONMENTAL COST .......................................................................................................... 13
4.3.1 Emissions ............................................................................................................................................. 13
4.3.2 Certification ......................................................................................................................................... 18
4.3.3 Energy Score (L
s
) .................................................................................................................................. 18
4.3.4 Wastage Score (M
s
)............................................................................................................................. 18
4.3.5 Packaging and sourcing Score (N
s
) ...................................................................................................... 18
4.4 COMBINATORIAL AUCTION ..................................................................................................... 19
EXPERIMENTAL ANALYSIS .............................................................................................................................. 21
5.1. EXAMPLE TESTED ................................................................................................................. 21
5.2. OPERATIONAL COSTS ............................................................................................................ 21
5.2.1 Capacity Score ..................................................................................................................................... 21
5.2.2 Leadtime Score .................................................................................................................................... 22
5.2.3 Quality Score ....................................................................................................................................... 23
5.3 ENVIRONMENTAL COST .......................................................................................................... 24
5.3.1 Energy Score ........................................................................................................................................ 24
5.3.2 Wastage Score .................................................................................................................................... 26
5.4 IMPACT OF THE OPERATIONAL AND ENVIRONMENTAL COSTS ............................................................ 28
DISCUSSION, CONCLUSIONS AND FUTURE WORK .......................................................................................... 30
REFERENCES ................................................................................................................................................... 31






LIST OF TABLES

Chapter III
Table 3.1: Summary of international environmental protocols and agreements
Table 3.2: Example of local regulations related electronic goods, car and chemical materials
Chapter IV
Table 4.1: Operational cost parameters description
Table 4.2: Quantified emission limitation targets in annex b to the kyoto protocol
Table 4.3: Quantified emission limitation commitment on each country
Table 4.4: Initial assigned amount of annex i parties
Table 4.5: History of carbon dioxide emissions in the us
Table 4.6: Allowable emissions from foundry cupolas
Table 4.7: Emission limits for pollutants from a designated facility
Table 4.8: NOx emissions limits for institutional boilers
Table 4.9: Elimination criteria for each area
Table 4.10: Packaging material sourcing scoring method
Chapter V
Table 5.1 Energy usage standards used in the experimental analysis
Table 5.2: Model result for three scenarios

Abstract

This project presents a combinatorial auction based methodology to solve a supplier selection
problem based not only in the asked price for a set of products, but considering also the operational
and environmental cost of each supplier. The objective is to minimize the total buyer cost subject to
the fulfillment of the demand considering the possible costs due by operational and environmental
criteria. The operational cost depends essentially on the evaluation of some defined parameters
Using Rank based relative scoring of suppliers whereas the environmental cost is defined by a mix of
the fulfillment of some defined certifications and environmental regulations and some defined
parameters, using the Rank based relative scoring of suppliers as well.





























CHAPTER I
Introduction

The supply chain is a key factor within business, because it allows the movement of goods and then
to generate revenue. The economic impact of supply chain is critical, because for a company, it could
make the difference between being in and being out of the business. For instance, according the
Twenty-Second Annual State of Logistics report, published in June 2011, the supply chain costs in
United States were 8.3% of the overall US gross domestic product; an estimated of $1.25 trillion.

Considering the current highly competitive market environment, being able to maximize efficiency
through procurement, manufacturing and distribution is a must. The supply chain management
strategy tries to benefit the entire system right from upstream through midstream until
downstream. However, trying to maximize the supply chain performance only from a cost point of
view will not be longer sustainable, given that in these days and for sure in the future, the
environment factors are evolving as important conditions to maintain market share.

Environmental aspects are rapidly emerging as important factors for business organizations to
consider. Public and governmental pressure makes them change the way they do their business.
Every company wants to be go green but do not want any reduction in profits due to that. To
produce a framework for green practices to satisfy the public interest in terms of environmental
protection as well as companys interest of making profits is a big challenge for the academic world
today. Organizations have attempted to respond by developing products/services which, for
example, use less packaging, reduce pollution and/or decrease energy consumption. But a proper
framework which satisfies both sides is yet to be produced.

Humphreys, Wong and Chan [1] indicate that companies are going on board on two change
processes: reducing the number of firms in the supply chain base and establishing closer and
collaborative relationships with the remaining companies. Then, as the supply base reduces the
number of suppliers, for them implementing environmental management programs as differential
factor, could give them a competitive advantage.

In fact, trying to select the best supplier from a pool is not an easy task. Indeed, this is a big
challenge and gets harder when more variables (quantitative and qualitative) as environmental
factors or operational are added into the decision. There are many studies about supplier selection
using auctions as decision tool, however, there is no much literature about green and reliable
supplier selection.

This project addresses the winner determination problem (WDP) in order to determine the winner
suppliers, based not only on the bids they submit, but also in the environmental and operational
attributes. Many to One combinatorial auctions arise as the tool for solving this problem. Abrache,
Gabriel, Gendreau and Rekik [2] describe the configuration of these auctions as one buyer who
needs to obtain a set G of items supplied by several potential sellers who make bids. Rekik and
Mellouli [3] proposes a model where the allocation of long-term contracts to carriers is decided with
respect to both ask-prices and unexpected hidden costs, which represent the possible additional
costs that the buyer may incur when dealing with a series of winning suppliers.

Based in the previous description, this project has three main objectives:
1. To identify operational and environmental factors which influence the company selecting
criteria,
2. To develop a framework of supplier selection process which incorporates operational and
environmental factors
3. To use the framework to develop a mathematical model for suppliers selection.

CHAPTER II
Problem Definition

This project is trying to bridge the gap between green practices to satisfy the public interest in
terms of environmental protection and companys interest of making profits by contributing a
solution to the environmental part of this big problem. Furthermore, it integrates environmental
factors with other kind of factors like quality, lead time and capacity, called in this project as
operational factors, in order to take the best decision at the moment of select a supplier.

Logistic cost has been considered in entirely monetary concept. But, nowadays as in the USA and
other countries became more aware of environmental problems owing to the climate change, air
pollution, and so forth, environmental concern has been taken in logistics field. This is how Green
Logistics is emerged.

The Green Supply Chain concept is established based on the sustainable development approach.
Green logistics is a concept that takes in consideration of environmentally, socially friendly and
economically factors. The Green Supply Chain approach seeks to reduce a product or services
ecological impact as less as possible. Currently, many companies are being proactive getting green
certifications and becoming green by themselves, but for sure, in few more years being green will be
a must in order to participate in the market. Then, the companies which are not able to meet these
green requirements, they will lose market share and as a consequence will be probably out of the
industry.

In this project we will develop a framework for supplier selection through which we are going to
address the problem of selecting green and reliable suppliers without any decrease in profits for
an organization. The reason for taking the supplier selection as the base of our project is because we
believe that is the first step for any organization, be it manufacturing or services, to do sustainable
business. They need suppliers to supply the materials for their products to be made in the first place.
If we go to the source of those materials and make it green and reliable, there will be a progressive
change in overall supply chain.

CHAPTER III
Literature Review

Several studies have been conducted to show the importance of considering attributes other than
cost for supplier selection (Rekik and Mellouli [3]). They present a reputation-based winner
determination problem for transportation procurement auctions where the allocation of long-term
contracts to carriers is decided with respect to both bid ask-prices and carriers reputation. The
objective is to manage the trade of between transport costs and the quality service during
operations. They use a concept called unexpected hidden cost to represent the possible additional
cost that the shipper may incur when dealing with a set of winning carriers and this cost depends
essentially of the carrier reputation which is evaluated by the shipper using a number of defined
service attributes.

P.K. Humphreys, Y.K. Wong, F.T.S. Chan [1] devised a framework for integrating environmental
factors into the supplier selection process. They created as decision support system for the
companies to look when selecting a supplier. They separated the environmental criteria into two
types namely Qualitative environmental criteria and Quantitative environmental criteria. These two
categories are classified into seven different sub groups, each having several sub-criteria. The
companies are divided into two types namely Proactive and reactive companies. A decision support
system which integrated these environmental criteria into the supplier selection process was built
and provides guidelines for the purchasing managers to select suppliers from an environmental
viewpoint.

To solve this problem, many to one combinatorial auction (sometimes called reverse combinatorial
auctions) arise as a convenient tool. According Abrache, Gabriel, Gendreau and Rekik [2] in this kind
of auctions configuration, one buyer needs to obtain a set G of items, supplied by several potential
sellers. A bid b is made by a seller and considering the whole set of bids B, a binary decision variable
is defined as xb = 1 if bid b wins and 0 otherwise. In order to show the powerful of reverse
combinatorial auctions, some applications of this tool in recent years which can be cited are:
trucking service acquisition for Sears Logistical Services (Ledyard et al. [4]), procurement of direct
inputs for a food manufacturer (Davenport and Kalagnanam [5]; Hohner et al. [6]), and assignment
of nationwide meal service contracts by the Chilean government (Epstein et al. [7])

Regarding the environmental regulations, currently, there are many protocols and agreements that
the countries have signed and that, obviously, affect the way in what companies do business. [8.1]
For instance: (1) Kyoto protocol is to enforce former conventions to keep the countries to observe
the agreement regarding greenhouse gases such as CO2, CH, N2O, PFCs, HFCs, and SF5, [8.2] (2)
Venna convention (Montreal Protocol) is to develop a global convention on the ozone layer. The
following table summarizes the target for each year of International regulations. [8.3]

The center ideas behind protocols are described below and summarized in table 1:

The Basel Accord is to reduce the transference of hazardous waste among countries to minimize the
toxicity of wastes generated. [8.4]
POPs (Persistent Organic Pollutants) is to restrict the production of persistent organic pollutants
intentionally produced. [8.5]
ErP (Energy-related Products) replaced Eco-Design Directive (EuP) on November 20, 2009. The old
one covered products such as a microwave and a television. The new one covers not olny products
under the EuP but also products that are energy-related but not directly use energy such as glazing
windows and showerheads. [8.6]


TABLE 3.1: SUMMARY OF INTERNATIONAL ENVIRONMENTAL PROTOCOLS AND AGREEMENTS [8]

REACH is the European Community Regulation on chemicals and their safe use (EC 1907/2006). It
deals with the Registration, Evaluation, Authorisation and Restriction of Chemical substances. [8.7]
WEEE (Waste Electric & Electrical Equipment) is for reuse, recycling and recovery of electrical
equipment. They require productors WEEE symbol labeling, recycling information, and production
details implemented on their goods. [8.8]
RoHS (Restriction on Hazardous Substances) is to prohibit the usage of hazardous substances that
Pb, Hg, Cadmium, Crom, PBBs and PBDE over the standard usage will be banned in market in EU.
[8.9]
ELV (End-of-Life Vehicles) was adopted to stop the problem of vehicles created between 8 and 9
million tonnes of waste in the European. [8.10]
Euro II - VI (European emission standards) determine the limits for exhaust emission gases of new
vehicles sold in EU. Nitrogen oxides (NOx), Carbon monoxide (CO) and Particulate Matter (PM) are
limited for most vehicle types such as cars, trains and similar vehicles. [8.11]

Table 2 below shows some of examples of local regulations related electronic goods, car and
chemical materials.


TABLE 3.2: EXAMPLE OF LOCAL REGULATIONS RELATED ELECTRONIC GOODS, CAR AND CHEMICAL MATERIALS

Therefore, as we presented previously, there are many regulation and protocols which are necessary
to consider at the moment of getting certain kind of product or service from a supplier, which are
not being considered if the decision is only taken by considering the supplier asked price.

CHAPTER IV
Function Development

The aim of this project is to come up with a tool which can help the buyer to decide which out of the
number of given suppliers provides the best balance of low cost, operational and a
green/environment friendly solution. In order to do that, combinatorial auctions will be used as
selection tool and the solution will be developed in four steps which are described ahead.

4.1 Bid Cost

At the beginning of the auction, the Company communicates its product requests to the market.
Based on the request, the suppliers Bid for the product. The First step is to obtain the bids submitted
by the suppliers for the products and then, all the bids are tabulated.

4.2 Operational Cost

The Operational cost is divided into three sub criteria namely Capacity, Lead time and quality. Each
criteria there is a score associated with a score where 1 is the best minimum score i.e, Best supplier
for each product will get a value of 1 and other will have values more than that based on their
performance in each criteria.

Criteria Capacity Leadtime Quality
Criteria Scores B
s,i

C
s,i

D
s,i

Supplier (s) for each
item (i)

1,1 1,1 1,1
: : :
n,m n,m n,m
Table 4.1 Operational cost parameters description
4.2.1 Capacity Score
First, Each suppliers capacity for each product is obtained. Two components make up the capacity
score. One is Fulfillment of Demand i.e. whether the supplier with his capacity for a particular
product can fulfill the demand of the customer at one go. This score can either be one or zero. If
fulfilled the score will be 1 and if not 0.
Fulfillment = 1 {if (capacity /demand) >=0}
= 0 {If (capacity /demand) <0}
The second Component is Penalty/Reward. This depends on the first component. If the supplier can
fulfill the demand with his capacity and that capacity is greater than the demand then he is given a
reward. If he cannot fulfill the demand of a particular product with his capacity then he is given a
penalty.
Reward/ Penalty = (capacity/demand) {If fulfillment =0}
= ((capacity-demand)/ (demand*100)) {If fulfillment =1}

The sum of the two scores gives the capacity score for each supplier for each product.
CAPACITY SCORE =Fulfillment of demand + Penalty/reward
Each supplier is ranked based on the above score for each product. The difference between the
minimum score supplier and the other suppliers are calculated. The best supplier gets a Final Lead
time score 1, While others will get 1 plus the difference calculated based on their ranks.

4.2.2 Lead time Score

The lead time score for each supplier for each product is calculated by first obtaining lead time
values for each supplier for delivering each product. Based On his capacity for a particular product,
supplier may need more than one lead time to satisfy the demand of the customer. Lead time values
obtained from the supplier are multiplied with a number based on the capacity of the supplier to
satisfy the demand.

Lead time score = [(Demand of product i/Capacity of the supplier s for product i) rounded off to
the Next integer]*Lead time for the product i for supplier s

C
s,I
=[(D
i
/cap
s,i
)*L
s,i


Each supplier is ranked based on the above score for each product. The difference between the
minimum score supplier and the other suppliers are calculated. The best supplier gets a Final Lead
time score 1, While others will get 1 plus the difference calculated based on their ranks.

4.2.3 Quality Score

First supplier quality certification is checked i.e. whether the supplier holds an ISO9001:2008
certification. Then the Number of defects of the products obtained from the supplier from the
previous historical data or from the Quality audit. Then operational of the supplier is
calculated from the historical data available about the supplier or from his present demand
fulfillment ability. Then the data, the service level score is obtained from difference between 100%
service level and number of defects score is obtained from difference between six sigma defect
value which is 3.4 and the supplier value. The total score is calculated by the addition of all the three
scores and rank suppliers in each product category. The difference between the minimum score
supplier and the other suppliers are calculated. The best supplier gets a Final Lead time score (D
s,i
) 1,
While others will get 1 plus the difference calculated based on their ranks.

For example, when considering the first supplier, we find the function value at each step till we
finally reach an end value which encompasses all the criteria.

Supplier s function value considering Capacity for item i = B
s,i
Supplier s function value considering Lead time for item i = C
s,i
Supplier s function value considering Quality for item i = D
s,i



Then, for instance, the final Operational cost function for supplier 1 per item i is:

B
1,i
+ C
1,i
+ D
1,i
= O
1,i

The general Operational cost function for a supplier s and item i is:

O
s,i
= B
s,i
+ C
s,i
+ D
s,i



4.3 Environmental Cost

Within the Environmental criteria, suppliers will be judged based on their availability to achieve a
minimum value on the environmental criteria selected .There are five different criteria and two
criteria are elimination criteria and other three are scoring criteria for selection. The elimination
criteria are

1. Emissions
2. Certification

The three scoring criteria are
1. Energy Score
2. Wastage Score
3. Packaging and Sourcing Score
4.3.1 Emissions

With respect to elimination process, there is contribution to the environment of each country which
should be taken into consideration where suppliers from different countries to be considered to
bear burden. Below is the emission reduction assigned in each country. In case of the US, it was -7%.


TABLE 4.2: QUANTIFIED EMISSION LIMITATION TARGETS IN ANNEX B TO THE KYOTO PROTOCOL [10]

Percentage of emission assigned in each country where over 100% means that they are entitled to
more emission than the one in the base year respectively is shown below. The US is 93, as its
obligation is 7%.


TABLE 4.3: QUANTIFIED EMISSION LIMITATION COMMITMENT ON EACH COUNTRY; ANNEX B [10]

After all, below is the amount of emission each country is allowed to emit.


TABLE 4.4: INITIAL ASSIGNED AMOUNT OF ANNEX I PARTIES [10]

Emission in the US in 2012 is projected to be the one in 1990 as they are supposed to do, which is
5,000 MMT below as each country has made an effort to reduce emission concerning more about
environment impact.


Graph 4.1: Trend of USA CO2 emissions [9]


TABLE 4.5: HISTORY OF CARBON DIOXIDE EMISSIONS IN THE US [11]

There are independent rules in each state. In case of Indiana, carbon monoxide emissions shall be
released at such elevation that the maximum ground level concentration from a single source shall
not exceed twenty percent (20%) of the maximum one (1) hour Indiana ambient air quality value for
carbon monoxide. [12]

For specialized type of industry for emission limitation, find the below regarding foundries.


TABLE 4.6: ALLOWABLE EMISSIONS FROM FOUNDRY CUPOLAS [12]

Emission limits for designated facilities as below.



TABLE 4.7: EMISSION LIMITS FOR POLLUTANTS FROM A DESIGNATED FACILITY [12]





Emission limits of NOx for boiler.

TABLE 4.8: NOX EMISSIONS LIMITS FOR INSTITUTIONAL BOILERS [12]

As there are specific regulations to limit certain type of gas emission in each country, even in a state,
first, general international policy should be considered. It is divided into 3 areas for the elimination
step regarding emissions; gas emission, waste and elec. equipment. Weight factor of each criteria
derived from each policy was assigned on them. Each factor can have max. 1 which will be used for
score of the policy where 1 is the max. value. As per the related policies applied to the suppliers
concerned about, the total score can be developed by averaging the score on each policy by sum of
score of related policies over the number of the policies. For example, if the supplier couldnt meet
the requirement of gas emission of CO2, CH, N2O, PFCs, HFCs, SF5 of 5.2% down as per the Kyoto
protocol, it will get 1 in a& b respectively and according to the function 1-0.5(a+b), it would be 0. As
the supplier is unable to meet the demands held by the protocol, they will be eliminated from the
list.

TABLE 4.9: ELIMINATION CRITERIA FOR EACH AREA [8]
*1 is the best score on each policy
*Each factor is estimated with max. 1 based on criteria
*Total score is sum of score of related policies over the number of the policies

No. Area Contents Factors Criteria
Weight
Factor
Remark
a CO2,CH,N2O 5.2% down 0.5
b PFCs,HFCs,SF5 5.2% down 0.5
c CFC13 20% down 0.4
d Freon Never use 1
e Halon Never use 1
f
Carbon
tetrachloride
Never use 1
g Methyl chloroform 70% down 0.3
h Methyl bromide 70% down 0.3
i CO2 (G) 1 0.2
j Nox (G) 0.08 0.2
k CO2 (D) 0.5 0.2
l Nox (D) 0.25 0.2
m PM (D) 0.025 0.2
n Wast cross boader trading to be prohibited Waste trade Waste history Doc. Submission 1 1-n
o Pesticide, dioxine control
21 substances
prohibited
Related
hisotry Doc.
Submission
1 1-o
p
non - environment friendly goods
to be sold in EU
Friendly Good
proof
Simbol
labeling
1 1-p
q
Registration, Evaluation, Authorisation and
Restriction of Chemical substances
Chemical
registeration
Registeration
History Doc.
Submission
1 1-q
r
Prohibited material
(Pb,Hg,Crom)
Never use 1
s Recovery % 85% 0.5
t Recycling % 80% 0.5
u Collecting sys. Established 1
v Recovery % 70 - 80% 0.5
w Recycling % 50 - 70% 0.5
x
Pb, Hg, Cadmium, Crom, PBBs, PBDEs
never to use
Prohibited material
(Pb, Hg, Cadmium,
Crom, PBBs, PBDEs)
Never use 1 1-x
End-of-Life Vehicles
Waste Electric & Electrical Equipment
Policies
g/km
Green house gas to be 5.2% decreasing
CO2, CH, N2O decreasing based on 1990
PFCs, HFCs, SF5 decreasing based on 1995
Green
House
Kyoto
protocol
for the Protection of the Ozone Layer
(Montreal)
1-0.5(a+b)
1-0.4c-
0.3(g+h)-
(d+e+f)
1-
0.2Sum[i:
m]
1-r-
0.5(s+t)
1-u-
0.5(v+w)
Waste
Elec.
Equipment
Basel
Accord
Stockholm
(POPs)
ErP
REACH
ELV
WEEE
RoHS
Gas
Emission
Ozone
Vehicle
Exhaust
Gas
EURO
2 - 6
Viena
Conventi
on
4.3.2 Certification

Since this criterion is used in the elimination step, Supplier with ISO14001 certification will be put in
to selection process. The suppliers without the ISO14001 certification will be eliminated from the
supplier pool and will not be considered for selection.
4.3.3 Energy Score (Ls)

For Calculating the energy Score, First, The electricity consumption, Natural gas consumption, fuel oil
consumption used for all the twelve months of the previous year and the percentage of renewable
energy used are obtained from the supplier. Averages of those values are obtained. The other way
to do this can be using the historical data available with the company. The Averaged values are
ranked from minimum to maximum. Then the final score will be one for the minimum value supplier
and for other suppliers the final score will be one plus the difference between their value and the
minimum value.
4.3.4 Wastage Score (Ms)

For calculating wastage score, first, based on the Texas government regulations (any state
regulations in which the supplier operates can be used, we have used Texas government rules for
the ease of use) for hazardous waste materials, Each suppliers hazardous waste material emission is
obtained and the difference between the government norms and the supplier emission is calculated
for each material. The cumulative sum of all the differences for each supplier is calculated. Then the
values for percentage of hazardous waste in all waste emitted, percentage of waste recovered,
Percentage of Waste Recycled are calculated for each supplier either by obtaining information from
each supplier or by conducting audits in each suppliers institution. Availability of Waste
management system is also checked for each supplier. Then suppliers are ranked in ascending order
based on these values separately .Relative scores of these values are obtained by finding the
difference between each value and the minimum value in each category. Then the final score for
each supplier will be sum of the score of all the categories plus one.

4.3.5 Packaging and sourcing Score (Ns)

The method chosen for scoring Sourcing of packaging materials is a direct function of how far the
material has to travel before reaching the supplier i.e how far the seller of the material is from the
supplier. The method developed is such that a supplier is not penalized if he sources the packaging
material within the warehouse or the DC but is penalized if he doesnt. The sourcing divisions are
local, national and international and the penalty for each increases as follows:


Source Penalty
Within Supplier D.C or Warehouse 0
Local (100 Mile Radius) 1
National (1000 Mile Radius) 3
International (>1000 Miles) 5
TABLE 4.10:PACKAGING MATERIAL SOURCING SCORING METHOD

After the elimination step, remaining suppliers are sent into a scoring process in which they are
scored in three different categories. Since values obtained are for each supplier, For using in the
objective function, We can specify the environmental score for each supplier each product using the
formulation below.

Energy usage for supplier s for item i = L
s,i

Packaging for supplier s for item i = M
s,i

Returns handling capacity for supplier s for item i = N
s,i


The general environmental cost function for a supplier s and item i is:


E
s,i
= L
s,i
+ M
s,i
+ N
s,i



4.4 Combinatorial Auction

In order to fill the buyer request, the supplier s S submits a set of bids B to the market. A bid b
B(s) made by the supplier is defined as b = (I
b
, p
b
), where I
b
is a subset of items that supplier s offers
to serve (I
b
I) and p
b
is the price that the supplier requires to be paid I
b
to be supplied.
Furthermore, for each supplier s S there is a operational cost O
s,i
associated with each item i I
b
.
Then, the cost C
s,b
associated with a bid b = (I
b
, p
b
) submitted by a supplier s is given by:



Similarly, for each supplier s S there is an environmental cost E
s,i
associated with each item i. Then,
the cost E
s,b
associated with a bid b = (I
b
, p
b
) submitted by a supplier s is given by:



The two costs described previously mean that; if s bid b wins, the buyer will pay the asked price p
b

and probably an additional cost given by either operational or environmental costs or both of them.
This is given by the effect of the attributes described previously in sections 4.2 and 4.3.

Then, the problem is modelled by using binary variables x
b
defined for each bid b B. Variable x
b
= 1
if bid b wins, and o if it loses. A constant parameter
bi
is defined for item i I and for each bid b B,
in order to indicate whether bid b covers set of items i. That is
bi
= 1 if i I
b
or o otherwise.

Then the auction looks for minimizing the total cost paid by the buyer, which includes the asked
price, operational cost and environmental cost. The model includes the objective function and the
e e
_
e
e

e
=
b
I i
i s b s
O C
, ,
e

e
=
b
I i
i s b s
E E
, ,
e
e e
e
constrains: The first one, guarantees that each item is covered at least once by supplier bids, and the
second one is the integrity constrain. The model is formulated as showed below:

































( )
{ } 1 , 0
1
. .
min
) (
, ,
e
>
+ +

e
e e
b
B b
b bi
S s s B b
b b s b s b
x
x
t s
x E C P
o
CHAPTER V
Experimental Analysis

In this chapter, we will assess the proposed supplier selection model in real life contexts. The main
goal is to compare the proposed model which minimizes the total cost (bid, operational and
environmental costs) and the traditional model which only considers the minimization of the bid
(price asked by the supplier) as decision criteria. The impact will be measured using the total cost
obtained in both scenarios as comparison metric. In order to be able to compare both the proposed
model, a set of instances is generated and the features of the problem are controlled by the number
of products, the number of suppliers, the number of bids, operational costs and environmental
costs.
5.1. Example tested

For this example, we used as input the number of suppliers [S], the number of items [I] and the
number of bids [B]. Three combinations ([S],[I],[B]) were considered: ([5],[10],[50]), ([7],[7],[40]) and
([10],[5],[50]). The demand for each item [i I] was randomly generated using numbers between
100 and 1000. Similarly, the unitary price asked by each supplier [s S] for a given product [i I] was
randomly generated with values between 50 and 100. Then the total price [b B] asked by a supplier
for a given item [i I] is computed by multiplying its unitary cost by the total amount of products
offered. Finally, for auction ([7],[7],[40]), the suppliers that bid for each product were randomly
assigned.
5.2. Operational costs
5.2.1 Capacity Score
The capacity for each supplier for each product is randomly generated between 100 and 1000.The
two steps fulfillment and the penalty/reward values are calculated using the formula

Fulfillment =1 {if (capacity /demand) >=0}
=0 {If (capacity /demand) <0}

Reward/ Penalty= (capacity/demand) {if fulfillment =0}
= ((capacity-demand)/ (demand*100)) {if fulfillment =1}



e
e e
e
e
Then fulfillment and penalty are added together to get a total capacity score, which is then ranked in
ascending order for each supplier for each product.


Then the difference between each suppliers value and minimum value is calculated for each
product for each supplier which is the relative score. Then the final capacity score is calculated by
Adding one to the result of the relative score to each cell value.


5.2.2 Leadtime Score

The lead time score for each supplier for each product is calculated by first obtaining lead time
values for each supplier for delivering each product which we created using random numbers
between 1 and 15. Based On his capacity for a particular product, supplier may need more than one
lead time to satisfy the demand of the customer. The first table values are obtained by using ceiling
function in excel to round off to nearest integer as follows:

Ceiling [Demand of product i/Capacity of the supplier s for product i)



Lead time Score values obtained from the supplier are multiplied with a number based on the
capacity of the supplier to satisfy the demand.



Lead time score = [(Demand of product i/Capacity of the supplier s for product i) rounded off to the
Next integer]*Lead time for the product i for supplier s

C
s,I
=[(D
i
/cap
s,i
)*L
s,i

Then each supplier is ranked based on the above score for each product.




The difference between the minimum score supplier and the other suppliers are calculated. The best
supplier gets a Final Lead time score 1, While others will get 1 plus the difference calculated based
on their ranks.


5.2.3 Quality Score

The Number of defective products is randomly generated between 3 and 233 i.e., between 6 sigma
and 5 sigma value, assuming that every supplier will have at least 5 sigma quality. Then the Service
level of the supplier is calculated from the suppliers present demand fulfillment ability



The service level score is obtained from difference between 100% service level and number of
defects score is obtained from difference between six sigma defect value which is 3.4 and the
supplier value.
The total score is calculated by the addition of all the three scores.


Then suppliers are ranked in each product category. The difference between the minimum score
supplier and the other suppliers are calculated. The best supplier gets a Final Lead time score (D
s,i
) 1,
While others will get 1 plus the difference calculated based on their ranks.


5.3 Environmental Cost
5.3.1 Energy Score
For Calculating the energy Score, First, The electricity consumption, Natural gas consumption, fuel oil
consumption used for all the twelve months of the previous year and the percentage of renewable
energy used are generated using random numbers using normal distribution. The means of the
distributions are chosen based on the industry average as given below.










TABLE 5.1 ENERGY USAGE STANDARDS USED IN THE EXPERIMENTAL ANALYSIS

Using the values in the above table as the means for the distributions concerned with the data for
each supplier we created the following table in which average values of energy usage is calculated.



The Averaged values are ranked from minimum to maximum. Then for each supplier in each
category, the difference between their energy usage value and the minimum energy usage value is
calculated.


1 Average Warehouse Space 17,400 square feet
2 AverageElectricity Usage IN US warehouses 7.6 Kwh/sqft/yr
3 Average Natural Gas Usage 20,900 Btu/sqft/yr
4 Average Fuel Oil usage in one warhouse 19.2 kbtu/sqft/yr
5 Average Electricity Usage in one warehouse 132240 Kwh/yr
6 Average Natural Gas Usage in One Warehouse 363.66 M Btu/yr
7 Average Fuel Oil usage in one warehouse 334080 kbtu/yr
8 Average Electricity Usage in one warehouse 11020 Kwh/month
9 Average Natural Gas Usage in One Warehouse 30.305 M Btu/Month
10 Average Fuel Oil usage in one warehouse 27840 Kbtu/month

201.7391304 gallons/month
Then the Total Energy score will be one for the minimum value supplier and for other suppliers the
final score will be one plus the difference between their value and the minimum value.



5.3.2 Wastage Score

For calculating wastage score, first, based on the Texas government regulations (any state
regulations in which the supplier operates can be used, we have used Texas government rules for
the ease of use) for hazardous waste materials, Each suppliers hazardous waste material emission is
obtained and the difference between the government norms and the supplier emission is calculated
for each material.



The cumulative sum of all the differences for each supplier is calculated. Then the values for
percentage of hazardous waste in all waste emitted, percentage of waste recovered, Percentage of
Waste Recycled are calculated for each supplier by randomly generating numbers based on industry
Average.



Availability of Waste management system is also checked for each supplier. Then suppliers are
ranked in ascending order based on these values separately .Relative scores of these values are
obtained by finding the difference between each value and the minimum value in each category.



Then the final score for each supplier will be sum of the score of all the categories plus one.

Total Wastage
score
Supplier 1 1.540
Supplier 2 1.117
Supplier 3 1.143
Supplier 4 1.336
Supplier 5 1.167
5.3.3 Packaging and Sourcing Score

The development of the Packaging and Sourcing score is based on the distance the material has to
travel to the supplier. The more the distance the higher the penalty and vice-versa. As sample
example from the tables is:


Packaging
Material Distance of Source Penalty Material Distance of Source Penalty Material Distance of Source Penalty
1 871 3 1 157 2 1 1562 3
2 2604 5 2 452 2 2 566 3
3 810 3 3 142 2 3 2928 5
1 1200 3 1 142 2 1 3961 5
2 397 2 2 385 2 2 1663 3
3 1608 3 3 940 3 3 336 2
1 849 3 1 644 3 1 2512 5
2 2026 5 2 728 3 2 4692 5
3 173 2 3 875 3 3 123 2
1 2663 5 1 511 3 1 3981 5
2 510 3 2 741 3 2 3461 5
3 355 2 3 316 2 3 2116 5
1 519 3 1 486 2 1 3701 5
2 2039 5 2 940 3 2 901 3
3 1911 3 3 642 3 3 396 2
Supplier 1
Supplier 2
Supplier 3
Supplier 4
Supplier 5
Product 1 Product 2 Product 3



Thus from the tables above, it can be seen that Supplier 3 is the best as they have the lowest Penalty
Score.
5.4 Impact of the operational and environmental costs

In order to measure the impact of considering operational and environmental costs, we compare
two scenarios. In the first case (scenario 1), suppliers are selected taking in account the bid,
operational and environmental costs, whereas in the second case (scenario 2), suppliers are selected
base only on the asked price. In scenario 1, the total potential cost incurred by the buyer is given by
the model presented in chapter 4:



In this case, the optimal set of suppliers is selected taking in account the total cost which considers:
asked price, operational cost and environmental cost. In this part, the total cost can be separated in
two parts: the asked price that the buyer will pay for sure and the operational and environmental
costs that will be paid likely during the operation.

In scenario 2, we solved a modified version of the auction model defined in chapter 4:

( )
{ } 1 , 0
1
. .
min
) (
e
>

e
e e
b
B b
b bi
b
S s s B b
b
x
x
t s
x P
o


Solving this model, we found the optimal solution by minimizing only the bid (asked price), which
represents the cost that the buyer has to paid anyways. Then, given this solution, we determine the
additional costs associated to operational costs and environmental costs which are likely to be paid
during the operation time. The operational costs are: ( )

e e
+
S s s B b
b b s b s
x E C
) (
, ,
.

Penalty Total Relative Score = R Score
Supplier 1 28 0.03571 1.03571
Supplier 2 25 0.04000 1.04000
Supplier 3 31 0.03226 1.03226
Supplier 4 33 0.03030 1.03030
Supplier 5 29 0.03448 1.03448
( )
{ } 1 , 0
1
. .
min
) (
, ,
e
>
+ +

e
e e
b
B b
b bi
S s s B b
b b s b s b
x
x
t s
x E C P
o
Table xx summarized the results obtained for each scenario after running the models for each
combination. For each scenario, we present the detail of total price asked by the suppliers (bid),
total operational cost, total environmental cost and finally, total cost for each combination.


TABLE 5.2: MODEL RESULT FOR THREE SCENARIOS

For scenario 1, the bid represents on average a 55% of the total costs that could be incurred by the
buyers, whereas the operational and environmental costs represent on average a 45% of the total
costs. Similarly for scenario 2, the bid represents on average a 50% of the total costs that could be
incurred by the buyers, whereas the operational and environmental costs represent on average a
50% of the total costs. Therefore, as expected, scenario 1 increases the total bid costs paid by the
buyer versus decreases the operational and environmental costs, nevertheless, the buyer is paying a
higher bid cost, the total cost is lower when the operational and environmental costs are taken in
account.
These results shows that is very important not only to consider the supplier asked price, because
there are other costs that sometimes are hidden which can affect dramatically the final total cost
that the buyer has to paid. A holistic analysis that considers different potential costs is important to
be conducted, since as we showed in this study, important savings can be obtained due costs that
are hidden, but are very likely to appear during supply process.













Scenario 1
s/I/B Bid Operational Environmental Total cost
10/50/5 352,246 216,477 186,328 755,051
7/40/7 251,541 73,499 63,269 388,309
5/50/10 125,462 29,952 32,175 187,589
Scenario 2
s/I/B Bid Operational Environmental Total cost
10/50/5 324,166 220,101 218,646 762,913
7/40/7 250,202 78,857 68,181 397,239
5/50/10 121,697 48,975 48,470 219,142

CHAPTER VI
Discussion, Conclusions and Future work

Each time more and more companies are concerned to be economic and environmental sustainable,
then important factors as quality, lead time, pollution yield, certification, etc. have to be considered
at the time to evaluate the supply chain as a whole. Additionally, many markets ask for very high
standards in terms of quality, operational and environmental certifications, where if a company is
not able to ensure those standards through its supply chain, the chances to get a percentage of
participation is almost null.

Off late sustainability has become a key point in the development and progress of companies around
the globe. The three pillars which are Economic Sustainability, Social Sustainability and
Environmental Sustainability have to be given equal importance. We proposed a model to select
suppliers considering not only the bid (asked price) that the supplier offers, but other criteria as
operational and environmental attributes which ensure, in certain way, the sustainability of the
company through the procurement segment of its supply chain. The model provides a basic tool to
evaluate a pool of suppliers and ensure to select the best combination in terms of bid, operational
and environmental costs, by minimizing the total cost that the buyer could pay. As we showed in this
study, an average saving of 6% was obtained by minimizing the total cost which considers
operational and environmental criteria.

This models aims to be a tool that helps buyer to reduce uncertainty by considering more factors
than only the asked price. Having the possibility to incorporate other factors that are present or may
potentially appear, the buyer has the choice to decide if paying more it is worthwhile as a return for
getting better operational and environmental conditions.

With respect to eliminating process, country contribution to environment where each suppliers are
from have to be considered to evaluate them to put on the list of elimination as different country
has different burden that they have to observe. Since there are more and more international
companies emerged, a specific burden to keep the environmental regulations on each country could
be applied to the factories where it is based on and applicable to the related countries. Because the
degree of weight factor to each country and each area is controversial, more aspects have to be
considered to this elimination process.

As future work, this model can be modified and more factors can be added in order to run different
scenarios. One improvement could be to incorporate different values from different environmental
acts customizing the tool for suppliers of different countries. On the other hand, even though the
model was tested with random data generated as we explained previously, it would be worth to test
this model with a more accurate companys historical data in order to show the real potential of our
model as a decision tool.




CHAPTER VII
References

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[2] Abrache, Gabriel Crainic, Gendreau, Rekik, Combinatorial auctions, Ann Oper Res (2007) 153:
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[3] M Rekik, and S Mellouli, Reputation-based winner determination problem for combinatorial
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1409

[4] Ledyard, J. O., Olson, M., Porter, D., Swanson, J. A., & Torma, D. P. (2002). The first use of a
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[5] Davenport, A. J., & Kalagnanam, J. R. (2001). Price negotiations for procurement of direct inputs.
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[6] Hohner, G., Rich, J., Ng, E., Reid, G., Davenport, A. J., Kalagnanam, J. R., Lee, H. S., & An, C. (2003).
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[7] Epstein, R., Henrquez, L., Cataln, J., Weintraub, G. Y., & Martinez, C. (2002). A combinatorial
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[8] International regulatory policies

8.1 http://www.oecd.org
8.2 http://unfccc.int/kyoto_protocol/items/2830.php
8.3 http://www.vienna.convention.at/
8.4 http://www.basel.int/
8.5 http://www.chem.unep.ch/pops/
8.6 http://ec.europa.eu/enterprise/policies/sustainable-business/ecodesign/index_en.htm
8.7 http://ec.europa.eu/enterprise/sectors/chemicals/reach/index_en.htm
8.8 http://ec.europa.eu/environment/waste/weee/index_en.htm
8.9 http://www.rohsguide.com/
8.10 http://ec.europa.eu/environment/waste/elv_index.htm
8.11 http://ec.europa.eu/environment/air/transport/road.htm

[9] USA CO2 emissions may drop to 1990 levels this year, Posted on July 2, 2012 by Anthony Watts
http://wattsupwiththat.com/2012/07/02/us-co2-emissions-may-drop-to-1990-levels-this-year/

[10] Kyoto Protocol reference manual Climate Change Secretariat (UNFCCC) & KYOTO PROTOCOL TO
THE UNITED NATIONS FRAMEWORK CONVENTION ON CLIMATE CHANGE UNITED NATIONS 1998

[11] U.S. Energy Information Administration / Monthly Energy Review October 2012

[12] INDIANA ARTICLE 9, CARBON MONOXIDE EMISSION RULES; ARTICLE 10, NITROGEN OXIDES
RULES; ARTICLE 11, EMISSION LIMITATIONS FOR SPECIFIC TYPES OF OPERATIONS