Quality Engineering, 18:123–129, 2006
Copyright # Taylor & Francis Group, LLC
ISSN: 0898-2112 print=1532-4222 online
DOI: 10.1080/08982110600567475
Supplier Selection Based on Process Capability and Price Analysis
Richard J. Linn
Department of Industrial and Systems Engineering, Florida International University, Miami, Florida, USA
Fugee Tsung and Lau Wai Choi Ellis
Department of Industrial Engineering and Engineering Management, Hong Kong University of Science and Technology,
Clear Water Bay, Kowloon, Hong Kong
Supplier selection is an important part of supply chain man-
agement. Among the numerous methods that have been pro-
posed, process capability index is considered to be the most
effective technique for identifying quality parts. However,
supplier selection should be carried out on the basis of qual-
ity and cost together. There is no easy tool available to eval-
uate the price and quality in an integrated manner. In this
article, a new approach to supplier selection using capability
index and price comparison (CPC) chart is presented. The
CPC chart integrates the process capability and price infor-
mation of multiple suppliers and presents them in a single
chart. It provides a simple but effective method to consider
quality and price simultaneously in the supplier selection
process.
Keywords Supplier selection; Process capability study; Price
quality integration.
1. INTRODUCTION
Supplier selection is an important part of supply
chain management. Techniques such as price com-
parison, sample inspection, factory visit, site survey, cer-
tification (e.g., ISO 9000 or QS 9000), and process
capability have been proposed for the process (Ourkovic
and Handfield, 1996). Among them, process capability
is considered to be the most effective method in selecting
quality products or parts (Asokan and Unnithan, 1999;
Boyles, 1996; Chan et al., 1991; Chen, 1990; Liu, 1993;
Pearn and Chen, 1997–98; Pillet et al., 1997–98; Singhal,
1990; Taam et al., 1993). Several researches have taken
the process capability further in selecting a supplier.
Address correspondence to Richard J. Linn, Department
of Industrial and Systems Engineering, Florida International
University, Miami, FL 33199. E-mail: Richard.Linn@fiu.edu
123
Chou (1994) applied hypothesis testing to select a
supplier by testing process capability indices. Their
method is not difficult to apply, but it is only suitable
for two-supplier comparison. Tong et al. (1998) applied
the bootstrap method to construct the bootstrap confi-
dence interval to distinguish between Cpk values of two
suppliers.
Although process capability study is an effective
way to identify a quality supplier, price is still the
widely used factor in practice. If the material cost is
not considered, product price competitiveness may
decrease and profit margin can shift. A modest reduc-
tion of 5% in purchasing price can achieve a 50%
increase in profits (Ballou, 1999). Verma and Pullman
(1998) pointed out in their research that although qual-
ity, price, flexibility and delivery performance seem
important to supply managers, the survey result shows
that they actually choose suppliers based largely on
cost and delivery performance. Hirakubo and Kublin
(1998) reported in their research that although
Japanese electronic component purchasers include in
their purchasing decisions product characteristics and
the supplier capability considerations, price is still a
critical decision-making criterion, regardless of the
product type, due to high labor costs and selling price
competition. Lau (2000) performed a study of more
than 100 companies in Hong Kong China Area on their
supplier selection method. The survey result (Table 1)
shows that the price and sample approvals together
remain as the main practice in the selection process.
Only a small percentage (4%) of the companies used
price and process capability together in their practice.
Price and quality are important factors in the
supplier selection process and should be evaluated in
an integrated manner. However, no formal method is
available for the integrated price and capability evalua-
tion. Therefore, supplier selection is still done largely
124 R. J. Linn, F. Tsung, and L. W. C. Ellis

Table 1 In a multiprocess environment where a group of

Summary of survey for supplier selection methods processes needs to be monitored or evaluated, it can
Method be difficult to analyze each individual chart to evaluate
overall performance of process control activities.
Sample
Singhal (1990) introduced a graphical chart using the
Frequency Price approval Site visit ISO9000 Cpk
p p
process capability indices Cpk to analyze the perfor-
32 mance of a group of processes. This chart is referred
p p p
28 to as the CpkMPZone.
p p p
20 As it is shown in Figure 1, a CpkMPZone chart
p p p p
16 contains six capability zones (F, D, C, B, M, and A),
p p
4
and zone M represents processes that satisfy Motorola’s
requirement (Harry, 1988). The x axis represents Cpu,
on the price basis, assuming that the sample is good. In and the y axis represents Cpl. For each individual pro-
this article, an integrated supplier selection method cess, the Cpu and Cpl values are calculated, and the
using capability index and price comparison (CPC) (Cpu, Cpl) pair is plotted in the chart. The 45 line repre-
chart to evaluate the quality and price of suppliers is sents the well-centered processes that Cpu ¼ Cpl. A (Cpu,
presented. The CPC chart is a graph presenting the Cpl) pair closer to the line has better centered process
process capability and price information concurrently performance. Depending on the capability indexvalue,
for the management to make supplier selection processes can be classified into six different categories:
decisions. F (inadequate where Cpk < 1.00), D (capable where
The concept of the CPC chart is expanded from the 1.00  Cpk < 1.33), C (satisfactory where 1.33  Cpk
CpkMPZone chart developed by Singhal (1990). The < 1.50), B (excellent where 1.50  Cpk < 2.00),
CpkMPZone chart is briefly discussed in Section 2. M (Motorola’s requirement where 1.50  Cpk,
Section 3 presents the details of the CPC charting Cpk  2.00), and A (super where Cpk > 2.00), respec-
approach. To demonstrate the application of CPC tively (Peam and Chen, 1997–98). This CpkMPZone
charting, two industrial cases of swivel ball parts chart provides a simple but clear picture of the status
for truck light fixtures are discussed in Section 4. of different process capabilities. This concept is
Section 5 concludes the entire study. expanded to integrate cost and process capability.

2. CpkMPZone 3. CPC CHART APPROACH

Cpk index is developed as a simple metric for Price and quality are important factors in supplier
revealing the effect of both the total underlying process selection process and should be evaluated in an
variability and the distribution skew condition. Proce-
dure for finding Cpk is as follows:
USL
l
Cpu ¼
3r
l
LSL
Cpl ¼
3r


Cpk ¼ min Cpl ; Cpu
where USL and LSL are the upper and lower specifica-
tion limit. In practice, the process mean l and the pro-
cess standard deviation r are almost unknown and
must be estimated by sample average X and sample
standard deviation s, as follows:
 X  rffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
1 1 X 2
X¼ xi ; s ¼ xi
X :
n n
1
where xi is the actual quality measurement of item i Figure 1. A CpkMPZone chart has six capability zones: A,
and n is the total number of items. M, B, C, D, and F.
 Supplier Selection Based on Process Capability and Price Analysis
integrated manner. A new approach using the
CpkMPZone chart concept is proposed to provide a
simple yet powerful tool to evaluate and qualify suppli-
ers. The procedure includes three steps:
1. Process capability and T=P ratio determination
2. CPC charting
3. Quality loss analysis
3.1. Process Capability and T/P Ratio Determination
When collecting samples for process capability
study, 30 samples of each part are highly recommended.
This is the number needed for a good estimate of
process mean and standard deviation. The samples
should be randomly taken from the production process.
If necessary, an agent should go to the site to personally
collect samples to avoid suppliers’ best available
samples. Before requesting samples for evaluation, the
functions, dimensions, appearance, and material used
should be properly studied to determine the critical
characteristics. The samples will be used to determine
Cpk of each supplier.
3.2. CPC Charting
Cpk values represent the quality performance of
different suppliers. To integrate the cost and quality
performance, a Cpk-price comparison (CPC) chart is
developed. As it is shown in Figure 2, in a CPC chart,
Figure 2. CPC chart.
125
the Cpk index is drawn on y axis, and the target price=
quoted price ratio (T=P ratio) is drawn on x axis. T=P
ratio is defined as follows:
T
Ri ¼
Pi
where
Ri: T=P ratio corresponding to supplier i
T: target price desired
Pi: price quoted by supplier i
The process capability index and T=P ratio of each
supplier i, (Ri, Cpk,i), is then plotted in the chart.
The chart is partitioned into six different zones
representing the quality performance and price levels.
The zones are defined as follows:
E Zone: excellent zone, E ¼ {(R, Cpk) | Cpk > 2.0 and
R > 2.0}
G Zone: good zone, G ¼ {(R, Cpk) | Cpk > 1.5 and
R > 1.5} – E
S Zone: satisfactory zone, S ¼ {(R, Cpk) | Cpk > 1.33
and R > 1.33} – G – E
C Zone: capable zone, C ¼ {(R, Cpk) | Cpk > 1.0 and
R > 1.0} – G – E– S
H Zone: high price zone, H ¼ {(R, Cpk) | Cpk > 1 and
R < 1}
U Zone: unacceptable zone, U ¼ {(R, Cpk) | Cpk < 1
and R > 0}
Because of their high-quality performance and low-cost
quotation, those suppliers falling into the E zone are the
best group of suppliers from which to choose. Those
falling into the U zone are simply not acceptable
because their Cpk index is too low. The supplier selection
should start from the E zone and follow the sequence of
E ! G ! S ! C ! H ! U. Within the same zone, those
falling into the lower half zone (below the 45 line) have
better cost performance. In contrast, those in the upper
half zone (above the 45 line) have better quality perfor-
mance. Therefore, if the objective is to select a better
cost performer, those in the lower half of the zone
should be selected. If the objective is to find a better
quality performer, those in the upper half zone should
be selected. If quality and cost are equally important,
those close to the 45 line should be selected.
3.3. Quality Loss Analysis
When quality and price are equally important to
the company and two or more suppliers are in the best
126 R. J. Linn, F. Tsung, and L. W. C. Ellis

zone, quality loss analysis can be applied. The quality ball action light is a common product used inside the
loss analysis procedures are summarized as follows: truck cabs. Due to the high demand on the product,
the CNC center does not have enough production
1. Calculate cost loss per part. This may include col- capacity to meet the demand of the swivel balls used
lecting information from different departments, in the lights. Thus, the company has decided to sub-
such as purchasing, quality, and customer service contract this part out. The outer diameter of
and maintenance, for cost data such as warranty 44.40 þ 0.04 mm is the most critical dimension of the
claim, service charges, handling cost, and material swivel ball parts.
cost.
2. Select the top two or three potential suppliers for
comparison with respect to the Cpk values and price 4.1.1. Process Capability and T=P Ratio
offered. Use CPC chart to determine the top
suppliers. Even though 30 samples are recommended, only
3. Apply the average loss function and calculate 20 sample parts were made available from each poten-
quality loss of each supplier. The loss function is tial supplier for the process capability study. There-
defined as (see Phadke, 1989): fore, the study was carried out with the limited
number of samples. The prices and dimensional data
L ¼ K½r2 þ ðl
X0 Þ2  of three suppliers are shown in Table 2. To prepare
the CPC chart, the process capability index, Cpk, target
where price, T, and T=P ratio of the parts are first deter-
mined, and the statistics are presented in Table 3.
L: quality loss
X0: the target value of x
Cost Lost=Piece
K¼
Tolerance
Table 2
4. Calculate the difference (La
Lb ), and compare the Outside diameter data of swivel balls from three different
difference between the two. suppliers of Grakon International Limited
5. Draw a quality loss difference=cost saving
Supplier A (Price quoted: HK$3.5)
(QLD=CS) chart. 44.415 44.422 44.416 44.418 44.410
6. Compare the quality loss difference with the value 44.418 44.430 44.417 44.426 44.412
of cost saving per part. 44.416 44.418 44.419 44.425 44.416
7. Select the one that can generate better cost saving. 44.415 44.415 44.418 44.42 44.418
Supplier B (Price quoted: HK$3.1)
44.43 44.405 44.425 44.416 44.412
4. ILLUSTRATION OF METHODOLOGY 44.422 44.403 44.424 44.415 44.408
44.415 44.400 44.415 44.395 44.405
The CPC chart approach is to evaluate the process 44.41 44.425 44.41 44.408 44.404
quality and cost performance of different suppliers in Supplier C (Price quoted: HK$2.2)
an integrated manner. The method is demonstrated 44.383 44.403 44.413 44.415 44.402
using two industrial cases. In the first case, the swivel 44.385 44.414 44.402 44.405 44.396
ball of industrial truck light fixture is used. Three 44.4 44.372 44.395 44.405 44.405
suppliers are investigated in this real industrial case. 44.394 44.393 44.402 44.398 44.385
To further illustrate the ability of CPC chart and loss
function analysis, a second case with 10 simulated sup-
pliers for the swivel ball case is used.
Table 3
Statistical data for CPC charting
4.1. Swivel Ball Case for Truck Light Fixtures
Supplier Variable X s Cpu Cpl Cpk T=P
Grakon International Limited is a U.S.-based Asuper C1 44.418 0.005 1.467 1.2 1.2 0.85
company with a manufacturing plant in Hong Kong. Rainbow C3 44.412 0.009 1.037 0.444 0.444 0.97
Its main business is to produce vehicular light fixtures Sam Siu C5 44.398 0.011 1.273 0.006 0.006 1.37
for truck manufacturers in the United States. Swivel Target price is $3=part.
 Supplier Selection Based on Process Capability and Price Analysis 127

4.1.2. CPC Charting

Given the Cpk and T=P ratio of each supplier, the

CPC chart is plotted in Figure 3. The CPC chart gives
a clear picture of the quality performance and price
position of each supplier regarding the critical dimen-
sions of swivel balls.
In Figure 3, C1 (Supplier Asuper) has an accepta-
ble Cpk value, but the price is slightly higher than the
target price. The C3 (Supplier Ranbow) has an unac-
ceptable Cpk value, and their price is higher than the
target. C5 (Supplier Sam Siu) has too low a Cpk value.
Because the company emphasizes product quality, the
choice is Asuper because it is the only supplier with
acceptable Cpk value, although it has a higher price
than the target.
If some suppliers may fall into two neighboring
zones but are very close to each other, a gray area
may occur because they may have similar quality per-
formances and prices. To resolve the difference, some
other factors may be included in the consideration, Figure 3. CPC chart for Grakon’s case.
for example, the quality performance history of the
suppliers and the service history of the suppliers generated within the range of 1.5 to 4.5 and allocated
regarding delivery time and customer support service. to each supplier. The simulation results of the 10 sets
The decision policies may vary from one company to of random data, and the calculated Cpk values and
another. For example, management may choose the T=P ratios are shown in Table 4. The CPC chart for
supplier with a higher Cpk value if the prices are close. the 10 simulated suppliers is shown in Figure 4.
Looking at the CPC chart, it is clear that S3, S5,
S7, and S10 are unacceptable and therefore eliminated.
Also, with the objective of good quality but low cost,
4.2. Simulated Ten Suppliers Case
supplier S2 is eliminated because it is in the high price
zone. Among the four suppliers left, S4 and S9 are
Because of company’s supplier contracting policy,
located in the zone that is less preferred than S1 and
the swivel ball case in Section 4.1 has only three suppli-
S6; therefore, S4 and S9, are also rejected.
ers to consider. To further demonstrate the function
and effectiveness of CPC chart, a simulation of 10
suppliers is carried out. Swivel ball components with 4.3. Quality Loss Analysis
critical dimension of 44.42  0.02 mm outside diameter
are to be produced. The target price of this component The best two choices, S1 and S6, from the simu-
is $3. For each supplier, the mean and standard devia- lated case are considered for the quality loss analysis.
tion are randomly generated within the range of Grakon International estimated the cost loss per piece
44.41 to 44.43 mm and the range of 0.0020 to 0.0080, of this swivel ball part at HK$90, which includes repla-
respectively. Ten different prices are randomly cement, labor cost, and operation cost for handling

Table 4
Process capability data of 10 simulated suppliers
Supr. S1 S2 S3 S4 S5 S6 S7 S8 S9 S10
X 44.4220 44.4180 44.4200 44.4180 44.4100 44.4210 44.4150 44.4300 44.4100 44.4170
s 0.0026 0.0041 0.0070 0.0039 0.0050 0.0030 0.0060 0.0035 0.0030 0.0070
Cpk 2.3077 1.4634 0.9524 1.5385 0.6667 2.1111 0.8333 0.9524 1.1111 0.8095
Price 1.6000 3.2000 3.8000 2.1000 2.8000 1.7000 3.0000 3.8000 1.8000 2.0000
T=P 1.8750 0.9375 0.7895 1.4286 1.0714 1.7647 1.0000 0.7895 1.6667 1.5000
128 R. J. Linn, F. Tsung, and L. W. C. Ellis

5. CONCLUSION

Supplier selection is a critical part of supply chain

management, and cost has been a major factor in sup-
plier selection. Although it is an effective way to iden-
tify quality suppliers, process capability index has not
been widely incorporated in the industrial practice
because these is no easy tool available to relate the
two factors. CpkMPZone method provides a simple
charting tool to relate the process capability of multi-
ple suppliers to select a quality supplier. Derived from
the concept of CpkMPZone chart, the CPC charting
method is to integrate both process capability and cost
performance of multiple suppliers into a simple chart,
allowing a clear view of quality–cost performance all
suppliers. If some supplier performances are difficult
to differentiate, quality loss function is incorporated
for further analysis. The CPC charting is demonstrated
with a real industrial case and a simulated case, in
Figure 4. CPC chart for Grakon’s case with 10 simulated selecting a quality supplier. It is an efficient but easy
suppliers. to use method to consider process capability and cost
together in supplier selection process.
this warranty claim. The loss function defined in Sec-
tion 3.3 is used for the analysis, where
ABOUT THE AUTHORS
Cost Lost=Piece 90
K¼ ¼ ¼ 225000: Dr. Richard Linn is an Associate Professor of
Tolerance :022
Industrial and Systems Engineering as the Florida
For S1, Ls1 ¼ 225000½0:00262 þ ð44:4220
44:4200Þ2  International University. He received his Ph.D. in
¼ 2:4210 Industrial Engineering in 1987 from the Pennsylvania
For S6, Ls6 ¼ 225000½0:00302 þ ð44:4210
44:420Þ2  State University, and his M.S. in Industrial Engineering
¼ 2:2500 and Operations Research in 1983 from the Virginia
The lost ¼ Ls1
Ls6 ¼ 0:1710 Polytechnic Institute and State University. He
The cost saving ¼ 1:7000
1:6000 ¼ 0:1000 served as a Senior Research Fellow on the aircraft
maintenance logistics at Naval Air Depot, Cherry
It is not justified to choose S1 because the cost Point, North Carolina. He teaches quality engineering,
saving=part cannot offset the quality loss=part of S1. statistics and logistics. His current work is to integrate
Instead, S6 should be selected. the quality monitoring and diagnosis into the enterprise
However, suppose that the cost loss per piece of production management system.
this swivel ball part is HK$9 rather than $90, then Dr. Fugee Tsung is an Associate Professor in the
the loss functions will be Department of Industrial Engineering and Logistics
Management at the Hong Kong University of Science
Cost Lost=Piece 9 & Technology. He received both his M.S. and Ph.D. in
K¼ ¼ ¼ 22500:
Tolerance :022 Industrial and Operations Engineering from the Uni-
versity of Michigan, Ann Arbor. He is an Associate
0
For S1, Ls1 ¼ 22500½0:00262 þ ð44:4220
44:4200Þ2  Editor of Technometrics, a Department Editor of the
¼ 0:2421 IIE Transactions, and on the Editorial Boards for
0
For S6, Ls6 ¼ 22500½0:00302 þ ð44:4210
44:420Þ2  ¼ Quality and Reliability Engineering International
0:2250 (QREI), the International Journal of Reliability, Qual-
ity and Safety Engineering (IJRQSE) and the Inter-
0 0
The lost ¼ Ls1
Ls6 ¼ 0:0171. In this case because the national Journal of Six Sigma and Competitive
cost saving is greater than the lost, supplier S1 will be Advantage (IJSSCA). He is an ASQ Certified Six
selected over the S6. Sigma Black Belt, ASQ authorized Six Sigma Master
 Supplier Selection Based on Process Capability and Price Analysis
Black Belt Trainer, and former Chair of the Quality,
Statistics, and Reliability (QSR) Section at INFORMS.
He is also the winner of the Best Paper Award for the
IIE Transactions focus issue on Quality and Reliability
in 2003. His research interests include quality engineer-
ing and management, statistical process control,
monitoring, and diagnosis.
Ellis Lau was a M.Phil. student in the Department
of Industrial Engineering and Logistics Management at
the Hong Kong University of Science & Technology.
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