multi-criteria supplier selection in the airline retail industry

232 Pages·2014·4.4 MB·English

MULTI-CRITERIA SUPPLIER
SELECTION IN THE AIRLINE

RETAIL INDUSTRY

PATRICK B.M. FAHIM

MASTER OF SCIENCE THESIS
SYSTEMS ENGINEERING, POLICY ANALYSIS AND MANAGEMENT
DELFT UNIVERSITY OF TECHNOLOGY
FACULTY OF TECHNOLOGY, POLICY AND MANAGEMENT
JANUARY 2014
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Delft, January 2014

Author: Patrick Badredin Maximilian Fahim
Student number: 1334875
Email: [email protected]

University: Delft University of Technology
Program: Systems Engineering, Policy Analysis and Management (SEPAM)
Faculty: Technology, Policy and Management (TPM)

Company: KLM – Royal Dutch Airlines
Department: Inflight Services

Graduation Committee:
Chairman Prof.dr.ir. L.A. Tavasszy TU Delft, Transport & Logistics (TPM)
First supervisor Dr. J. Rezaei TU Delft, Transport & Logistics (TPM)
Second supervisor Dr.ing. V.E. Scholten TU Delft, Technology, Strategy &
Entrepreneurship (TPM)
External supervisor Drs. M. Smallegange KLM – Royal Dutch Airlines

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PREFACE
This Master of Science thesis is the final deliverable of the Systems Engineering, Policy Analysis and
Management program at the Delft University of Technology. This thesis is the result of a graduate
research internship at KLM Inflight Services. The research mainly concerns the supplier selection of
airline retail.
First of all, I would like to express my gratitude towards Anna Ketting and Koos Kruijswijk for
granting me the opportunity to conduct my graduate research internship at KLM Inflight Services.
Also, I would like to thank them for sharing their opinions on relevant topics of this research.
Special thanks go out to my first internal supervisor Dr. Jafar Rezaei, who has majorly contributed to
the realization of this research. His passion for supply chain management, and genuine interest in my
research topic, had a contagious effect with regard to my own efforts. I would like to thank him for his
support and willingness to help in any time of need throughout the complete research period. He had
proven to be a true mentor to his pupil by means of providing him with guidance and inspiration.
Similarly, I would like to express my sincerest gratitude towards my external supervisor Drs. Marijke
Smallegange for her patience, kindness, and support throughout the complete research period. She has
significantly contributed to the realization of this research by providing frequent feedback, and
valuable insights and ideas.
In addition, I would like to thank Prof.dr.ir. Lóránt Tavasszy and Dr.ing. Victor Scholten, which
fulfilled the function of chairman and second internal supervisor in my graduation committee,
respectively. Their valuable comments and ideas during the feedback meetings of a more formal
nature have enabled me to approach the research from different perspectives.
Furthermore, I would like to thank the members of KLM Inflight Services for sharing their opinions,
and for making my internship an educative and pleasant experience.
Last but not least, I would like to thank my dear family and friends for their invaluable support and
encouragement throughout my complete student career. A very special note of thanks and appreciation
is due to my father, mother, and brother, who have always supported me by any means necessary and
beyond.

Patrick Fahim
January 2014
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SUMMARY
Whereas, in previous times, the airline industry could be characterized by high returns, high growth
rates and governmentally regulated protectionism, nowadays, since the liberalization of the industry,
the airline industry could be characterized best as a highly competitive market. One of the major
consequences of the liberalization of the airline industry was the market entry of the low cost carriers
(LCCs), which, in combination with the increased ticket price transparency due to the rise of the
internet, have resulted in reduced average yields of airlines. In addition to the reduced average yields
of airlines, the increased competition has caused a loss in market share of the traditional airlines.
Although a reduction in KLM’s market share (as compared to the situation before the liberalization)
seems inevitable since the competition in the airline industry has increased dramatically, clever
customer need identification, by means of among others appropriate use of marketing tools, should
allow KLM to continue to do well in the airline market.
Due to the fierce competition and low profit margins, KLM seeks for opportunities within the
passengers category, ancillary to ticket sales, to generate substantial revenues. This research focuses
on increasing revenues generated from the retail branch within the ancillary products and services.
Traditionally, airline retail comprises the sales of in-flight retail products, which customers can buy
during their flights. Complementary to the in-flight sales, in 2012, KLM introduced the KLM web
shop through which customers can order retail products online by means of home delivery. In
addition, more recently, in an endeavor to provide tailored product- and service offerings in order to
better meet customer demands KLM provides its passengers the possibility to pre-order retail
products.
As the case in ordinary retail, airline retail can be characterized by intense pressure of competition,
ever-changing customer requirements, and ever-changing product portfolios. Ever-changing customer
requirements force companies to develop agile supply chain capabilities to remain competitive, which
implies that these companies need to emphasize their ability with regard to flexibility and
responsiveness to be able to cope with their complex and dynamic business environments. In the
current retail assortment roughly a distinction can be made between a mainstream segment and an
image building segment. While the mainstream segment comprises tax-free articles, mainly from
international “A-brands”, that are widely available in the market and form the basis of a tax-free
assortment of an airline, by means of the image building segment KLM seeks to create a “signature”
assortment, which differentiates them from alternative airlines.
While KLM Retail’s current supply base strategy follows the principles of a competitive approach, i.e.
utilizes a larger number of suppliers, KLM Retail´s decision maker (DM) believes that it should
increasingly establish close relationships with its supply chain partners to be able to cope with the
constantly changing market conditions within the airline retail market. For this purpose, KLM Retail’s
DM contemplates to reduce its supply base, i.e. utilize a smaller number of suppliers, with respect to
the mainstream segment of the retail assortment. Ultimately, through this development in its supply
strategy, KLM strives to achieve greater cost-efficiency, while at the same time providing customers
higher quality products and services. However, to allow KLM to correspondingly to their envisioned
supply base strategy effectively select the most suitable suppliers, there is a need for a supplier
selection methodology that takes into account supply base reduction (SBR). This research specifically
focuses on KLM’s supplier selection with respect to the mainstream segment of retail products in a
SBR-context. Hence, the main research objective is to provide KLM Retail with a methodology that
allows to select the most suitable suppliers with respect to mainstream retail in a SBR-context.

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Following from the main research objective, the main research question was formulated as follows:
How should KLM conduct its supplier selection with respect to its mainstream retail assortment,
taking into account supply base reduction as supply base strategy?
In order to provide a satisfying answer to this main research question, first, an extensive literature
study was conducted. Based on literature study, the conclusion was drawn that the supplier selection
problem at KLM Retail could be best characterized as a multi-criteria decision making problem,
involving both qualitative and quantitative criteria. In addition, the literature study provided insights
into (among others) conceptual supplier selection models, specific supplier selection methods, and
supplier selection criteria. The conceptual models mainly rely on the principle of first reducing the
initial set of potential suppliers into a smaller set of qualified suppliers by means of a “sorting”
mechanism in the qualification phase. Then, the qualified suppliers ought to be evaluated, and
eventually ranked, in the more comprehensive final choice phase of the supplier selection procedure.
To be able to incorporate KLM’s specific requirements with respect to supplier selection into the
development of the methodology, interviews were held with the DM and experts. In addition, in order
to grasp the complexities and dynamics of the airline retail market, an endeavor was made to analyze
the current situation at KLM Retail. On the basis of mainly literature review and interviews, the
“Funnel Methodology for Supplier Selection” was developed. The developed methodology comprises
two main phases: (1) Qualification phase, and (2) Final choice phase. Each of these phases provides a
step-by-step approach to execute to, eventually, be able to select the most suitable supplier(s).
For the qualification phase, the choice was made to apply a conjunctive screening method. This choice
was made, firstly, in order to reduce the initial set of potential suppliers prior to the final choice phase,
and secondly, to be able to effectively cope with the possible adverse effects occurring due to the fully
compensatory nature of the fuzzy AHP applied in the final choice phase. For the final choice phase,
the choice was made to apply the improved fuzzy AHP using FPP as developed by Rezaei et al.
(2013). The choice for an AHP was made due to its ability to cope with quantitative as well as
qualitative criteria. The choice for the improved fuzzy AHP using FPP was made due to its high
sophistication in the ability to incorporate uncertainty and vagueness of human thinking.
After the methodology was developed, it was fully applied to three product categories (Electronics,
Watches, and Jewellery & Bijoux). For each considered product category a number of suppliers was
derived from KLM Retail’s supplier database.
Based on DM’s and experts’ opinions, in the qualification phase suppliers were assessed against the
following six criteria:
 Cost/Price;
 Product quality;
 Delivery;
 Financial stability;
 CSR; and
 Assortment.
Suppliers were, then, evaluated against each of the criteria by means of an acceptable or unacceptable
performance. In order for a supplier to successfully pass the qualification phase, it must be evaluated
acceptable with respect to each of the specified criteria. The supplier evaluations demonstrated that
most suppliers were assessed as acceptable against each criterion, except for assortment. Implying that
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most suppliers were considered not to be suitable for a SBR context due to limitations of their
assortment.
By means of constructing the AHP-hierarchy in the final choice phase, thirty-six relevant sub-criteria
along with twelve “parent” criteria, and three criteria classes were identified and specified. After the
establishment of the AHP-hierarchy, priority weights of each of the sub-criteria, parent criteria, and
criteria classes were obtained by means of applying FPP to the earlier expressed pair-wise comparison
judgments by the DM. Subsequently, the qualified suppliers were evaluated against the thirty-six sub-
criteria, after which, the priority weights and the supplier evaluations were aggregated to final supplier
scores, resulting in supplier rankings.
In addition to the derived criteria from the literature, the construction of the AHP-hierarchy led to the
identification of a number of industry-specific supplier selection criteria:
 Listing fee;
 Content related costs;
 Media activities;
 Product packaging;
 Sourcing ability; and
 Ability to return/sell back.
It could be argued that these criteria can be attributed to the manner in which retailers operate due to
their direct interface with the consumer. In addition, processing of the pair-wise comparisons led to
insights into the importances of the criteria with respect to their parent criterion, and with respect to
the overall goal of selecting the most suitable supplier(s). Although discrepancies were detected in the
priority weights of criteria between the different product categories, in general, the following six
(higher level) criteria had proven to be considered as most important with respect to selecting the most
suitable supplier(s):
 Financial stability;
 CSR;
 Cost/price;
 Product quality;
 Delivery; and
 (Delivery) Flexibility & Responsiveness.
With respect to KLM Retail’s current suppliers, the final supplier scores and rankings for each of the
considered product categories reflect the relative performances of the suppliers. The conclusions
regarding the supplier selection are relatively straightforward, and were directly derived from the
supplier rankings:
 With respect to the supplier selection of Electronics, the conclusion can be drawn that
Supplier E, Supplier D, and Supplier F would be first, second, and third choice, respectively.
 With respect to the supplier selection of Watches, the conclusion can be drawn that Supplier
R, Supplier S, and Supplier D would be first, second, and third choice, respectively.
 With respect to the supplier selection of Jewellery & Bijoux, the conclusion can be drawn that
Supplier R, Supplier S, and Supplier D would be first, second, and third choice, respectively.
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With respect to the qualification phase, the conclusion was drawn that it serves its two main objectives
well. Firstly, by means of considerably reducing the number of suppliers prior to comprehensive
assessment in the final choice phase (to diminish the exhaustiveness of the overall supplier selection
procedure), and secondly, by means of accomplishing that each of the (further scrutinized) qualified
suppliers were evaluated to perform at least acceptable in the final choice phase with regard to the
adopted criteria in the qualification phase. The latter inference implying that no adverse effects due to
the compensatory nature of the AHP were allowed by the methodology.
With respect to the final choice phase, the conclusion was drawn that it had provided many valuable
insights. Firstly, by means of constructing the AHP-hierarchy, relevant criteria for the specific supplier
selection are identified and defined. Secondly, processing the pair-wise comparisons leads to
preferences of the DM in terms of criteria importances with respect to their parent criterion, and with
respect to the overall goal. Thirdly, by means of aggregating priority weights and supplier evaluations
final supplier scores and rankings are obtained, which enable the user to select the most suitable
supplier(s). Fourthly, insights into intermediate results in terms of supplier scores on higher level
elements of the AHP-hierarchy are provided.
Subsequently, validation tests had been conducted to test the developed methodology for validity. The
qualification phase had been tested for validity by means of expert opinions. The final choice phase
had been tested for validity by means of expert opinions, consistency indices, and comparison between
product categories. Lastly, the methodology was tested for validity by comparing supplier evaluations
obtained from the first and second phase. Since each of these validation tests had been successfully
passed, the conclusion can be drawn that the methodology represents and reproduces behavior as
anticipated in, and accordingly to, the real-world.
Then, the main research question could be concisely answered by stating that KLM should conduct the
supplier selection of its mainstream retail assortment by applying the step-by-step approach prescribed
by the “Funnel Methodology for Supplier Selection”.
However, when conducting supplier selection there are a number of crucially important issues that
were not included in the scope of this research. These critical issues are lot-sizing, supplier capacity,
power balance, supplier development, and total cost of ownership. Due to their crucial importance,
these issues are recommended to be further investigated when conducting supplier selection. In
addition to the recommendation to further investigate these issues, other recommendations were made
that should provide insights into the manner in which the findings throughout this research could be
used to the advantage of KLM Retail.
These recommendations can be categorized into two main categories: (1) supplier selection, and (2)
sourcing strategy. In turn, supplier selection recommendations are subdivided into general and
specific. The general recommendations could be used to improve the supplier selection in general,
whereas the specific recommendations are focused on recommendations regarding the developed
supplier selection methodology.
General supplier selection
 Firstly, resources should be invested in educational programs about sourcing, purchasing, and
supplier selection in an agile environments, consequently, allowing the DM and experts to
increasingly understand, and cope with, the complexities and dynamics of their business
environment.
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 Secondly, increase invested resources in gathering as comprehensive, and detailed,
information as possible about the suppliers prior to selecting them to increase leverage on
suppliers.
 Thirdly, comprehensively assess the supply market to identify new, and benchmark current,
suppliers.
Specific supplier selection
 Firstly, implement and apply the developed methodology in its business practices.
 Secondly, construct a user-friendly (spreadsheet) model as it can significantly increase the
usability of the developed supplier selection methodology
 Thirdly, invest resources in familiarizing the envisioned users (DM and experts) with applying
the methodology.
 Fourthly, regularly review criteria, and if required, adapt criteria accordingly to changes in the
environment.
 Fifthly, regularly reevaluate and benchmark supplier performances by means of applying the
methodology.
Furthermore, although it was not originally intended, however, since the discussion about which
sourcing strategy to pursue is still in progress, and due to the relevance of sourcing strategy for
supplier selection, a few basic recommendations regarding the development of a suitable sourcing
strategy are provided. These can be subdivided into general recommendations regarding the
development of a sourcing strategy, and recommendations about the implementation SBR.
General sourcing strategy
During the development of the sourcing strategy, we recommend to adopt an open decision making
process involving the following actors:
 Director of KLM Retail & Media (Initiator);
 Retail Manager (Initiator);
 Manager Operational Excellence;
 Category Manager I & II;
 Retail Buyer I & II;
 (Logistics) Operations Manager;
 KLM Finance Department; and
 Supplier(s).
In addition, during the development of a suitable sourcing strategy, it is recommended to:
 Firstly, define clear requirements and needs of products and services for each individual
product category.
 Secondly, comprehensively assess the supply market to identify new and benchmark current
suppliers with regard to each of the product categories.
 Thirdly, correspondingly customize the sourcing strategy for each of the product categories
individually, depending on the respective requirements and needs of products and services,
and supplier opportunities (e.g. the scope and scale of offered products and services).
 Fourthly, take into account the desired buyer-supplier relationship, supply risk, and power
balance.
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Furthermore, a minor recommendation, with respect to utilizing distributors opposed to brands as
suppliers, would be to investigate whether profit margins obtained from distributors and brands
actually significantly differ. This could be done by conducting relatively simple statistical analyses.
Finally, since retail is clearly not a core competence of KLM as an airline, it could be argued that their
resources could be more effectively deployed elsewhere in the organization. Hence, it is recommended
to seriously investigate the possibilities to outsource the retail function.
SBR
With respect to implementing SBR, the general conclusion was drawn that the current mind-set
regarding purchasing and supplier selection at KLM Retail must change. Whereas in the current
situation suppliers are selected mostly on a two-monthly basis, in the future situation possibly
suppliers should be selected for the longer-term with the intention to develop closer relationships.
Obviously, this change solicits for a change in the manner in which supplier selection should be
approached.
In addition, when the decision is made to adopt SBR, it is recommended not to change the supply base
too abruptly for two main reasons: firstly, to provide room for adjustment in both the own organization
and the organization of supplier(s), and secondly, to reduce supply risk due to teething problems. Also,
it could be argued to first reduce the supply base with respect to one, or a smaller number of, particular
product category, in the fashion of a “pilot”-project. This could be done for the same arguments a
provided to not change the supply base too abruptly.
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