Application of Taguchi loss functions for supplier selection

Purpose – This paper seeks to provide a tool for decision makers to make more informed decisions regarding their outsourcing decisions and selection of the appropriate supplier.Design/methodology/approach – The method uses the Taguchi loss function for the inclusion of intangibles in the evaluation and selection of suppliers. Intangibles are defined as factors that have an impact on the selection of an appropriate supplier but are not easily quantified to be included in the financial evaluation. These intangibles are classified as the benefits and risks of using a supplier to perform the outsourcing function. A decision maker has certain expectations regarding these intangibles and a loss occurs when a supplier's performance does not meet the decision maker's expectations. The Taguchi loss function has been selected as a means of measuring the loss. The decision maker defines the target value and the specification limits for each benefit and risk category. The weighted loss scores are calculated where the...

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