Categorizing suppliers for development investments in construction: application of DEA and RFM concept

Abstract

Supplier development plays a significant role in the cost, quality and delivery improvements of construction projects. However, there is limited research on analytical methods of categorizing and prioritizing a high number of suppliers for effective allocation of scarce development resources. This research aims to develop an objective model to categorize a general contractor’s suppliers. To do so, we use three concepts from different research backgrounds – recency, frequency and monetary value (RFM); data envelopment analysis (DEA); and the customer pyramid – and add the number of projects (P) shared with each supplier as a context-related variable to build a novel RFMP model. The model categorizes suppliers into four levels of the supplier pyramid, utilizing historical data on supplier–contractor transactions. To test the model in practice, we adopt a case study of an international construction company in Finland. The results reveal that a supplier’s RFMP score reflects its contribution to the contractor’s business; therefore, development investments should vary, based on a supplier’s position in the supplier pyramid. This research contributes to the knowledge on supply chain management in construction by combining three approaches – RFM, DEA and the customer pyramid – into a single objective model to categorize suppliers for effective development investments.

Keywords:

• Supply chain management
• supplier development
• recency, frequency and monetary value
• data envelopment analysis
• benchmarking
• customer pyramid

Acknowledgements

The authors thank the staff members of the case company’s supplier development division for their assistance regarding access to the suppliers’ data and feedback on study findings. The authors are also grateful to the journal’s editor and the three anonymous referees for their helpful and constructive comments. In addition, the first author would like to thank Dr. Mahdi Mahdiloo for valuable discussions.

Notes

1. Please note that in this study, we use the terms programme, practice and initiative interchangeably for supplier development.

2. For more background studies about SD, see Nagati and Rebolledo (2013) and Chen et al. (2016).

3. In this study, the term supplier refers to all types of service and material providers.

4. In this study, we refer to the construction company as a buyer.