Tiered Data Envelopment as method for clustering suppliers

Abstract

Effective supplier management requires continuous monitoring of the performance and capabilities of one’s supplier base. Although the literature often focuses on ranking, it has lately become increasingly important to group suppliers according to their capabilities. In this paper, we compare two clustering methods. The application of Cluster Analysis (CA) has been widely discussed in the literature. Tiered Data Envelopment Analysis (TDEA) is also well-known in the decision-making literature, but is nonetheless seldom employed in supplier evaluation. CA is only suitable for group formation on a nominal scale, whereas the TDEA method during group formation allows the groups to be formed on an ordinal scale. TDEA may therefore prove to be the more suitable method for ordinal group formation. This article attempts to bridge a research gap, which arises since the two methods are infrequently employed in supplier selection. A numerical example is used to compare their application.