Risk analysis for the supplier selection problem using failure modes and effects analysis (FMEA)

While seeking for global suppliers is a general trend for lower cost and better quality, it is not trivial for a company to assess the corresponding risks in supplier selection. This paper proposes the supplier selection method that applies failures modes and effects analysis (FMEA) to assess the risks in the decision process. As each supplier is evaluated under the common multi-criteria framework, risks are viewed as the possible deviations from expected performance, and they are interpreted as failure modes in risk analysis. Following the concepts of FMEA, each failure mode is examined with respect to the possible causes and effects. This method generates two technical deliverables for supporting risk analysis. Firstly, the FMEA document is developed to support the team’s discussion of supplier risks and accumulate the risk knowledge within the company. Secondly, the ranking numbers based on FMEA (i.e., risk priority numbers) are utilized to evaluate a discount on a supplier’s performance according to their risk level. A real-case example about selecting methanol suppliers in the global market is used to demonstrate the proposed method for risk analysis in practice.