How the Analytic Hierarchy Process (AHP) Can Help You Make Key Business Decisions

By
Sarah Leung
October 2, 2015

Analytic Hierarchy Process is one of several approaches––including total cost of ownership (TCO), multiple attribute utility theory, and others––that wholesale companies can use when it comes to making complex decisions. The Analytic Hierarchy Process, or AHP, is useful for making any decisions with multiple criteria, like selecting software or choosing supply chain partners. In general, analytic hierarchy process uses comparison and prioritization to help companies make important business decisions when there are multiple factors to consider. The process was developed in the early 1980s by Thomas Saaty, Professor of Business Analytics and Operations at University of Pittsburgh, during his tenure at the University of Pennsylvania. Today, companies around the world use AHP to analyze and organize the criteria around decision-making so that they can find the solution best suited for their needs. It is part of the curriculum in many business schools, and is used by many Six Sigma corporations and lean Six Sigma companies to make assessment, prioritization and selection among options more streamlined and measurable. However, AHP isn’t just for MBA students and large enterprises with sophisticated supply chains. Because of the flexibility of the criteria that can be used with AHP, even small businesses (including wholesalers in startup mode) can use it to their advantage.

Analytic Hierarchy Process (AHP) in Software Selection

AHP uses a hierarchical approach to deal with complex information where there are multiple criteria to consider. We first became interested in AHP as a decision-making technique in conversations with some of our customers who use AHP to make key business decisions. For many companies, AHP is an important part of the software selection process. AHP offers 6 main advantages:

  1. AHP’s hierarchical structure allows decision-makers to determine if a solution is aligned with strategic goals.
  2. AHP considers quantitative and qualitative considerations, as well as multiple stakeholders in setting priorities.
  3. AHP measures the relative importance of projects, as well as benefits, cost, risk and payoff.
  4. AHP can use numerical data or subjective judgements, so any type of organization, large or small, can use it.
  5. AHP allows organizations to consider multiple “what if” scenarios.
  6. AHP provides structure for systematizing decision-making that can be audited and reviewed to improve project selection and allocation decisions.

If this is sounding rather complicated, don’t worry. Software exists to assist with the identification, prioritization, analysis, and measurements involved in using AHP for decision making. Yes, software to help you pick your software. Vendors include Decision Lens and MakeItRational, among others. However, AHP can also be done with a simple spreadsheet. Templates abound, along with explanations of the techniques used to prioritize and analyze the data.

How to Perform an AHP

Although the criteria used can be flexible, the Analytic Hierarchy Process itself typically follows a rather structured format, consisting of three steps: creating a list of attributes or criteria that must or should be met by the solution, identifying their relative importance, and scoring each option’s performance on those criteria. Each option’s performance is then compared against other options; the option that is rated highest wins. When identifying the relative importance of the criteria, a numerical value is assigned to each one. The most important attributes receive the highest ranking, and the least important would receive the lowest ranking. According to Lori Homsher, Vice President of IT at Cooper-Booth Wholesale, a distributor of convenience store products, “AHP is basically listing all important features and applying a weight against each. It’s also good to make sure the total adds up to 1 or 100, depending on your scoring metrics, because this forces you to make tough decisions about priorities.”

Proof of Concept

A final step for some organizations includes proof-of-concept, or a demonstration to verify that the solution will work in the real world. This is also sometimes referred to as a pilot project. A proof of concept can be as simple as demoing the solution. However, the important thing is to bring it in-house to make sure that it works in your environment and functions as advertised. In some cases, this is done as a limited implementation of the solution in a “lab” environment similar to the actual environment in which the software will eventually run. Basic steps to the proof of concept include:

  1. Identify the objectives you want to accomplish. These should already be clear from the AHP.
  2. Bring it into your environment. Some organizations do their pilot or proof-of-concept after purchase, but for obvious reasons, this is not ideal. It’s like test-driving a car after you’ve already driven off the lot.
  3. Document your results. This is another major advantage of AHP­­­––that a framework for documenting results of the proof-of-concept already exists. Simply document how the proof of concept performs against all the criteria stated in the AHP. Then compare the results.

After performing the AHP and proving the concept with your two main contenders, the right solution for your company should be pretty clear. You will be able to move forward with a decision, knowing that you’ve used a reliable, auditable process that considered all the known factors that could potentially impact the success of your project. What process does your organization use to make complex decisions? Let us know in the comments. For more on the topic of vetting software in particular, check out this helpful post.