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PART 4 · 14 Decision analysis · 06

Ranking Alternatives with TOPSIS

Technique for Order Preference by Similarity to Ideal Solution

Ideal solutionNegative-ideal solutionVector normalizationDistances D⁺ · D⁻Relative closenessRank reversal

Ideal A⁺Negative-ideal A⁻ABCD⁺D⁻C = D⁻ / (D⁺ + D⁻)Closest to the ideal,farthest from the worst wins

Can you find the option that sits closest to the ideal and, at the same time, farthest from the worst? When you evaluate several alternatives, it’s rare for one of them to be best on every criterion. Some products are cheap but perform poorly; others perform well but cost a lot. TOPSIS is a multi-criteria decision-making method that ranks alternatives by considering both how close each one is to an ideal reference point and how far it is from the least favorable one.

SECTION 01

The basic idea of TOPSIS

Ideal solution (A⁺)

A reference point made of the most desirable performance on each criterion

Negative-ideal solution (A⁻)

A reference point made of the least desirable performance on each criterion

Negative-ideal A⁻C = 0Ideal A⁺C = 1A 0.561B 0.566C 0.3611-D sketch of the idea · in practice, distances are measured in 3-criterion space and C = D⁻ / (D⁺ + D⁻)
Figure 1. The core principle of TOPSIS

The ideal and negative-ideal solutions may not be alternatives that actually exist. If one product is the cheapest and another performs best, the ideal solution is a hypothetical reference point that combines the strengths of both.

SECTION 02

In what order is TOPSIS calculated?

01 Decision matrixAlternatives × criteria scores02 NormalizeAlign units · ranges03 Apply weightsReflect each criterion’s importance04 Find A⁺ · A⁻Best · worst per criterion05 Compute distancesD⁺, D⁻06 Closeness · rankC = D⁻/(D⁺+D⁻)
Figure 2. The steps of a TOPSIS calculation
SECTION 03

A worked example: choosing a supplier

A company is choosing one of three suppliers, and the criteria are price, quality, and on-time delivery rate. Assume every score is out of 10 and higher is better. The price score is not the actual price; it’s a rating converted so that cheaper suppliers get higher scores.

SupplierPrice scoreQuality scoreDelivery score
A978
B799
C886
CriterionWeight
Price0.40
Quality0.35
Delivery0.25
Total1.00
SECTION 04

Normalizing and applying weights

TOPSIS usually uses vector normalization. Each score is divided by the square root of the sum of squares of that criterion’s values, and then multiplied by the criterion’s weight.

rij = xij / √Σi xij²  ·  vij = wj rij
Example: denominator for price = √(9² + 7² + 8²) = √194 ≈ 13.928 → A’s normalized value 9 / 13.928 = 0.6462
Supplierr pricer qualityr deliveryv pricev qualityv delivery
A0.64620.50260.59460.25850.17590.1487
B0.50260.64620.66900.20100.22620.1672
C0.57440.57440.44600.22970.20100.1115

This lets you adjust for values measured in different units while still reflecting how important each criterion is. Results can differ depending on the normalization method (vector, min–max, and so on), though, so you should state which method you used.

SECTION 05

Calculating the ideal and negative-ideal solutions

Because every score has been converted so that higher is better, the ideal solution is made of the largest weighted normalized value on each criterion, and the negative-ideal solution of the smallest.

A⁺ = (maxi vij) = (0.2585, 0.2262, 0.1672)  ·  A⁻ = (mini vij) = (0.2010, 0.1759, 0.1115)

The ideal solution’s price comes from A, and its quality and delivery come from B. In a real analysis, if you use raw data where lower is better, such as price, you have to flip the direction so that the minimum becomes the ideal for that criterion. Set a criterion’s direction wrong and the results get read backwards.

SECTION 06

Calculating the distances to the two reference points

Di⁺ = √Σj (vij − vj⁺)²  ·  Di⁻ = √Σj (vij − vj⁻)²
Di⁺: distance between alternative i and the ideal solution · Di⁻: distance between alternative i and the negative-ideal solution

A good alternative tends to be a short distance from the ideal solution and a long distance from the negative-ideal solution.

SECTION 07

Relative closeness and the final ranking

Ci = Di⁻ / (Di⁺ + Di⁻)
SupplierD⁺D⁻Closeness CRank
A0.05360.06840.5612
B0.05740.07510.5661
C0.06760.03820.3613
C = 0.3C = 0.5C = 0.7A (C = 0.561)B (C = 0.566)C (C = 0.361)0.000.000.030.030.060.060.090.09D⁺ : distance to the ideal (smaller is better)D⁻ : distance to the negative-ideal↖ Better alternatives toward the upper left (dashed = equal closeness)
Figure 3. The two distances and relative closeness

B (0.566) edges out A (0.561) for first place, and C (0.361), with the lowest delivery score, sits close to the negative-ideal solution. For reference, a weighted sum with the same scores and weights gives B 8.20, A 8.05, C 7.50, the same ranking.

Relative closenessInterpretation
Near 1Relatively close to the ideal solution
Around 0.5About equally far from both reference points
Near 0Relatively close to the negative-ideal solution

Relative closeness is not an actual probability of success or a rate of hitting a target. It’s a relative score among the alternatives that depends on the criteria, the weights, and the normalization method.

SECTION 08

How is TOPSIS different from AHP?

AspectAHP (Ch. 05)TOPSIS
Main purposeDerive the relative importance of criteria and prioritiesEvaluate alternatives by their distance from the ideal solution
Typical inputPairwise comparison judgmentsEach alternative’s performance on the criteria, plus weights
Main outputCriterion weights, alternative prioritiesRelative closeness and a ranking of alternatives
Notable featureLets you check the consistency of judgmentsCombines performance on several criteria into a ranking

You can combine them, deriving criterion weights with AHP and then evaluating alternatives with TOPSIS, but if the weights are already set or were derived some other way, there’s no need to go through AHP.

SECTION 09

Cautions when using TOPSIS

0.000.250.500.751.00ABC41%: B → AUsed here: 40%10%20%40%60%80%Relative closeness CPrice weight (quality : delivery kept at 35 : 25)
Figure 4. Relative closeness as the price weight changes

First, check how the weights affect the result. In Figure 4, once the price weight goes above about 41%, first place switches from B to A. The example’s assumption (40%) sits just below that boundary, so the gap between A and B is very small. Lower the price weight to 20% and B’s closeness is 0.777 versus A’s 0.445, a clear lead for B.

Second, check each criterion’s direction and the normalization method. Mishandle cost criteria (lower is better) and benefit criteria (higher is better) and the conclusion gets distorted.

Comparing suppliers A, B, C onlyAdding supplier D (5, 5, 5)0.561A0.566B0.361C0.719A0.705B0.633C0.000DAdding D shifts the denominators and A⁺ · A⁻, so A and B swap (rank reversal) · D = (price, quality, delivery)
Figure 5. Adding an alternative can change the existing ranking

Third, a rank doesn’t mean absolute superiority. TOPSIS produces a relative ranking within the chosen set of alternatives and criteria, so the result can change when the set being compared changes. In Figure 5, all we did was add supplier D (5, 5, 5), the worst on every criterion, yet the normalization denominators and the negative-ideal solution shift and A (0.719) moves ahead of B (0.705). This is called rank reversal, and it’s best to finalize the list of candidates before you run the analysis.

Fourth, any must-have requirements need to be handled separately. If a supplier must meet a specific quality standard, apply that condition first and then run TOPSIS.

Sample write-up

Three suppliers were evaluated on price, quality, and delivery (weights 0.40 : 0.35 : 0.25) using TOPSIS with vector normalization. Relative closeness ranked B 0.566, A 0.561, and C 0.361. However, the gap between A and B was small, and A became first once the price weight exceeded about 41%, so the rationale for the price weight was reviewed again before the final selection.

✓ KEY TAKEAWAYS

Rank alternatives by how close they are to the best and how far from the worst.


Up next: 07 Sensitivity Analysis for Decisions. We’ll look at how to check how much a decision changes when assumptions such as weights, probabilities, or scores change.