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It~te~fiationa~~ourna~ 0~Prodl~ction Economics, 27 ( 1992 ) 175-i 8 1

Elsevier

175

Just-In-Time purchasing: Single or multiple sourcing?


Jae-Dong Hong
Departmrnt qflndustrial Engineering Technology, South Carolina State ilniver.sity. Orangeburg, SC 29117, USA

and
Jack C. Hayya
Department ~f~a~~ge~~ent Science, Pennsylvania State ~ni~?ersit~~,University Park, PA ~~8~2, USA
(Revised version accepted I 1 December 1991)

Abstract
We consider two Just-In-Time (JIT) purchasing models, one utilizing a few sources, and the other using the more conventional single source. We address the issue of splitting a large order quantity into multiple deliveries, taking account of
the increase in the aggregate ordering, transportation, and inspection costs. For multiple sourcing, we formulate and solve
a mathematical programming problem to obtain the optimal selection of suppliers and the size of the split orders. For
single sourcing. we provide a procedure that yields the optimal number of deliveries.

1. Introduction
The hallmark of JIT purchasing is the steady
purchase of high-quality parts in small lot sizes
on time from a single or a few sources of supply.
Implementing JIT purchasing requires a reduction in the number of suppliers. Without such a
reduction, JIT purchasing would become unmanageable. Having many suppliers may force
the buyer to concentrate on coordinating them
rather than on other important objectives, such
as improving quality and cost reduction. The JIT
approach is to build a collaborative contract between buyer and suppliers to permit acceptable
returns on investment to both sides and to force
both sides to strive for continuous improvement,
In order to do this, the splitting of a large order
quantity into small deliveries or allocating it
among a few suppliers coincides with the JIT
purchasing philosophy: Place one large orderfor

a/l your ~e~u~rerne~t~and receive deliveries in the


smartest conceivable lot size.
Some researchers [ 1-81 have suggested that
splitting an order among several vendors can offer savings in inventory holding costs, Other re-

09X-5273/92/$05.00

searchers, for example, Pan and Liao [S], assumed that the ordering cost remained constant
no matter how many vendors there were. Their
reasoning was that in many procurements a large
component of the ordering cost was fixed and the
marginal cost of including more deliveries was
relatively small [ 7 1. However, as Larson [ 91 argued, this was unrealistic, because in multiple
deliveries, the cost of transportation,
receiving,
and inspection should be introduced. Following
this avenue, Ramasesh [ 7 ] included the cost per
shipment in the equation of the total relevant cost
(TRC), It is interesting how the treatment of this
cost has evolved and we summarize in Table 1
the literature to date.
In this paper, we analyze the deterministic order-splitting EOQ model, assuming that the aggregate ordering cost, which includes transportation, inspection, as well as any other costs
incurred by order splitting, is a nondecreasing
function of the number of deliveries. We start
with the situation where there are a few suppliers. A mathematical programming problem of
selecting suppliers and allocating the order quantity among them is formulated. The objective

0 1992 Elsevier Science Publishers B.V. All rights reserved.

176
TABLE I
Chronological
summary of the literature on how the ordering
is treated wtth multiple deliveries or order splitting

Pan [4]

Ramasesh [ 6 ]
Pan and Liao
ISI
Kelle and Silver
[31

Ramasesh

[ 71

Ramasesh,
Ord. Hayya
and Pan [S]
Total relevant

Model

Ordering

Two vendors,
stochastic lead time,
constant demand
Improved Pan [ 41
Deterministic
EOQ
formulation
Multiple vendors.
Weibull lead-time
and constant unit
demand

Not affected by the


number of vendors

Sameasin

[5]

Sameasin

[6]

cost

cost

Same as Pan [ 41
Not affected by the
number of deliveries
TRC functions not
developed and the
question of ordering
costs not explicitly
addressed
Same as in [4]. The
TRC function includes
the shipment cost
Allowed to increase to
offset savings in
holding costs

(1)
x, 20,

Vj,

where
1
= number of the suppliers selected,
{S,) = a subset of the suppliers selected,
= the quality level of supplierj,
?I
P
= predetermined quality level,
P
= the unit cost from supplierj, and
6
= predetermined, delivered cost of the item.
Using the TRC formula in the EOQ system, the
TRC with N split orders may be expressed as (see
Appendix)

cost.

function is to minimize the total relevant cost.


For constraints in formulating the problem, we
choose two ~mpo~ant criteria: the delivered cost
and product quality [ 10, 1 1 ] , Later, we address
the issue of multiple deliveries/small-lot
shipments from a single source.
2. JIT purchasing with multiple vendors
Suppose that n suppliers are available. Let
a ( y1)A, denote the cost of placing n split orders
simultaneously, where A, is the cost of placing a
single full-order. We consider the problem of selecting suppliers and allocating the full order
quantity between them subject to cost and quality constraints. Let Xi denote the percentage of
the order quantity assigned to supplier i, i= 1, 2,
. ..) M.The objective is to minimize the total relevant cost per unit time incurred from splitting the
order quantity among the suppliers selected, subject to the constraints that the delivered cost is
less than and that the product quality is higher
than some predetermined
levels. This relationship can be formulated as follows: Find the numher t)f suppliers I and the percentages ofthe order

~l~antit~to be assigned to each sl~ppii~~x, so as to


ordering
minimize
TRC( - ) = Aggregate
cost + Holding cost subject to

where
Q, =the full order quantity that is to be split
among y1suppliers,
D = constant demand rate, and
r = the carrying charge.
After algebraic manipulations
(see the Appendix), letting v,~denote the delivered cost of the
single source and Q!(I) denote the proportion of
the increase in the aggregate ordering cost, the
objective function in ( 1) can be rewritten as
maximize=v,-cu(t)

C ZJ,.X~.

(3)

jt{.Si;

Let cl!(/) denote the upper limit of the


increase in the aggregate ordering cost
the savings accrued from order splitting
pletely offset. From ( 3 ), @(I) is upper
by

tolerable
at which
are combounded

Now, after substituting (3) into f I), ( 1) becomes a nonlinear integer programming problem. We see that for a given number of suppliers,
it can be solved by computer software. An eff-

177
cient way to find a solution can be stated as
follows:
(i ) Include all the suppliers considered in
the supplier set, {S,}. Solve the problem in ( 1)
using the software.
(ii) Eliminate from the supplier set that
supplier who has the smallest percentage of the
order quantity assigned. Solve the problem. If infeasible, return the eliminated supplier back to
the supplier set, eliminate the supplier with the
next smallest percentage, and solve the problem
again.
(iii) Repeat step (ii) until the number of
suppliers in the solution set is one.
(iv) Compare the resulting TRC for each
fixed I, choose the smallest TRC. This gives the
optimal number of suppliers and the corresponding order splits.

TABLE 2
Data used in examples 1 and 2
D=50,000units,A,=5.0($),r=5(%)
I= 1
fl

Required
level

Supplier

Factor

Price ( $ )
Quality(%)

5.45
98.0

5.60
98.5

5.85
99.0

5.93
99.8

5.80
99.0

Legend
D
=demand per unit time
AS =ordering cost with one vendor or a single delivery
=inventory holding rate per unit per unit time
r
(u(l) =ordering cost multiplier
TABLE 3

Illustrative example 1. We consider 1= 1,2, 3, and


4 suppliers. The data are in Table 2. Using GINO
[ 12 1, we find the optimal solutions for each given
I listed in Table 3.
When the unit cost from the single source is assumed to be $5.80, the upper limits for the tolerable increase in the aggregate ordering cost, i.e.,
&, from Eq. (4 ) and cy(l) from Table 2 are

4
3
2
1

0.167
0
0

0.220
0.265
0.348
0.345
0.330
0.325
0.514
0
0.486
no feasible solution

$373.7
367.5**
379.5

4817
3809
2635

3. JIT purchasing with a single vendor


I

n(l)

3.742
3.6

3.005
2.8

2.014
2

Infeasible
1

a(0

Note that cu(l) is slightly greater than 1when I= 2,


3, but is less than 1 when 1=4. As expected, if
cy(1) > d (I), order splitting among 1 suppliers is
not feasible. Thus, letting
(5)
the optimal I can be determined

from

6(1*) =maximum(b(l)}.
I= I,...,n

(6)

If, in the previous example, the delivery cost is


increased to $5.85, the solutions we find are the
same except for 1= 1:
f=l,

x,=x2=x4=0,

TRC*=$382.4,Qf

(=EOQ)

= 1307.

Now assume that supplier 3 is selected as the single source. Then, a long-term purchasing agreement that splits a large order quantity into equal
deliveries may be negotiated. Letting A (m) denote the aggregate ordering cost as a function of
the number of split orders m the TRC is given by

TRC(Q,)

In this example, 6(Z) by ( 5 ) is

x,=1

=A(mPlQ,

+QrnWm,

(7)

1 <m<mm,,,
1

6(l)

0.142

0.205

0.014

Inf.

Thus, as we found, the optimal number of suppliers I* is three.

where h = ~.~ris the unit inventory holding cost.


In (7 ), we assume that the number of split orders
is constrained by a reasonable maximum, mmax.
The optimal order quantity and the correspond-

178
A(m)

Islope

Ordering

cost per
Full

Order

I
I
I

ply

Slope

0
) m

A(l)
1

Fig. 1. Some possible

shapes

Number

of

,5 : A

of the ordering

:
:

Convex
Concave

Step

Function

A(I),

where

ing TRC can be found by setting the first derivative of (7 ) equal to zero and substituting it into
(7). Thus,
(8)

and
TRC(Q*,)=dw.

Function

cost function

Q:,=J2DA(m)m/h

Deliveries

(9)

Function

II? is the number

of split deliveries.

where x/-denotes a set of feasible solutions of m


and ,u, the ith element of the set y,; In the following section, using the convex, concave and step
ordering cost functions shown in Fig. 1, we provide theoretical and numerical solutions for the
optimal number of deliveries.
4. Ordering cost functions

Now, from (9)) the savings in the TRC are


SV(m)=&%{~-J-1.

(10)

Thus, the feasible region for multiple deliveries


is that area below the 45 line, A( m ) =
mA ( 1 ),m z 1. In order to maximize SV (m ) in
( lo), it is necessary and sufficient to minimize
A(m)/m.
We state it as follows:
Lemma. Multiple deliveries are worthwhile only
when A (m) /m <A ( 1) and the optimal number
of deliveries m * should satisfy

A convex exponential, a logarithmic, and a linear step ordering cost functions can be expressed
as
A>0
A( 1 )ew[A(m-1) I,
(for the exponential),
A>0
A(l)+dn(m),
(for the logarithmic ),
A(m)=
(12)
rA(1)
l,lG:mdm,,

(for the linear step )


.

A(m*)/m*=mi~~~m{A(~,)/~,},

(11)

, mgeI <mQm,

179
(i) Exponential function. From the lemma,
equating A( m)/m to A ( 1) yields the critical
value of the parameter A,
Ah(m)=Zn{m/(m-l)}.

(13)

This critical value of 2 is a decreasing function of


m, which implies that, for a given value of m, if
,J is greater than Ab( m), then order splitting is
uneconomical.
Letting Z(m) =A (m)/m
and
setting the first derivative of Z( m) equal to zero
yields
fi=Ll/nJ,

(14)

where L*J denotes the greatest integer in. Then,


from ( 11) , m * should satisfy
A(m*)/m*

(15)

=minimum{A(*)/*,

A(Kz+ l)/(fi+

l)}.

(ii) Logarithmic function. From the lemma,


the critical value, ;Ib, is given by
~h(m)=A(l)(m-l)/ln(m).
The first derivative

(16)

of Z( m) yields

dZ(m)/dm=(A(l)+~ln(m)-J)/m.

(17)

From (16) and ( 17),ifA<Ab(m),thendZ(m)/


dm<O,Vm. Thus,
(a) If3L>Ab(mmax),m*=1.
(b) IfAh
<A,<&,(y),1 bw<ydm,,,,
multiple deliveries are feasible in [ w+ 1, mmax ] and
m=m,,,.
(iii) Linear step function. Since the ordering
cost remains the same in a given interval of
(m,- I, m,l ,g= l,...,k, we only consider the value
of the upper limit of the interval. Let Ak denote
the slope of that line which connects A( 1) with
A(k). Then Ak is
&=(A(k)-A(l))l(m,-m,).
The connected line can now be treated as a
straight-line ordering cost function for that interval. From the lemma, the critical value for each
interval is

;Ih(mk)=A(l)(mk-l)l(mk-m,).

(18)

Note that the critical value depends upon the upper limit of the interval. The slope of the connected line for each interval is compared to
1 h( mk) to check whether multiple deliveries are
worthwhile. Thus, in order to find m*, the following three steps are needed:
(i ) Find feasible intervals using Eq. ( 18 ).
(ii) Find feasible solutions in the feasible
intervals.
(iii) Find the optimal solution m* using Eq.
(11).
Illustrative example 2. For illustration, we set the
maximum number of deliveries at mm_ = 20 for
supplier 3. Other input data are same as in example 1.
(i) Exponential function. From Eq. ( 13),
Ab(mmax) is 0.1577. We set 2=0.15; then, from
the lemma, the set of feasible integer solutions of
m becomes M/=(1, 2,...,20}. Using (14) and
(15), we find that m*=6. From (8)-( lo), we
compute that Qk =4659.7, TRC( QL ) =$227.1,
andSV(m*)=$155.3.
(ii) Logarithmic function. For illustration, we
set A= 14. Since from (16), Ah(6) andAh(7) are
13.9527 and 15.4 169, multiple deliveries are feasible in the range [ 7,201. We tind that m*= 20
and that Qz = 179 15, TRC( Q> ) = $262.0, and
SV(m*)=$120.4.
(iii) Linear step function. We use the following ordering cost step function for illustration:
5.0,
16mG
1,
14.8,
l<m<
3,
3<md
4,
I 19.8,
31.3,
4<m<
6,
A(m)=
39.2,
6<md
8,
45.7,
8<md 10,
77.6, lO<m< 15,
99.4, lS<m<20.
From (18), we find that the intervals 1, 2, 3, 5,
and 8 are feasible and that the feasible solutions
are m = 3, 4, 8, and 20. Out of the feasible solutions, m*= 8 and the corresponding QG = 10354,
TRC(Q*,)=$378.6,andSV(m*)=$3.8.

180
5. Summary

and conclusion

JIT purchasing requires a trusting and sharing


partnership between the buyer and the suppliers.
The suppliers now become part of a team that is
motivated
to deliver high-quality
parts, frequently, and on time. Lack of trust in suppliers
leads the buyer to spread the risk between many
vendors. But trust leads to long-term and mutually beneficial relationships and contribute to
high quality and cost reduction. For implementation of JIT purchasing with multiple vendors,
it is important to find out what the marginal ordering costs are. For example, quantity discounts
may disappear if a large order is split among several vendors. Also the transportation cost will increase due to multiple deliveries, be it single or
multiple sourcing.
In this paper, we examine the issue of how to
handle these additional costs analytically. For the
multiple sourcing model, we determine the optimal number of suppliers and the proportional
splitting of a large order by formulating a mathematical programming problem, subject to an
aggregate delivered unit cost and an aggregate
predetermined
quality level. For the single
sourcing model, there must be a necessary condition for the use of multiple deliveries in the traditional EOQ formulation. This condition is that
the increase in the aggregate ordering cost should
not exceed the savings in the holding cost and
other benefits resulting from the multiple deliveries. Three hypothetical aggregate ordering cost
functions are investigated: a convex exponential,
a concave logarithmic, and a step-function. We
find that
(i) For the multiple sourcing model, the feasible region for the ordering cost depends upon
the percentage of the full order assigned to a supplier, which is a function of the delivered unit
cost. The optimal number of suppliers is found
from the analysis of the aggregate ordering costs,
since the interplay of the marginal increase of
these costs with the reduction of the holding costs
dictates whether another supplier can be added.
(ii) For a multiple delivery single-sourcing
model, we find that if the ordering cost A(m) is
concave in terms of the number of deliveries m
we must go all the way with multiple deliveries,
aslongasA(m)dmA(l).ifA(m)
isconvexand

A(m) < IMA ( 1) in a certain range of rn, that range


should contain the optimal number of deliveries
rn*.

Appendix

The TRC formula in the EOQ system with a


single full order is expressed as
TRC~Q)=~.~D/~+~*r~/2.
With n split orders, the aggregate ordering
per unit time, AOC, is given by
AOC=a(n)A,D/

~x,Q,.
I=1

(Al)
cost

(A2)

The inventory holding cost per unit time is obtained by multiplying carrying charge r by the average inventory in dollars. Now the total amount
of inventory in dollars during one cycle of order,
TAI, is the sum of the amount of inventory in
dollars delivered from n suppliers, which can be
expressed as

Thus, the average inventory in dollars during one


cycle of order, AVI, can be found dividing TAI
by one cycle of order. So,
(A3)
Multiplying AVI in (A3) by r yields the holding
cost per unit time and adding it to the aggregate
ordering cost in (A2 ) yields Eq. ( 2 ) .
Now, if 1 suppliers are selected, then Q7 and
TRC; can be obtained by setting the first derivative of Eq. (2) equal to zero and substituting
the expression for QT into (2). We obtain

and

181
TRC[( . )*= [ 2cu( I)A,Dr

1 u,.x,] I*.
je is/i

(A4)

Let SV( 1) represent the savings in the TRC with


1split orders. Then, from (A2 ) ,
W(I) =TRC, (*)*-TRC,(
= (2DA,r)2f

( v,y2

*)*

(AS)
7

Since minimizing the TRC by splitting orders is


equivalent to maximizing the savings in the TRC
with 1 split orders, SV (i), the objective function
in ( 1) can be written as Eq. ( 3 ) .

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10

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