Elsevier
175
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
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
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
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.
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;
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
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
n(l)
3.742
3.6
3.005
2.8
2.014
2
Infeasible
1
a(0
from
6(1*) =maximum(b(l)}.
I= I,...,n
(6)
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,)
x,=1
=A(mPlQ,
+QrnWm,
(7)
1 <m<mm,,,
1
6(l)
0.142
0.205
0.014
Inf.
178
A(m)
Islope
Ordering
cost per
Full
Order
I
I
I
ply
Slope
0
) m
A(l)
1
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
of split deliveries.
(10)
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,,
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)
(14)
(15)
=minimum{A(*)/*,
A(Kz+ l)/(fi+
l)}.
(16)
of Z( m) yields
dZ(m)/dm=(A(l)+~ln(m)-J)/m.
(17)
;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
Appendix
~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
and
181
TRC[( . )*= [ 2cu( I)A,Dr
1 u,.x,] I*.
je is/i
(A4)
( v,y2
*)*
(AS)
7
References
Hayya, J.C., Ord, J.K. and Pan, A., 1986. On lot-splitting with and without planned shortages. DSI Proc.:
1103-I 105.
Hayya, J.C., Christy, D.P. and Pan, A., 1987. Reducing
inventory uncertainty: A reorder point system with two
vendors. Prod. Inv. Manage., 28 (2 ): 43-49.
Kelle, P. and Silver, E.D., 1990. Safety stock reduction
by order splitting. Nav. Res. Log. Quart., 37: 725-743.
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