Allocation of Order Quantity among Suppliers

Allocation of Order Quantity Among Suppliers This article presents a linear programming model that can be used in the simultaneous determination of the number of suppliers to utilize and the purchase quantity allocations among suppliers in a multiple sourcing system. The model is simple and powerful. It can be used to make rational multiple sourcing decisions. INTRODUCTION In 1973, the U.S. supply of crude oil was cut by 15 percent due to the O.P.E.C. oil embargo. Refineries that had contractual agreements with a single foreign supplier found themselves without raw crude oil and had to make "spot purchases" at $40 per barrel, 20 percent higher than many buyers with several suppliers were paying. Recently, the U.S. Under Secretary of Defense for Acquisition, Mr. Robert Costello, has noted that he will demand more competitive bidding on contracts to streamline cost and improve quality. [1] These examples make it clear that a multiple sourcing policy for certain types of purchases is still recognized as a useful approach to ensure the reliability of a manufacturer's supply stream. Notwithstanding the current emphasis on supplier base reduction, if done properly multiple sourcing can also reduce costs and improve quality in many cases. In a multiple sourcing operation, a buyer purchases the same item from more than one vendor. These suppliers can be employed alternately or concurrently. In the case of large volume purchases, requirements are split among several vendors. Most purchasing authorities agree that when buyers use more than one supplier for critical materials, the buying firm generally will be protected more fully in times of shortage as a result of its alternate sources. [2] Although multiple sourcing has been used for years, a simple reliable approach has never been developed for making decisions about the number of suppliers to use and the optimal volume of business to allocate among them. In this article, a linear programming model is proposed for use in the simultaneous determination of the optimal number of suppliers and order quantity allocations among them. The article is divided into three parts: (1) an overview of the model, (2) an illustrative example, and (3) a conclusion. ALLOCATION OF ORDER QUANTITY AMONG SUPPLIERS The buying firm, before implementing a multiple sourcing policy, has to specify the number of suppliers to employ. The buyer then needs to determine the distribution of order quantities among vendors. Some authorities, for example, have suggested that two suppliers be used for a material category that has an annual dollar volume higher than a given predetermined level. The order quantity may be split between suppliers on something other than a 50-50 basis to promote competition between suppliers and to improve purchasing performance. [3] Supplier performance is usually measured in terms of the delivered cost, product quality, delivery, and service. [4] The purchasing performance of a multiple sourcing system is a weighted average of performances of all suppliers, with each supplier's weight being equal to the percentage of the order quantity it receives. In order to ensure that the system is optimal, a model is needed for decisions on the number of vendors to use and the allocation of order quantities among them. These problems can be solved simultaneously by a linear programming model. To illustrate, assume a buyer wishes to minimize aggregate purchasing price subject to the constraints that quality, delivery, and service performances of the system are higher than some predetermined levels. This relationship can be represented by the linear program as follows: Minimize: Aggregate Price Subject to: Aggregate Quality: [is greater than or equal] Q Aggregate Lead Time: [is less than or equal] L Aggregate Service: [is greater than or equal] S Q, L, and S are the predetermined levels of quality, delivery, and service. …