Quantitative Support for Buyer-Supplier Negotiation in Just-In-Time Purchasing

INTRODUCTION In a Just-In-Time (JIT) production system, purchasing is critical to the success of the operation. It is harder to implement than other aspects of the system because it involves an external element to the system - the supplier. A purchaser seeks a single, reliable supplier that is willing to deliver quality items, in the amount and at the time needed. A long-term contract is generally negotiated between the two parties where the order quantity, delivery frequency, quality level, and price are specified. In a traditional purchasing environment, the purchaser and supplier often have an adversarial relationship. Each party tries to enhance its own position, which can considerably increase the costs for the other party. For JIT to be effective, there should be a cooperative relationship between the two parties. They should work together to enhance both positions. Rubin and Carter showed that "compromises by the buyer, as well as by the seller, can serve to improve profitability for both."[1] Studies have focused on the qualitative aspects of buyer-supplier negotiation.[2] Since it is difficult to quantify, few quantitative models have been proposed, and they are not specifically in terms of a JIT system.[3] This study proposes using a quantitative model to aid in negotiation of a contract between the purchaser and supplier in a JIT system. QUANTITATIVE MODEL AND NUMERICAL EXAMPLE The model is a joint Economic Order Quantity (EOQ) model, that considers a known, constant demand rate for a product. The joint total relevant cost (JTRC) is expressed as the total cost of ordering/setup, inventory holding, and shipping for both the purchaser and the supplier as given by Banerjee.[4] The difference is that this model is adjusted for multiple deliveries of an order, which is typical for JIT, and a shipping cost has been added as in Ramasesh.[5] The supplier's holding cost is also altered, as given by Golhar and Sarker, for a JIT supply system/This cost expression can serve as a quantitative tool to evaluate and compare different ordering/setup and shipment policies. The joint optimal order quantity and number of shipments are found by minimizing the joint total cost of the purchaser and supplier (see Appendix on page 29). The optimal joint total cost is less than the sum of the individual total costs if either party's optimal order quantity is used. The following example illustrates the cost implications for the model, using the following notation and data: D = demand rate = 1000/year P = production rate = 2500/year A = purchaser's ordering cost = $100 S = supplier's setup cost = $200 [C.sub.v] = per unit production cost = $20 [C.sub.p] = per unit purchasing cost = $25 Z shipment cost per shipment = $10 (fixed part of cost that is charged at each shipment and is independent of the shipment size, paid by the buyer) r = annual inventory carrying cost rate = 0.2 (20%) Q = order (contract) quantity n = number of shipments for an order (each shipment is of size Q/n) The optimal order quantity, shipment schedule, and the costs are summarized in Table I for three different policies. TRC is the total relevant cost of ordering/setup, inventory holding, and shipping using [Q.sub.p], the optimal order quantity for the purchaser, [Q.sub.v], the optimal order quantity for the supplier, or [Q.sub.j], the joint order quantity and the appropriate number of shipments [n.sub.p], [n.sub.v], or [n.sub.j]. In considering the costs involved for the purchaser and supplier in this model each party has the lowest total cost when their individual optimal order quantity is ordered, but the other party experiences a considerable loss, compared to its own optimal policy. The model quantifies the benefits or losses for each of the two parties if they must adjust their policy to the other party's or if they change their ordering/setup policy using a compromise like the joint optimal order quantity. …