A model for the analysis of procurement strategies in the economic order interval environment

Abstract

The paper analyzes two different procurement strategies, i.e. single sourcing and double sourcing, for a buyer that adopts the economic order interval (EOI) reorder policy. The analysis consists of two steps. We start by developing a simulation model, which reproduces the two procurement strategies. In the single sourcing scenario, the buyer exploits only one supplier for purchasing. This supplier owns a defined level of reliability, i.e. a given capacity of providing the product when requested. In the case of double sourcing, besides the first supplier, the buyer can exploit a second vendor, which is always able to deliver the product required (reliability=100%); however, it sells its product at a higher price, generating higher cost. The simulation model, built on Microsoft ExcelTM, allows deriving the total cost of the system under the two scenarios, thus helping the buyer select the most suitable (i.e. minimum cost) purchasing strategy. As a second step, for the double sourcing scenario, the analytic formulae of the total cost as a function of the supplier’s reliability are derived and a sensitivity analysis is carried out to investigate how the total cost changes as a function of the input parameters.This paper expressively links the strategic decision of single sourcing vs. double sourcing to a specific reorder policy, such as EOI, which is very often implemented in real cases but not so widely investigated in literature. The proposed approach is thus expected to be of interest under both a practical perspective and a scientific one.