Coordinated Replenishments from a Common Supplier

Abstract

ABSTRACTCoordinated replenishment strategies may be implemented by jointly ordering multiple items from a common supplier. A major benefit of coordinated replenishment is that it increases the size of shipments, permitting the buyer to enjoy transportation economies without a major increase in average inventory levels. The coordinated replenishment problem is complex because side constraints govern the attainment of transportation rate breaks. The problem is further complicated by the presence of purchase quantity discount opportunities. Thus, the buyer must decide which items to order independently, which items to include in a group order, and the order quantities of each item, governed by the frequency of independent or group orders.We present a mathematical model and a heuristic solution procedure that provide analytical support to the buyer seeking to minimize total costs of replenishing multiple items from a common supplier. The relevant costs are purchase prices, ordering costs, holding costs, and transportation costs. Coordinated replenishment provides nearly a 30 percent reduction in controllable costs relative to independent control. Experimentation with the heuristic has yielded optimal solutions over 88 percent of the time. When optimality was not obtained, the mean penalty was much less than one percent. The average heuristic search was more than two orders of magnitude faster than branch and bound, even for small problems, and possessed a much tighter distribution around the mean search time.