Headquarters-centered Common Sourcing Management: Order Coordination and Order Consolidation

Abstract

This paper considers the problem of a group company that purchases one kind of products from a single supplier. Such companies typically consist of one headquarters and several geographically dispersed and operationally semi-autonomous subsidiaries. It is of great significance what and how the headquarters should provide services to its subsidiaries in terms of inventory and sourcing management. This paper focuses on headquarters-centered sourcing management services. Two sourcing management models are formulated. One is Subsidiary-Autonomous Sourcing Management (SD-ASM) where subsidiaries manage their inventories and place purchasing orders relatively independent of each other. The other is the Headquarters-centered Common Sourcing Management (HQ-CSM) where purchasing orders of all the subsidiaries are processed by the headquarter. In HQ-CSM, two purchasing order management policies are proposed. One is Order Coordination Policy in which common replenishment epochs or time periods are proposed by the headquarter and the subsidiaries are encouraged to coordinate the timing of their orders based on the common replenishment epochs. The other is Order Consolidation Policy in which the subsidiaries are enticed by a price discount to combine the quantity of their orders and the headquarter places a combined order with the supplier. In SD-ASM, each subsidiary places replenishment orders at any time interval corresponding to their economic order quantity (EOQ). In the Order Coordination Policy of HQ-CSM, the classic RAND heuristic to solve the well-known Joint Replenishment Problem is used to find the best common replenishment epoch and the best replenishment timing of each subsidiary. In the Order Consolidation Policy of HQ-CSM, the optimal order quantity of the combined order can be obtained from the mathematical model. Then, the combined order is allocated to the subsidiaries according to the proportional allocation rule. A series of simulation experiments is conducted to compare order quantities and costs in SD-ASM and HQ-CSM. The results show that. This achievement is largely due to the economies of process (simplified ordering process and reduced ordering cost) in the Order Coordination Policy and the economies of scale (large order quantity) in the Order Consolidation Policy.