Integrated Procurement Planning in Multi‐division Firms

Abstract

For large multi‐division firms, coordinating procurement policies across multiple divisions to leverage volume discounts from suppliers based on firm‐wide purchasing power can yield millions of dollars of savings in procurement costs. Coordinated procurement entails deciding which suppliers to use to meet each division's purchasing needs and sourcing preferences so as to minimize overall purchasing, logistics, and operational costs. Motivated by this tactical procurement planning problem facing a large industrial products manufacturer, we propose an integrated optimization model that simultaneously considers both firm‐wide volume discounts and divisional ordering and inventory costs. To effectively solve this large‐scale integer program, we develop and apply a tailored solution approach that exploits the problem structure to generate tight bounds. We identify several classes of valid inequalities to strengthen the linear programming relaxation, establish polyhedral properties of these inequalities, and develop both a cutting‐plane method and a sequential rounding heuristic procedure. Extensive computational tests for realistic problems demonstrate that our integrated sourcing model and solution method are effective and can provide significant economic benefits. The integrated approach yields average savings of 7.5% in total procurement costs compared to autonomous divisional policies, and our algorithm generates near‐optimal solutions (within 0.75% of optimality) within reasonable computational time.

Maturity model of procurement and supply management in small and medium-size enterprises

“…Process of procurement planning , which was considered as a secondary function in the past, nowadays is critical to the competitiveness of enterprises. Inefficiency in its management can bring high overall costs, arising from uncoordinated purchases (Balakrishnan and Natarajan, 2014). According to the McKinsey Global Survey Results (2008), firms have become more aware of the importance of purchasing activities and the results obtained via them.…”

“…According to the McKinsey Global Survey Results (2008), firms have become more aware of the importance of purchasing activities and the results obtained via them. The observation of purchasing practices leads companies to align sourcing decisions with significant discounts from suppliers, minimizing the total cost of procurement, logistics and inventory (Balakrishnan and Natarajan, 2014). In the instrument proposed in the present research, we considered the following as indicators of the procurement planning process: demand forecast and planning, inventory turnover control and planning of buying/restocking.…”

Supply Optimization Model in the Hierarchical Geographically Distributed Organization

“…Pepino et al (2012) proposed a simulation model of centralized purchasing based on Petri net for cases of serious economic suffering at the regional or national level, when the scale economies, obtainable by supply centralization, would be partly or totally compromised by the extra charges induced by the missing of contractual commitments. Balakrishnan and Natarajan (2014) suggested an integrated optimization model using integer programming that that accounts for both corporate volume discounts and divisional costs and preferences.…”

Are You Receiving Me? A Viable System Model (VSM) Analysis of Purchasing Coordination in a Firm Engaged in Offshoring of Manufacturing Activities

“…The literature appears to have extensively documented a number of challenges related to the coordination of a disaggregated firm. For example, problems such as task communication and interdependences (Larsen, Manning, & Pedersen, 2013), infrastructure differences , information asymmetry (Balakrishnan & Natarajan, 2013), team and contextual differences (Kotabe & Murray, 2018), culture and language problems (Clampit, Kedia, Fabian, & Gaffney, 2015). However, the coordination of purchasing and supply activities of firms involved in production offshoring is not well investigated, despite evidence that purchasing decisions do contribute to the success or failure of the firm's offshoring strategy (Handley & Benton Jr, 2013).…”