Headquarter-centered common sourcing management through order coordination and consolidation

It is common for subsidiaries of a group company to use the same types of components for producing similar products. Different subsidiary companies may well procure such components from the same suppliers. This paper studies two sourcing management models. One is the Subsidiary-Autonomous Sourcing Management (SD-ASM) where subsidiaries manage their inventories and place purchasing orders independent of each other. The other is the Headquarter-centered Common Sourcing Management (HQ-CSM) where purchasing orders of subsidiaries are processed centrally through some kind of headquarter coordination. In the SD-ASM model, each subsidiary places replenishment orders at a time interval corresponding to their economic order quantity (EOQ). In the HQ-CSM model, two purchasing order management policies are examined. One is the 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 the Order Consolidation policy in which the subsidiaries combine the quantity of their orders and the headquarter places a combined order with the supplier. In the Order Coordination policy, classic RAND heuristic is used to find the best common replenishment epoch and the best replenishment timing of each subsidiary. In the Order Consolidation policy, the optimal order quantity of the combined order is obtained from a mathematical model. The combined order is then allocated to the subsidiaries according to a proportional allocation rule. A series of numerical studies is conducted to compare the costs of the SD-ASM and HQ-CSM policies. The results show that HQ-CSM outperforms SD-ASM in terms of cost and robustness against demand uncertainties. This achievement is largely due to the economies of process (synergistic ordering process), the economies of scale (large order quantity with price discount) and risk pooling effect (transshipments). The results also reveal that the Order Consolidation policy with a combined order always performs better than the Order Coordination policy with common replenishment epochs especially in face of high demand uncertainties and high service level in the global market.