How to Optimize Material Supply Chain

Material supply chain is one of the most exclusive part of the business. It contains a lot of constraints and requirements. For example, some suppliers have MPQ (minimum purchase quantity), some have shipment multiple of batch sizes. There are price scale advantages, lead-time options, transportation ways, shelf life etc.

Along with the uncertainty and ordinary supply chain cost items, we need to consider such constraints in our optimization model.

Before starting to challenge them, we need to go back to the Total Supply Chain Cost. By assuming a common demand function, we can say that when order quantity (Q) is bigger, the opportunity cost rises. Here, we may expect a compensation by the logistics cost. However, if we just consider ordering multiples of the containers, the logistics cost per unit will remain the same. Therefore, it’s better to order the lowest amount. So, we need to minimize Q and try to bring it closer to the periodic demand.

As a review, when the logistics cost is same, we should order less but frequently.

We started to apply this logic with the article Optimizing Material Order under Logistics Constraints. Here’s the formula;

OPQ = min[ EOQ, mCL ]

Optimum purchase quantity is the minimum of Economic Order Quantity (EOQ) and Container loads (mCL) carrying periodic demand (d). However, it just considers the transportation cost, and doesn’t check other supplier requirements.

For example, supplier may require ordering with pallet load multiples (PL). We assume that the logistics cost per PL is same. Then, the formula is;

OPQ = roundup[ d / PL ] * PL

The operator roundup[..] rounds the division up to the nearest integer. This formula finds the minimum order amount which can cover the periodic demand, and orders multiples of PL.

We may have some lower limits on ordering. A valid example can be MPQ. We can’t order an amount lower than this figure. Then, the formula is;

OPQ = max[ EOQ, MPQ ]

Where max[..] takes the maximum of EOQ and MPQ. EOQ can be lower than MPQ, where the periodic demand is extremely low.

We can check other requirements, and maybe combinations (MPQ, PL, and EOQ at the same time). Always, we should consider the minimum acceptable amount.

The reorder point (R) will balance the order quantity (OPQ) around customer service level (CSL), which is explained in How to optimize inventory.

So, the Unified Supply Model is capable of containing lots of constraints and providing optimum results under uncertainty.