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Title:The Effect of Preferred Supplier Programs and TQM on Logistical and Procurement Policies
Authors:Cynthia L. Miller and Frank J. Dooley
Publication Date:Jun 1995
Report #:MPC-95-47
Project #:MPC-073
TRID #:00715420
Keywords:competition, cost control, economics, international, inventory, logistics, mathematical models, procurement, purchasing, suppliers
Type:Research Report – MPC Publications

 

Abstract

The United States food processing industry is under increasing economic pressure to remain competitive internationally. Consequently, American firms are evolving from an adversarial to a close procurement relationship, with many adopting preferred supplier or partnership programs to decrease costs. A major logistical area where costs can be reduced is in inventory. The objective of this study is to explain the effects of close versus adversarial industrial buyer-supplier relationships on logistical and procurement policies and costs. In this study, a two-firm economic order quantity (EOQ) model is developed that minimizes total costs of inspection, inventory, and quality based on joint buyer and supplier costs. Results indicate that logistical costs can fall by 4.24 percent with a close buyer-supplier relationship because of reduced uncertainty and inspection costs. The two-firm EOQ model developed in this report is distinguished from other work by combining quality, uncertainty, and two-firm dynamics into the EOQ model. As such, the model permits the investigator to consider differences in logistical costs between adversarial and close buyer-seller procurement relationships. Specific considerations include defect rates, inspection costs, safety stock, and stockout costs, as well as the traditional purchase, order, and carrying costs.

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