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Joint Vendor-Buyer Policy in JIT Manufacturing

Author(s): Rotimi Aderohunmu, Ayodele Mobolurin and Noel Bryson
Source: The Journal of the Operational Research Society, Vol. 46, No. 3 (Mar., 1995), pp. 375-
Published by: Palgrave Macmillan Journals on behalf of the Operational Research Society
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Journal of the Operational Research Society (1995) 46, 375-385 C 1995 Operational Research Society Ltd. All rights reserved. 0160-5682/95 $9.00
Joint Vendor-buyer Policy in JIT Manufacturing
'University of Denver, USA and 2Howard University, USA
In this study, we show that a co-operatiVe batching policy, based on cost information exchange
between the vendor and the buyer, can reduce total cost significantly in the just-in-time (JIT)
environment. We examine the impact of such co-operation on total costs, including ordering, set-up,
transportation and inventory holding costs for a long-term supply relationship. The study shows that
joint optimization of both the vendor and the buyer's operations does not necessarily result in a
common lot size. We further examine the sensitivity of the resulting cost savings due to the exchange
of cost information to changes in the relevant operating parameters.
Key words: inventory, JIT production, logistics, purchasing
A desirable condition in long-term purchase agreements in a just-in-time (JIT) manufacturing
environment is the frequent delivery of small quantities of items by vendors so as to minimize
inventory holding costs for the buyer. The vendor also needs to minimize total costs;
therefore, the order or delivery quantity for the buyer may not be an optimal production lot
size for the vendor. The additional inventory holding costs to the vendor, due to the buyer's
frequent delivery policy, may not be obvious to the buyer, and could lead to adversarial price
negotiation between the two. However, we show that close co-operation between the two
parties through information exchange, would be beneficial not just to the buyer' but to both
parties2 and lessen the point of contention.
In the traditional Toyota-type JIT environment, the vendor is dedicated to the buyer, and is
located close to the buyer's facilities2'3. It is therefore easy for the vendor to synchronize its
operations with those of the buyer. In most situations outside of Japan, however, the vendor
may be located at a significant distance from the buyer and may supply the same item to
more than one buyer. More significantly, the same process is often used by the vendor for
more than just one item or one buyer's orders. In the same manner, a buyer may buy the
same part from more than one supplier4. These and other differences5 imply that such JIT
relationships are more complex to analyse and to implement than the Toyota model. Current
thinking and practice in industry is to have transparent relationships between functional areas
and between the manufacturer and suppliers26. Therefore, to operate optimally in the JIT
environment, it is necessary to optimize the combined activities of both buyer and vendor
simultaneously, taking all operating parameters into consideration. Unfortunately, until
recently, most JIT studies in the literature have been descriptive7, and most of the ahalytical
ones do not take all the costs for both parties into consideration"3'6. Therefore, the overall
result may not be optimal.
Using past data from an automobile company, Chapman and Carter7 carried out an
empirical study of a buyer-supplier JIT relationship. The study showed that strong supplier/
customer linkages and fast communication of engineering and other changes to the supplier,
for example, are very important for an efficient JIT operation. In another empirical study,
O'Neal6 also emphasized the need for replacing the traditional adversarial roles between
buyers and vendors with mutual co-operation. The study suggests the need for vendors to
Correspondence: R. Aderohunmu, College of Business Administration, University of Denver, 2020 South Race Street,
Denver, Colorado 80208, USA
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376 Journal of the Operational Research Society Vol. 46, No. 3
assume additional responsibilities for inventories and to develop greater responsiveness to
buyers' long-term operations. These and other studies imply that close vendor-buyer linkage
is critical2 for successful implementation of JIT.
Banerjee8 developed a joint economic lot size (JELS) model for the case in which the
vendor produces to order for the buyer on a lot-for-lot basis. The study examined the effect
of each party's optimal lot size on the other party and developed a JELS that is based on
joint total relevant costs. The difference between the independent optimal costs of one party
compared with the corresponding optimal relevant costs based on the JELS, as well as the
clout of each party, are used for negotiating prices. Goyal9 relaxed the lot-for-lot assumption
of Banerjee's model and achieved a reduction of the joint total relevant cost. While
Banerjee's analysis did not examine a JIT environment, his results, as well as Goyal's, give
indications of the benefits of joint optimization of decision variables in buyer/vendor
relationships. This paper is different from Banerjee's in two ways. First, we consider a
long-term, JIT relationship between the vendor and the buyer. Hence, the vendor's
production should not be based on lot-for-lot, but on what is optimal for his operations, given
the delivery agreement. Secondly, in Banerjee's paper, the differences in costs are used for
bargaining leverage. However, in this paper, we seek to determine a non-adversarial policy
that would reduce the total costs for all parties in the relationship.
Joshi and Campbell'0 investigated the optimal allocation of buyer's delivery capacity among
several inventory items. Although the paper did not consider transportation costs, it did
recognize the potential impact of these costs. Aderohunmu et al.11, however, examined the
impact of the transportation and delivery processing costs, but solely from the buyer's
In this paper, we analytically examine the need for a non-adversarial approach to co-
ordinating batching policies so as to ensure a stable, mutually beneficial, and long-term JIT
relationship, while allowing for flexibility in each party's operations. Using a multiple delivery
model, we first examine the impact of the buyer's independent ordering and delivery policies
on the vendor's operations and costs. We then determine the effect of joint policy based on
the open exchange of information, the total costs (ordering, set-up, transportation, delivery
processing), and the delivery frequency agreed to by the vendor and buyer, so as to minimize
total vendor and buyer costs.
Assumptions and notation
To simplify the analysis, we make the following assumptions.
(1) There is only one vendor and only one buyer for the one item.
(2) Consumption of the item by the buyer is uniform and constant over time.
(3) The production rate is uniform and finite.
(4) There are no shortages.
(5) The cost functions are continuously differentiable.
(6) The buyer and the vendor exchange information on their respective relevant.costs.
The following general notations apply throughout the paper. When subscripted with 'm',
the notation refers to the buyer, and subscript 'v' applies to the vendor.
= Order size (buyer)/production lot size (vendor).
D = Annual demand rate.
P =
Production rate.
Ordering (buyer)/set-up (vendor) cost.
h =
Inventory holding cost.
Number of deliveries per order.
T = Vendor's cycle time.
F = Transportation cost per delivery.
T1= Period during which vendor produces.
T2= Period when vendor supplies from inventory.
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R. Aderohunmu et al.-Joint Vendor-Buyer Policy in
Manufacturing 377
FIG. 1. Variation of inventory level with time for vendor (top), and buyer/manufacturer (bottom).
Figure 1 shows the variation of both the vendor's and buyer's inventory levels over one
vendor cycle (cycle time T). Each vendor cycle is equivalent to n buyer cycles (cycle time t).
Description of model
In general, the vendor produces over a period T1 at a rate P> D. The excess of
production over demand or delivery requirement is kept in the vendor's finished item
inventory and used for making deliveries to the buyer in period T2 until the inventory is
exhausted. Production is then resumed, and the cycle is repeated. The general integrated
vendor-buyer relationship will involve the vendor supplying a component to more than one
buyer/manufacturer and the buyer acquiring the same component from more than one
vendor. The average annual total cost of both parties is:
TCvm DMrDvS [ v (1
+ Qm(hm +
+ Dm[Sm + n(A + F)]
DvLQV 2 2n
where A is the additional handling cost per delivery.
However, in order to focus more clearly on the impact of co-operation between a buyer
and a vendor, we apply the assumptions above, and examine the relationship between a single
buyer and vendor with respect to one item and annual demand quantity D from the buyer to
the vendor, i.e. Dm =
= D.
In the following sections, we first determine the total average annual costs when the buyer
and vendor optimize independently and compare this with the situation when there is
co-operation between the two in arriving at the optimum total average annual costs. We then
show that separate lot sizes f-or buyer and vendor, based on exchange of information, are
better than a single common lot size. As is often the practice, we use the classical economic
order quantity (EOQ) as a benchmark for comparing quantities and costs.
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378 Journal of the Operational Research Society Vol. 46, No. 3
Buyer's independent JIT cost analysis
The average total annual cost for the buyer optimizing, independent of the vendor's
operation, is (see Aderohunmu et al.11):
SmD A +F Qmhm
TCm + Dn + m (2a)
If we let
A + F (2b)
the resulting optimum order quantity is:
+ n2a)1/2 = nQEOQ(1+a)
/ (2c)
Therefore, the buyer's independent optimal average total annual cost is:
+ n(A +
F)]hm) =
TCEOQ(! +c2) (3)
Comparison of buyer's independent costs with EOQ
The buyer's independent proportional cost saving relative to orders based on the EOQ is:
TCEOQ- TC = 1- 1 +
Splitting the delivery of each order leads to cost savings for the buyer as long as the savings
due to reduced inventory costs and the reduction in the number of orders per year more than
make up for the additional transportation and handling costs (see Aderohunmu et al.11). In
the following section, we examine the vendor's costs resulting from this buyer's ordering
policy and delivery requirements.
Vendor's independent cost analysis
The vendor's average inventory per year is given by the area under the vendor's cycle
inventory level curve (see Figure 1) divided by T, the cycle time, and can be determined to
(Qv QmQv Q
22D D 2P
2 2n 2P
Therefore, the vendor's average total annual cost is (including set-up costs):
+ QMh (6)
2 \ 2n
Differentiating with respect to
to obtain the optimum
vendor's Economic Production Lot
size, given
buyer's ordering
delivery policy, 1/2
((1 D)h)
But this is the same as the economic production quantity when delivery is constant and
continuous (QEPL). Therefore, the withdrawal rate does not affect the optimal production lot
size of the vendor.
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R. Aderohunmu et al.-Joint Vendor-Buyer Policy in
Manufacturing 379
Substitution of Equations (7) and (2c) into (6) gives the vendor's optimal average total
annual cost to be:
+ ) (n +
1 /f31/2
(n +
2n -
H =- 1_ D) (10)
hm Sm
The above costs show that although the vendor's optimal production quantity is the same as
when withdrawal is constant and continuous, the costs are higher here because the vendor
incurs additional holding costs as a result of the intermittent delivery policy, a situation that
would not arise if the vendor's facility was located close to the buyer, and both parties
synchronize their production. The vendor's additional holding cost due to the buyer's
withdrawal rate depends on the buyer's order quantity Qm, given the withdrawal policy. This
additional cost may not be obvious to the buyer.
Buyer's modified JIT cost analysis
As is often the case, this additional inventory holding cost incurred by the vendor is passed
on implicitly to the buyer, within the vendor's pricing structure. The buyer's modified total
cost is therefore:
+ a, + v (n + n2ca)'/2 (lla)
n ~2n h I
The proportional cost savings relative to orders based on EOQ is given by:
_ ( \1/2( /Nh12
= -+
1 +
p -(12)
) \ 2!
Buyer-vendor co-ordination through exchange of cost information
Any approach that conceals the additional cost within the
buyer of the opportunity to incorporate explicitly
this factor in
determining his/her
optimum ordering lot size. Suppose the additional cost was
communicated to the
before s/he determines the optimal quantity (QmE). Then, the
total costs
the additional cost would be:
+ Dn(A
+ F)
QmE (hm
hv) (13)
QrnE QmE
The above function indicates that the
of information on
costs is a critical
linkage between vendor's and buyer's policies.
corresponding buyer's optimal
lot size is:
Q* (2
K - (n(
na)) (14b)
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380 Journal of the Operational Research Society Vol. 46, No. 3
and the buyer's optimal total annual costs (for the JIT with information exchange model) are:
TC*E - D[Sm + n(A + F)] K + 1/2(15)
K(ED 1m)
substituting for the value of K
1 (1__ __ nfa3K 1 1
( + (16)
r,~~ \
TCmE = TCEOQ[(- + c)(1 + 13)] = TC*(1 + /3)1/2 (17)
The proportional cost savings compared with total cost using the EOQ
model is
given by
TC*E[ 1 )
C0 - mCE - 1
[( + ))
Comparison of buyer's modified costs and information exchange
The average total cost of the information exchange
model above
(Equation (18))
is less
than the costs for the modified model in
Equation (12),
(1+ 0)1/2
p ) (19)
This shows that, in constrast to each party independently optimizing
the total
costs for both parties would be reduced if the two
co-ordinate their
policies by
exchanging cost information and the buyer incorporates
this additional information in the
determination of his/her lot size. Also, it will be shown in the next section that the total cost
of this policy is less than when an optimum single joint
based on total costs for the
vendor and the buyer, is adopted.
We now examine the cost implications
of the lot
sizing policies by
determining a common economic lot size
for both the
and the
vendor, using
total costs for both parties. Using (1) and (6),
Li+i-v+ (hhvi
+ (20)
2\ P/i
Therefore the optimal joint lot size is:
Q*= (2Dn[Sv
Vendor's costs for the joint
lot size model
The above quantity in (21) can be expressed
in terms of the vendor's
optimal production
size Q* in (7); that is,
+EL 13
where the expression under the radical is simplified as Fv.
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R. Aderohunmu et al.-Joint Vendor-Buyer Policy in JIT Manufacturing 381
The vendor's total cost, excluding additional inventory cost, which is transferred to the
buyer, is:
TCV(Q) = !TCEPL(rV + 1) (23)
Comparison of vendor's independent and joint lot size models
If adoption of the joint economic lot size
leads to savings for the vendor, then:
Q) = 1- !(FV+ 1) >0 (24a)
(V- 1)2<0 (24b)
which is a contradiction. Therefore, no savings can be realized by the vendor if the lot size is
the same as for the buyer.
Comparison of buyer's JIT with information exchange and joint lot size models
The buyer's costs, if the joint economic lot size is adopted as the order quantity, can also
be determined and compared with the buyer's costs in (17).
1 +
=nQEOQam1 (25)
=QEOQ[nE/3 +
The buyer's total cost including additional holding cost transferred by the vendor is
(1 +
+ ([
If this buyer's cost is compared with the cost for the information exchange policy (equation
(17)), utilizing the same approach as for the vendor (equation (24a)), it can be shown that the
joint economic lot for this model not only reduces flexibility in the operations of the parties
but also leads to an increase in total costs.
Computational results of comparisons for buyer's models
Tables la and lb display the order size for the modified buyer's model QmT and the
information exchange model QmE as multiples of the traditional EOQ (i.e. QEOQ) and the
corresponding savings over the EOQ model for given values of a and a/3. a is the ratio of the
buyer's transportation and delivery costs to the ordering cost, and /3 is the ratio of the
vendor's holding cost to the buyer's. The results show that, in general, n (the number of
deliveries) increases as the JIT order size increases, when the values of a and /3 are fixed.
Also, the proportional cost savings (PCSmT, PCSmE) for both models increase as the value of
n increases. However, the information exchange model provides the greater savings.
In order to realize an increase in cost savings, the order size must be increased with a
corresponding increase in the number of deliveries. However, the risk of obsolescence would
prevent arbitrary increase in the order size.
As might be expected, the higher the buyer's holding cost compared with the vendor's (i.e.
lower /3S) the more savings would be realized through holding cost information exchange
(PCSE), when all other parameters remain unchanged. We next present some numerical
examples to illustrate the superiority of JIT with information exchange policy.
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382 Journal of the Operational Research Society Vol. 46, No. 3
TABLE 1. Comparisons of buyer's models for several combinations of values of a and /3
=0.1, =2.0
2 1.55 1.48 0.186674 0.187896 * * * *
6 3.10 2.95 0.457782 0.458397 3.10 1.79 -0.032796 0.105573
10 4.47 4.26 0.530426 0.530958 4.47 2.58 0.105573 0.225403
25 9.35 8.92 0.607126 0.607572 9.35 5.40 0.251669 0.351926
45 15.73 15.00 0.632917 0.633333 15.73 9.08 0.300794 0.39447
*Indicates increased costs (negative savings) for this and smaller values of n
a = 0.3, ,3= 0.8 av= 0.5, /3=0.6
6 4.10 3.06 0.043618 0.083485 * * * *
10 4.71 0.114562 0.015472 0.151472 7.75 6.12 0.006976 0.020204
25 14.58 10.87 0.183667 0.217696 18.37 14.52 0.044699 0.070484
45 25.54 19.04 0.205296 0.238423 32.52 25.71 0.060556 0.085913
*Indicates negative cost savings for this and smaller values of n
Illustrative examples
The first example is based on the data provided by Goyal9 and the second is an extension
of this data. The comparative performance of the information exchange model is much better
than is reflected in the tables, since its costs include the additional cost of frequent deliveries
while the costs shown for the other models do not include transportation or delivery costs.
Example It(Table 2a)
D=1000, P=3200, Sm 25,
hm=5, hv=4
Additional data for the JIT model a, = 0.2, (/3 = 0.8)
For this example, Table 2b shows the total annual costs for the information exchange model
as a fraction of the total annual cost for each of the other three models. A similar comparison
is shown in Table 2d for Example 2 below.
Example 2 (Table 2c)
10000, P =
40000, Sm 100, Sv
600, hm
8, hv
= 4.8
Additional data for the JIT model a, = 0.2, (/B = 0.6)
These examples indicate that significant buyer savings can be realized for the information
exchange model compared with the other three models, without increasing the vendor's costs,
especially as the other models do not include transportation and delivery costs. The savings
are significant enough to make it possible for the buyer to provide the vendor with monetary
incentives to ensure co-operation. This incentive would be an important inducement to
vendors supplying small manufacturers, who have limited other negotiation power12.
Sensitivity analysis
Given a fixed delivery frequency, the level of savings realized by adopting the information
exchange policy depends on the values of the parameters at and /3. Therefore, we next
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R. Aderohunmu et al.-Joint Vendor-Buyer Policy in JIT Manufacturing 383
TABLE 2a. Comparison of models' operating parameters and costs
Traditional Banerjee's Goyal's JIT info exchange
Buyer Vendor Buyer Vendor Buyer Vendor Buyer Vendor
#Deliveries/set-up 1.0 1.0 1.0 1.0 1.0 2.0 9.0 52.0
Lot size 100.0 2157.4 368.8 368.8 197.8 395.6 974.2 2157.4
Delivery size 100.0 100.0 368.8 368.8 197.8 197.8 41.6 41.6
Total annual cost 500.0 1483.2 989.7 1315.1 620.9 1659.9 374.2 1483.2
Total system cost 1983.2 2304.9 2274.9 1857.4
TABLE 2b. Comparison of total annual costs for Example 1
Model EOQ and EPL Banerjee Goyal
Buyer's total costs 0.7484 0.3781 0.6027
Total system costs 0.9366 0.8059 0.8165
TABLE 2c. Comparison of model's operating parameters and costs
Traditional Banerjee's Goyal's JIT info exchange
Buyer Vendor Buyer Vendor Buyer Vendor Buyer Vendor
#Deliveries/set-up 1.0 1.0 1.0 1.0 1.0 3.0 8.0 39.0
Lot size 500.0 8763.6 1233.6 1233.6 532.0 1596.0 1802.8 8763.6
Delivery size 500.0 500.0 1233.6 1233.6 532.0 532.0 225.3 225.3
Total annual cost 4000.0 6572.7 5745.0 5604.0 4007.7 7270.6 2884.4 6572.7
Total system cost 10572.7 11349.0 11278.3 9457.1
TABLE 2d. Comparison of total annual costs of Example 2
Model EOQ and EPL Banerjee Goyal
Buyer's total costs 0.7211 0.5021 0.7197
Total system costs 0.8945 0.8333 0.8385
examine the sensitivity of the cost savings for the information exchange policy to changes in
the parameters a and /3.
The computational results in Tables la and lb show that for low values of av (e.g. av =
and low values of
/3 =
0.1) the buyer realizes very large savings (PCSmE
= 61% for
25, Table la). For a low value of a, even when the vendor's holding cost is twice that for
the buyer (/ = 2.0), it is still economical for the vendor to hold any extra inventory
35% savings for 25 deliveries). Moderately high values for both parameters
0.3 and
0.8) still yield relatively high, though smaller, savings (PCSmE
= 22% for 25
deliveries, Table lb). The savings tend to decrease (PCSmE
= 7% for 25 deliveries, Table lb)
as a approaches 0.5 for even moderate values of /3(/3
Figure 2 shows the percentage cost savings as a function of a and
for fixed values of n.
Cost savings are more sensitive to the buyer's transportation-delivery costs than to the
holding costs. Consequently, in order to effect further reduction in total costs, it is not
enough to strive continuously to reduce the ordering and set-up costs without simultaneous
continuous reduction of the transportation-delivery processing costs.
The analyses show that significant cost savings can be achieved to the advantage of both
parties in a JIT relationship when timely cost information, among other information, is shared
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384 journal of the Operational Research Society Vol. 46, No. 3
0.4 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ c
1 a5
0 PCsC
16 2
FIG. 2. (a) Variation of percentage cost savings with or and ,3, n = 6; (b) variation of percentage cost savings with a~ and
/3, n = 10; and (c) variation of percentage cost savings with or and ,3, n = 20.
between the parties. A joint batching policy does not necessarily imply that the processing
batch be equal to the order quantity or the delivery quantity. The result in Equation (24b)
shows that if the cost parameters for the buyer and the vendor are different, as is usually the
case, a single joint economic order quantity may not be optimal. Because of the differences in
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R. Aderohunmu et a.-Joint Vendor-Buyer Policy In JIT Manufacturing 385
the vendor batch size and buyer's order or delivery quantities, a long term relationship and
frequent communication of any changes in engineering design and the demand pattern,
ordering, set-up, transportation as well as inventory holding costs are essential to obtain fully
the benefits of co-operation among the parties. Frequent communication also protects the
vendor against obsolescence and ensures stability. An important area of co-operation is the
location at which the inventory for supplying the buyer during period T2 is held. Even though
the buyer pays for any additional inventory holding costs, an exchange of information on
holding costs at both facilities would help to minimize total costs. As expected in a JIT
environment, continuous, simultaneous reduction in ordering, set-up, and especially trans-
portation costs is to the benefit of both the buyer and the vendor.
These results reinforce the importance of timely and honest cost information exchange
between the parties in the JIT environment, while demonstrating the usefulness of technolo-
gies such as electronic data interchange (EDI), which facilitate such communication.
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Received February 1993; accepted June 1994 after one revision
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