Dr.

Niniet Indah Arvitrida 14/04/2022

Aggregating Multiple
Products in a Single Order
JOINT ORDERING

Niniet Indah Arvitrida, PhD

Learning Objective
• Students will be able to understand and implement the aggregation
concept in supply management.

Reference
Chopra, Sunil (2019). Supply chain Management: Strategy, Planning,
and Operation. Prentice Hall International, Inc., New Jersey. Chapter
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Aggregating Multiple Products in a Single

Order
• Transportation is a significant contributor to the fixed cost per order
• Combining shipments of different products from the same supplier will have
• same overall fixed cost, shared over more than one product, which implies
• effective fixed cost is reduced for each product and hence lot size for each product can be
reduced
• Can also have a single delivery coming from multiple suppliers or a single truck
delivering to multiple retailers
• Aggregating across products, retailers, or suppliers in a single order
allows for a reduction in lot size for individual products because fixed ordering
and transportation costs are now spread across multiple products, retailers, or
suppliers

Niniet Indah Arvitrida, PhD

Aggregating Multiple Products in a Single

Order
• Savings in transportation costs
• Reduces fixed cost for each product
• Lot size for each product can be reduced
• Cycle inventory is reduced

• Single delivery from multiple suppliers or single truck delivering to

multiple retailers

• Receiving and loading costs reduced

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Example
• Suppose there are 4 computer products in the previous example: Deskpro,
Litepro, Medpro, and Heavpro
• Assume demand for each is 1000 units per month
• If each product is ordered separately:
• Q* = 980 units for each product
• Total cycle inventory = 4(Q/2) = (4)(980)/2 = 1960 units
• Aggregate orders of all four products:
• Combined Q* = 1960 units
• For each product: Q* = 1960/4 = 490
• Cycle inventory for each product is reduced to 490/2 = 245
• Total cycle inventory = 1960/2 = 980 units
• Average flow time, inventory holding costs will be reduced

Niniet Indah Arvitrida, PhD

Lot Sizing with Multiple

Products or Customers
• In practice, the fixed ordering cost can consist of
• A portion of the cost is related to transportation
• A portion of the cost is related to loading and receiving

• Three scenarios/approches:
• Lots are ordered and delivered independently for each product
• Lots are ordered and delivered jointly for all three models
• Lots are ordered and delivered jointly for a selected subset of models

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Lot Sizing with Multiple Products

• Suppose there are 3 computer products:
Litepro, Medpro, and Heavpro
• Demand per year
• DL = 12,000; DM = 1,200; DH = 120
• Common transportation cost, S = $4,000 (previously, it refers to fixed order
cost).
• Product specific order cost
• sL = $1,000; sM = $1,000; sH = $1,000
• Holding cost, h = 0.2
• Unit cost
• UCL = $500; UCM = $500; UCH = $500

Niniet Indah Arvitrida, PhD

Delivery Options

• No Aggregation:

Each product ordered separately

• Complete Aggregation:

All products delivered on each truck

• Tailored Aggregation:

Selected subsets of products on each truck

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Dr. Niniet Indah Arvitrida 14/04/2022

No Aggregation: Order Each Product

Independently
Litepro Medpro Heavypro

Demand per 12,000 1,200 120 • Total cost =

year $155,140
Fixed cost / $5,000 $5,000 $5,000
order
Optimal 1,095 346 110
order size
Order 11.0 / year 3.5 / year 1.1 / year
frequency
Annual cost $109,544 $34,642 $10,954

Niniet Indah Arvitrida, PhD

Aggregation: Order All Products Jointly

Combined fixed order cost:
RC* = S* = S + sL + sM + sH = 4000+1000+1000+1000 = $7000

Identify the optimal ordering frequency per year:

m* = n *= Sqrt[(DLhCL+ DMhCM+ DHhCH)/2S*] = 9.75

S* = S + sL + sM + sH Annual order cost = S * n = 9.75*$7000 = $68,250

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QL = DL/n* = 12000/9.75 = 1230

QM = DM/n* = 1200/9.75 = 123
QH = DH/n* = 120/9.75 = 12.3
Cycle inventory = Q/2

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Litepro Medpro Heavypro

Demand per 12,000 1,200 120

year
Order 9.75/year 9.75/year 9.75/year
frequency
Optimal 1,230 123 12.3
order size
Annual $61,512 $6,151 $615
holding cost

Annual order cost = 9.75 × $7,000 = $68,250

Annual total cost = $136,528
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Aggregation with Capacity Constraint: An

example
• G Corp. sources from hundreds of suppliers and is considering the
aggregation of inbound shipments to lower costs.
• Truckload shipping costs $500 per truck along with $100 per pickup.
• Average annual demand from each supplier is 10,000 units.
• Each unit costs $50 and G Corp. incurs a holding cost of 20 percent.
• What is the optimal order frequency and order size if G Corp. decides
to aggregate four suppliers per truck?
• What is the optimal order size and frequency if each truck has a
capacity of 2,500 units?

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Demand per product, Di = 10,000

Fraction of holding cost, h = 0.2

Unit cost per product, UCi = $50

Common order cost, S = $500

Supplier-specific order cost, si = $100

The combined order cost from four suppliers is given by

S* = S + s1 + s2 + s3 + s4 = $900 per order

å
4
D1hC1 4 ´10,000 ´ 0.2 ´ 50
n* = i=1
= = 14.91
2S * 2 ´ 900
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• Annual ordering cost per supplier

900
Annual order cost = 14.91´ = $3,354
4

• Quantity ordered from each supplier

Q = 10,000/14.91 = 671 units per order.

Annual holding hC Q 671

= i = 0.2 ´ 50 ´ = $3,355
cost per supplier 2 2

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• This policy, however, requires a total capacity per truck of

4 * 671 = 2,684 units.

• IF the truck capacity is 2,500 units, so the order quantity must be

adjusted.
Adjusted Q = 2500 / 4 = 625 unit per supplier

Adjusted n* = 10,000 / 625 = 16 orders per year

The limited truck capacity will increase the annual order cost per supplier to $3,600
and decrease the annual holding cost per supplier to $3,125.

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Lessons from Aggregation

• Aggregation allows firm to lower lot size without increasing cost

• Complete aggregation is effective if product specific fixed cost is a

small fraction of joint fixed cost

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Exercise No.1
SuperPart, an auto parts distributor, has a large warehouse in the Chicago region and is deciding on
a policy for the use of TL or LTL transportation for inbound shipping. TL shipping costs $800 per
truck plus $100 per pickup. Thus, a truck used to pick up from three suppliers costs 800 + (3 * 100)
= $1,100. A truck can carry up to 2,000 units. SuperPart incurs a fixed cost of $100 for each order
placed with a supplier. Thus, an order with three distinct suppliers incurs an ordering cost of $300.
Each unit costs $50, and SuperPart uses a holding cost of 20 per cent.
Assume that product from each supplier has an annual demand of 3,000 units. SuperPart has
thousands of suppliers and the company must decide on the number of suppliers to group per
truck if using TL.
a) What is the optimal order size and annual cost per product if TL shipping is used but two suppliers are
grouped together per truck?
b) What is the optimal number of suppliers that should be grouped together? What is the optimal order size
and annual cost per product in this case? What is the time between orders?

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Exercise No.2
Ford and GM carry spare parts for their dealers at a third-party
warehouse in Michigan's Upper Peninsula. Demand for Ford spare
parts is 100 per month, whereas demand for GM parts is 120 per
month. Each spare part costs $100 and both companies have a
holding cost of 20 percent. Currently, each truck has a fixed cost of
$500. What is the optimal order size and frequency for Ford? For GM?
What is the annual ordering and holding cost for each company?

A third-party logistics provider has offered to combine shipments for

each of the two companies on a single truck. This will increase the
cost of each truck to $600. If the two companies agree to the joint
shipment, what is the optimal order frequency and size? What is the
annual ordering and holding cost for the two companies combined?
Should Ford and GM accept the third party's proposal?
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Discussion Questions
1. Consider a supermarket deciding on the size of its replenishment order from
a supplier. What costs should it take into account when making this
decision?
2. Discuss how various costs for the supermarket in Question 1 change as it
decreases the lot size ordered from Procter & Gamble.
3. As demand at the supermarket chain in Question 1 grows, how would you
expect the cycle inventory measured in days of inventory to change?
Explain.
4. The manager at the supermarket in Question 1 wants to decrease the lot
size without increasing the costs he incurs. What actions can he take to
achieve this objective?

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