Purchase price optimization by demand allocation to suppliers based on the performance attributes

Abstract

Selection of the right supplier is always a challenge for the firm. Identifying the right supplier and allocating the optimum demand is always the critical part of supplier management in procurement industry. Cost and high-quality raw material are the two factors critical for reducing the manufacturing cost. This paper discusses about the two different approaches for optimization of the cost to realize the potential savings opportunities. It also proposes to two models to optimize the cost of purchasing by allocating the demand to the suppliers based on their performance attributes. The objective is to minimize the overall purchasing cost by considering the monetary effect associated with the supplier’s performance. Comparative analysis of Linear optimization model and lexicographic for optimum demand allocation to the supplier’s selected based on the performance of the suppliers is done to understand the better model based on the business requirement of the firm and thus reducing the overall purchasing cost.The outcome of the model will guide the managers to make better decisions while allocating the demands based on the priority of the business and save the purchasing cost by optimization of the demand allocation.