Modeling Pooled Purchasing Strategy in Purchasing Consortium to Optimize Total Purchasing Cost

Purchasing consortium (PC) is horizontal collaboration amongst companies to jointly perform their purchasing activities. PC offers companies with better pricing in obtaining goods. One of the critical factors companies to join in the PC is the amount of benefits that would be achieved when they join in the PC compared to when they purchase individually, this factor also called nature of benefits. Strategies to maximize the nature of benefit of PC include two aspects, namely minimizing the total cost of purchasing and maximizing the allocation of saving/gain to each member. This research will be focused on the first aspect of those strategies which is modelling strategy to minimize the total purchase cost. The total purchase cost involves the purchase costs, ordering costs, shipping costs, inventory costs, fix operational cost and penalty cost. Mixed integer programming was developed to model procurement strategy to minimize the total cost of the purchasing system. Sensitivity analysis was also performed to evaluate how different values of parameters affect the total cost. Numerical experiments showed that the total cost of purchasing very sensitive to changes in number of demand from each member of PC. Potential contributions of this research is to provide an overview of the purchasing strategy in the PC by a quantitative approach and determine the condition when a PC needs to make changes on its procurement strategy to maintain and/or improve its nature of benefits during different system's condition.