The application of a decision model in the management of raw material costs

Abstract

The management of raw material costs is of most importance, especially when it represents a considerable part of the industrial costs, when the price of raw materials is very volatile and the acquisition of raw materials has operational and strategic implications. However, most companies do not support the purchasing process of raw materials with models and procedures properly structured. Thus, supplier selection, the timing of the acquisition, and the quantity and allowable price of raw material ask for appropriate decision models which support a better cost management of raw material. In this paper the main focus is to explain the developed method used to identify the best conditions for the acquisition of raw materials. The problem was to analyze several criteria such as: price, delivery time, credit line and how much time is needed for the delivery of raw materials, considering some suppliers. As the solutions needs to be sustained by a mathematical method including future choices, the development requires cooperation between the researcher and the actors involved in searching the solutions. Based on an approach that combines decision trees, developed using Precision Tree software, and multicriteria models, the method, validated and tested, allows the decision maker to consider various criteria for selecting a supplier. The use of the decision tree developed turned possible to determine the supplier who offers the best overall expected value. The model developed in Flexus S.A. gained wide acceptance by the managers and it is used to make procurement decisions of raw materials for its agility and easy understanding. Furthermore, the application of the model allowed Flexus S.A. to initiate trade relations with suppliers who had not been previously considered. This change allowed the company to increase responsiveness to customer needs.