CHAPTER 10

PURCHASING AND SUPPLY SCHEDULING DECISIONS 1 (a) The following requirements schedules will lead to the proper timing and quantities for the purchase orders. Desk style A
Sales forecast Receipts Qty on hand 0 Releases to prod. 1 150 200 50 300 2 3 150 200 300 200 0 300 Week 4 5 6 7 8 200 150 200 200 150 300 300 300 100 250 50 150 0 300 300

Desk style B
1 Sales forecast Receipts Qty on hand 80 Releases to prod. 60 20 100 2 60 100 60 3 60 0 100 Week 4 5 80 80 100 100 20 40 100 100 6 100 100 40 100 7 80 100 60 8 60 0

Desk style C
Sales forecast Receipts Qty on hand 200 Releases to prod. 1 100 100 100 2 120 100 80 100 3 100 100 80 Week 4 5 80 80 100 0 20 100 100 6 60 100 60 7 60 0 100 8 80 100 60

Summing the releases for these three desk release schedules gives a production requirements schedule for desks in general and sheets of plywood in particular. That is,
2 Desk requirement 500 100 Plywood sheetsa 1500 300 a Desk requirements times 3 1 3 Week 4 5 400 500 200 1200 1500 600 6 7 400 100 1200 300 8 0 0

Now, find the purchase order releases for the plywood sheets.
1 2 1500 300 600 900 1200 1000 1000 3 1200 1000 1000 1000 Week 4 5 6 7 1500 600 1200 300 1000 1000 1000 500 900 700 400 1000 8 0 400

Sales forecast Receipts Qty on hand 2400 Releases to prod.

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Therefore, purchase orders should be placed in weeks 1, 2, 3, and 4 for 1000 sheets each. (b) Using Equation 10-2 in the text, the probability of not having the plywood sheets at the time needed would be:
Pr = 1 Pc 5 = 1 = 0.02 Cc + Pc 01 + 5 .

From Appendix A, z@1-.02 = 2.05. Therefore, the lead-time should be: T * = LT + z sLT = 14 + 2.05( 2) = 181 days . Another week should be added to the current lead-time of 2 weeks. 2 (a) Using Equation 10-2, the probability of not having the item when needed for production is:
Pr = 1 Pc 150 = 1 = 0.0001 Cc + Pc ( 0.2 35 / 365) + 150

The time to place an order ahead of need is: T * = LT + z s LT = 14 + 3.6( 4) = 28 days where z@1-.0001 = 3.6 from Appendix A. (b) Use part period cost balancing. The unit carrying cost is (0.2/52)35 = 0.134. Then, (Q=250) Week 4 0.134[500 + 200]/2 = 46.9 (Q=1350) Weeks 4 + 5 0.134[(1350 + 1050)/2 + (1050 + 200)/2] = 244.6 The carrying cost closest to the order cost of $50 is Q = 250. Order this amount. 3 Using the requirements planning procedure, we can develop a schedule of material flows through the network over the next 10 weeks.
Whse 1 Requirements Schd receipts On-hand qty 1700 Releases 1 2 3 4 5 6 7 1200 1200 1200 1200 1200 1200 1200 7500 500 6800 5600 4400 3200 2000 800 7500 7500 8 9 10 1200 1200 1200 7500 7100 5900 4700

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Whse 1 1 Requirements 1200 Schd receipts On-hand qty 1700 500 Releases 7500 Whse 2 Requirements Schd receipts On-hand qty 3300 Releases Whse 3 Requirements Schd receipts On-hand qty 3400 Releases

2 3 4 5 6 7 1200 1200 1200 1200 1200 1200 7500 6800 5600 4400 3200 2000 800 7500 4 5 6 2300 2300 2300 7500 1600 6800 4500 7500 5 6 2700 2700 7500 4900 2200 7500

8 9 10 1200 1200 1200 7500 7100 5900 4700

1 2 3 2300 2300 2300 7500 1000 6200 3900 7500

7 8 9 10 2300 2300 2300 2300 7500 2200 7400 5100 2800 7500 7 8 9 2700 2700 2700 7500 7000 4300 1600 7500 10 2700 7500 6400

1 2 3 4 2700 2700 2700 2700 7500 700 5500 2800 100 7500 7500

Regnl whse A 1 2 3 4 5 6 7 8 9 10 Requirements 22500 0 0 15000 0 15000 7500 0 7500 0 Schd receipts 15000 15000 On-hand qty 52300 29800 29800 29800 14800 14800 14800 7300 7300 1300 1300 Releases to plant 15000 15000 Whse 4 Requirements Schd receipts On-hand qty 5700 Releases Whse 5 Requirements Schd receipts On-hand qty 2300 Releases Whse 6 Requirements Schd receipts On-hand qty 1200 Releases Regnl whse B Requirements Schd receipts On-hand qty 31700 Releases to plant 1 2 3 4100 4100 4100 7500 1600 5000 900 7500 7500 4 5 4100 4100 7500 4300 200 7500 6 4100 7500 3600 7500 7 8 4100 4100 7500 7000 2900 7500 9 10 4100 4100 7500 6300 2200

1 2 3 4 1700 1700 1700 1700 7500 600 6400 4700 3000 7500 1 2

5 6 7 8 9 10 1700 1700 1700 1700 1700 1700 7500 1300 7100 5400 3700 2000 300 7500

3 4 5 6 7 8 9 10 900 900 900 900 900 900 900 900 900 7500 7500 300 6900 6000 5100 4200 3300 2400 1500 600 7200 7500 7500 900 3 7500 4 5 0 15000 6 7500 15000 7 8 0 7500 9 7500 15000 10 0

1 2 22500 0 15000

9200 24200 16700 16700 15000

1700

9200 1700 9200 15000

9200 9200

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Plant Requirements Schd receipts On-hand qty 0 Releases-matls

1 0 0 0 40000

2 0 0

4 5 6 7 8 30000 0 0 30000 0 40000 20000 10000 10000 10000 0 0 20000

3 0

9 0 0

10 0 0

Summing the releases to the plant shows that the plant should place 30,000 cases into production in weeks 4 and 7. Because demand is shown to be constant, the average inventory must be one-half the order quantity. For the six field warehouses and a shipping quantity of 7500, the average long run inventory would be (7500/2)6 = 22,500 cases. For the regional warehouses, the average inventory would be (15,000/2)2 = 15,000 cases. For the plant, the average inventory would be 20,000/2 = 10,000 cases. The total system average inventory would be 22,500 + 15,000 + 10,000 = 47,500 cases. 4 (a) The leverage principle shows the relative change that must be made in cost, price, or sales volume to affect a given change in the profit level. Usually it is used in reference to the cost of goods sold to show the impact that small changes in the cost of goods will have on profits and the important role that purchasing plays in the profitability of the firm. The following simple profit and loss statements will show how much change is needed in various activities to increase profits by 10 percent.
Current $55.0 27.5 15.0 8.0 $ 4.5 Sales (+4%) $57.2 28.6 15.6 8.0 $ 5.0 Price (1%) $55.5 27.5 15.0 8.0 $ 5.0 L&S (-3%) $55.0 27.5 14.5 8.0 $ 5.0 OH (-6%) $55.0 27.5 15.0 7.5 $ 5.0 COG (-2%) $55.0 27.0 15.0 8.0 $ 5.0

Sales Cost of goods Labor & salaries Overhead Profit

Due to the magnitude of cost of goods sold, it requires less than a two percent change in COG to increase profits by 10 percent. (b) The current ROA as: Profit margin = (4.5/55)100 = 8.2 percent Investment turnover = 55/20 = 2.75 ROA = 2.758.2 = 22.6 percent Reducing cost of goods by 7 percent will increase profits to 55 27.50.93 15 8 = $6.43 and the profit margin now is 6.43100/55 = 11.7 percent. Inventory at 20 percent of total assets is $4 million. If the cost of goods is reduced by 7 percent, inventory value will decline to $40.93 = $3.72. Total assets will be 3.72 + 16 = $19.72 million. The investment turnover is 55/19.72 = 2.789. The ROA now will be 11.72.789 = 32.63 percent.

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5 (a) A mixed purchasing strategy will generally be beneficial when prices show a definite seasonality, they are predictable, and inventory costs associated with forward buying are not excessive. In the problem, we should consider forward buying in the first half of the year and hand-to-mouth buying in the last half. To test the various strategies, compare (1) hand-to-mouth buying, (2) forward buying every 2 months, (3) forward buying every 3 months, and (4) forward buying for the first 6 months. The results are summarized in Table 10-1. The inventory for the hand-to-mouth buying strategy can be approximated as 50,000/2 = 25,000. The carrying cost would be 0.304.9825,000 = $37,350 per year. The carrying cost for the two month forward buying strategy is: 0.304.88[(0.5100,000/2) + (0.550,000/2)] = $54,900 For the 3-month forward buying strategy: 0.34.56[(0.5300,000/2) + (0.550,000/2)] = $119,700 From the total costs in Table 10-1, the best strategy is to forward buy the first sixmonth's requirements in January and hand-to-mouth buy for the last six months. (b) Some possible disadvantages are: Prices may fall rather than rise in the first six months There may not be adequate storage space to accommodate such a large purchase. The materials may be perishable and not easily stored. Uncertainties in the requirements and carrying costs may void the strategy.

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TABLE 10-1 A Comparison of Various Forward Buying Strategies with Hand-to-Mouth Buying
Hand-to-mouth buy 2-month forward buy 3-month forward buy 6-month forward buy

Jan Feb Mar Apr May Jun Jly Aug Sep Oct Nov Dec

Price, Quantity, $/unit units 4.00 50,000 4.30 50,000 4.70 50,000 5.00 50,000 5.25 50,000 5.75 50,000 6.00 50,000 5.60 50,000 5.40 50,000 5.00 50,000 4.50 50,000 4.25 50,000 Subtotals Inventory costs Totals Average price/unit

Total $200,000 215,000 235,000 250,000 262,000 287,500 300,000 280,000 270,000 250,000 225,000 212,000 $2,987,500 37,350 $3,024,850 $4.98

Price, $/unit 4.00 4.70 5.25 6.00 5.60 5.40 5.00 4.50 4.25

Quantity, units 100,000 100,000 100,000 50,000 50,000 50,000 50,000 50,000 50,000

Total $400,000 470,000

Price, $/unit 4.00

Quantity, units 150,000

Total $600,000

Price, $/unit 4.00

Quantity, units 300,000

Total $1,200,000

5.00 525,000 300,000 280,000 270,000 250,000 225,000 212,000 $2,932,500 54,900 $2,987,400 $4.88 6.00 5.60 5.40 5.00 4.50 4.25

150,000

750,000

50,000 50,000 50,000 50,000 50,000 50,000

300,000 280,000 270,000 250,000 225,000 212,500 $2,887,500 72,150 $2,959,650 $4.81

6.00 5.60 5.40 5.00 4.50 4.25

50,000 50,000 50,000 50,000 50,000 50,000

300,000 280,000 270,000 250,000 225,000 212,500 $2,737,500 119,700 $2,857,200 $4.56

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6 (a) On the average, a total expenditure of 1.1025,000 = $27,500 should be made for copper each month. (b) For the next 4 months, the dollar averaging purchases would be:
(1) Price, $/lb. 1.32 1.05 1.10 0.95 (2) No. of lb. 20,833 26,190 25,000 28,947 100,970 (3)=(1)(2) Total cost,$ 27,500 27,500 27,500 27,500 $110,000 (4)=(2)/2 Average inventory, lb. 10,417 13,095 12,500 14,474 12,622a

Month 1 2 3 4
a

50,486/4 = 12,622

The average per-lb. cost would be $110,000/100,970 = $1.089. The inventory carrying cost over 4 months would be 0.201.089(4/12) 12,622 = $916. If hand-to-mouth were used, we would have:
(2) No. of Month lb. 1 25,000 2 25,000 3 25,000 4 25,000 100,000 a 50,000/4 = 12,500 (1) Price, $/lb. 1.32 1.05 1.10 0.95 (3)=(1)(2) Total cost,$ 33,000 26,250 27,500 23,750 $110,500 (4)=(2)/2 Average inventory, lb. 12,500 12,500 12,500 12,500a 12,500

The average per-lb. cost would be $110,500/100,000 = $1.105. The inventory carrying cost over 4 months would be 0.201.105(4/12) 12,500 = $921. If 100,000 lbs. of copper were purchased, the two strategies can be compared as follows. Purchase Inventory Total Strategy cost cost cost Dollar averaging $108,900 + 916 = $109,816 Hand-to-mouth 110,500 + 921 = 111,421 Dollar averaging buying would be preferred. 7 For an inclusive quantity discount price incentive plan, we first compute the economic order quantities for each range of price. Using
Q * = 2 DS / IC

we compute 138

Q1* = 2(500)(15) / ( 0.20)( 49.95) = 38.75 cases

* Q2 = 2(500)(15) / ( 0.20)( 44.95) = 40.85 cases

* Since Q2 is outside of the second price bracket, Q1* is the only relevant quantity. Now we check the total cost at Q1* and at the minimum quantities within the price break. We solve:

TCi = Pi D + DS / Qi + ICi Qi / 2

At Q = 38.75 TC = 49.95500 + 50015/38.75 + 0.249.9538.75/2 = $25,362 At Q = 50 TC = 44.95500 + 50015/50 + 0.244.9550/2 = $22,850 At Q = 80 TC = 39.95500 + 50015/80 + 0.239.9580/2 = $20,388 Floor polish should be purchased in quantities of 80 cases.
8 This noninclusive price discount problem requires solving the following relevant total cost equation for various order quantities until the minimum cost is found.
TCi = Pi D + DS / Qi + ICi Qi / 2

The computations can be shown in the table below given that D = 1,400, S = 75, and I = 0.25.

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Q 20 50 100 200 300 400 500

550

600

Price 795 795 795 795 200795+100750 300 200795+200750 400 200795+200750 +100725 500 200795+200750 +150725 550 200795+200750 +200725 600

P D +DS/Q +ICQ/2 = Total cost 1,113,000.00 5,250.00 1,987.50 $1,120,237.50 1,113,000.00 2,100.00 4,968.75 1,120,068.75 1,113,000.00 1,050.00 9,937.50 1,123,987.50 1,113,000.00 525.00 19,875.00 1,133,400.00 1,092,000.00 350.00 29,250.00 1,121,600.00 1,081,500.00 1,068,200.00 262.50 210.00 38,625.00 47,687.50 1,120,387.50 1,116,097.50

1,063,363.64

190.91

52,218.75

1,115,773.27

1,059,333.33

175.00

56,750.00

1,116,258.33

The optimal purchase quantity is 550 motors.

9 (a) This problem is a good application of the transportation method of linear programming. We begin by determining the costs for the current sourcing arrangement.
Source Dayton Dayton Kansas City Minneapolis Destination Cincinnati Baltimore Dallas Los Angeles Price 3.40 3.40 3.45 3.25 Transport 0.05 0.15 0.08 0.24 Volume Cost 5,000 $17,250 1,000 3,550 2,500 8,825 1,200 4,188 Total $33,813

To optimize, we establish the following transportation cost matrix and solve it using any appropriate method, such as the TRANLP module in LOGWARE. Cincinnati 3.40 Minneapolis 3.55 Kansas City 3.45 Dayton Requirements
5000 5000

Dallas 3.44 3.53 3.52

2500 2500

Los Angeles 3.49 1200 3.65 3.67 1200

Baltimore 3.46 3.63

Capacity 1200 4800

3.55
1000 1000

9999

The total cost for this solution is $33,788, or a savings of $25 over the current sourcing.

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(b) Because Minneapolis is at capacity, this supplier should be examined further. If unlimited capacity were available at Minneapolis, all requirements would be met by this supplier for a total cost of $33,248, or a savings of $565 for this material. (c) The above analysis does indicate that too many suppliers are being used. Only two are needed if Minneapolis continues to supply at the current level. If Minneapolis can be expanded, it becomes the only supplier. Of course, whether the company would risk a single supplier for this material must be left unanswered.
10 (a) The deal-buying equation (Equation 10-5) can be applied to this problem. First, find the optimal order quantity before the discount.
Q* = 2 DS = IC 2(120,000 )( 40 ) = 566 units 0.30(100 )

Next, find the adjusted order quantity after the discount has been applied.
$ Q= dD pQ * 10(120,000) 100(566) + = + = 42,700 units ( p d ) I p d (100 5)( 0.30) (100 5)

A large order size of 42,700 units should be placed. (b) The time that an order of this size will be held before it is depleted is given by:
$ Q 42,700 = = 0.356 years, or 18.5 weeks D 120,000

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INDUSTRIAL DISTRIBUTORS, INC. Teaching Note Strategy The purpose of the Industrial Distributors case study is to illustrate the computation of purchase quantities under inclusive and noninclusive price discounts and transport rateweight breaks. The INPOL module of LOGWARE is helpful in conducting the analysis. As a teaching strategy, it may be worthwhile to begin any class discussion with the cost tradeoffs that are present in such a problem as this. This will help to establish the nature of the total cost equation that needs to be solved in this problem. Answers to Questions (1) What size of replenishment orders, to the nearest 50 units, should Walter place, given the manufacturer's noninclusive price policy?

When price discounts are offered, purchase quantities are not simply determined by a single formula. Due to discontinuities in the total cost curve as a function of order quantity, the optimal order quantity is found by computing total costs for different quantity values. In this case of both price and transport rate breaks plus warehousing costs that can be affected by the order size, the following annual total cost formula is to be solved. TC = PD + RD + where TC = total cost for quantity Q, $ PD = purchase cost for price P, $ RD = transport costs at rate R, $ SD/Q = ordering cost at quantity Q, $ ICQ/2 = carrying cost at quantity Q, $ W(Q-300) = public warehousing cost if Q is greater than 300 units, $ W = public warehousing rate, $ per unit per year D = annual demand, units P = price for orders of size Q, $ per unit R = transport per unit for shipments of size Q, $ per unit S = order processing cost, $ per order I = annual carrying cost, % C = product value, $ per unit Q = size of purchase order, units Under noninclusive price discounts, price is an average, determined by the number of units in each break. For example, if 250 units are to be ordered, the average price per unit would be computed as: SD ICQ + + W ( Q - 300) Q 2

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P250 =

(100 $700) + (100 $680) + (50 $670) = $686.00 250

A table of annual costs can now be developed, as shown in Table 1. To the nearest 50 units, the optimal purchase quantity should be 250 units. (2) If the manufacturer's pricing policy were one where the prices in each quantity break included all units purchased, should Walter change his replenishment order size? The average price per unit is more easily determined in this case than the previous one. Since all units are included in the price break back to the first unit, the average price is simply the price associated with a given purchase quantity. Finding the optimal purchase quantity is simply a matter of determining the total cost for the quantities, found by the economic order quantity formula, assuming these quantities are feasible, and for the quantities at the transport rate-weight break. The comparison is made among the total costs of these alternatives. These costs are shown in Table 2. The order quantities, as determined by the economic order quantity formula for the base price of $700, would be:
Q* = 2 DS = IC 2(1500 )( 25) = 18.8, or 19 units 0.3( 700 + 7.2 )

where C is the $700 price per unit at Baltimore plus the $45 transport cost from Baltimore, as determined by an LTL shipment (19 units 250 lb. = 4,750 lb.) at $18 2.5 cwt. = $45 per unit. The Q values for the other prices in the schedule lie outside the feasible range of the price used to compute Q. The optimal strategy is to purchase 201 units per order, which is one unit into the last price break. Yes, Walter should alter his buying strategy.
TABLE 1 Annual Costs by Quantity Purchased for Noninclusive Price Discounts
Average Purchase Transport Quantity price cost cost $700.00 $1,050,000 $67,500 19 50 700.00 1,050,000 67,500 100 700.00 1,050,000 67,500 693.33 1,039,995 67,500 150 692.50 1,038,750 45,000 160 200 690.00 1,035,000 45,000 686.00 1,029,000 45,000 250 300 683.33 1,063,286 45,000 400 680.00 1,020,000 45,000 a EOQ at a price of ($700 + 45) per unit. b First price break. c Transport rate break. d Second price break. Ordering cost $2,049 750 371 250 234 187 150 125 94 Carrying cost $2,045 5,588 11,287 16,613 17,340 21,707 26,850 32,100 42,600 Warehouse cost $0 0 0 0 0 0 0 0 1,000 Total cost $1,121,594 1,123,838 1,129,158 1,124,363 1,101,324 1,101,818 1,101,000Opt. 1,102,225 1,108,694

TABLE 2 Annual Costs by Quantity Purchased for Inclusive Price Discounts

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Average Purchase Transport Quantity price cost cost $700.00 $1,050,000 $67,500 19 680.00 19 670.00 19 680.00 1,020,000 67,500 101 680.00 1,020,000 45,000 160 670.00 1,005,000 45,000 201 a Feasible EOQ at a price of ($700 + 45) per unit. b Infeasible EOQ at a price of ($680 + 45) per unit. c Infeasible EOQ at a price of ($670 + 30) per unit. d First price break. e Transport rate break. f Second price break.

Ordering cost $2,049

Carrying cost $2,045

Warehouse cost $0

371 234 187

10,984 17,040 21,105

0 0 0

Total cost $1,121,594 Infeasible Infeasible 1,098,855 1,082,274 1,032,732Opt.

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