Supply Chain Management:
From Vision to Implementation
Chapter 5: The Order Fulfillment Process:
Managing the Physical Flow
Infrastructure
Chapter 5: Learning Objectives
1. Describe how purchasing, production, and logistics
decisions work together to create customer value.
2. Identify and describe the steps in the purchasing
process.
3. Identify and discuss design and control decisions in
production operations management. Describe the
underlying principles and practices lean
manufacturing. Describe the characteristics of
service operations.
2
Chapter 5: Learning Objectives
4. Identify the key decision-making elements of the
logistics process. Discuss order fulfillment,
transportation, and distribution strategies.
5. Describe how physical flow decisions affect the
cost and service positions of the company as well as
the design of the overall supply chain.
3
Order Fulfillment
 Order fulfillment is the process that actually
makes and delivers a product or service
 Three functions are responsible:
 Purchasing – acquires the inputs used to support
production
 Production – converts inputs into outputs that
customers value
 Logistics – transports and stores goods assuring
access
4
SCOR Model
 When purchasing, production, and logistics
work in concert directed by overall strategy,
they help deliver value to the customer.
 The SCOR model helps to create a common
vision for managing and coordinating five
primary SC processes.
5
Elements of the SCOR Model





Plan: Processes that balance demand and supply to develop a course of
action to meet sourcing, production, and delivery needs. This process
aligns the supply chain plan with the financial plan.
Source: Processes that purchase goods and services to meet planned or
actual demand. Emphasis is on selecting suppliers, establishing policies,
scheduling deliveries, and assessing performance.
Make: Processes that transform product to a finished product to meet
demand. Emphasis is on scheduling production, measuring performance,
managing inventory, and configuring the network.
Deliver: Processes that provide finished goods and services to customers.
Emphasis is on order management, warehouse management, and
transportation management.
Return: Processes associated with the return of products for any reason,
and includes post-delivery customer support. Emphasis is on reverse
logistics and long-term customer support.
6
SCOR Model
7
Purchasing Management
Four developments during the 80s and 90s
increased the importance of purchasing:
1. Purchased inputs became a primary operating cost
2. Just-in-time emphasized cooperative, long-term
buyer-supplier relationships
3. Information technology provided information
needed to strategically manage relationships
4. Better trained and more competent managers
entered supply arena
8
Purchasing Costs
 Manufactures spend 55% of each dollar on
purchased goods and services
 Approximately 60-80% of operating expense
 Direct manufacturing costs have declined to
between five and 15% of total operating costs
 As little as 2% for some high-tech industries
 Service industries spend less on purchased
materials than manufacturing
9
Purchased Inputs as a Percent of Sales
10
Outsourcing – Purchasing Role
 Focusing on core competencies has led many
companies to outsource value added activities
 Sourcing professionals take on the role of
acquiring and managing:
 Inputs
 Supplier capacity
 Supplier capabilities
11
The Sourcing Process
Supplier Selection:
 Identification
 Evaluation
 Approval
 Monitoring
Transaction Management:
 Price Determination
 Purchase Order
 Follow-Up and
Expediting
 Receipt and Inspection
 Supplier Payment
Need Communication:
 Recognition
 Description
Relationship Management:
Performance Monitoring
and
Improvement
12
Recognition and Description of Need
 Well-managed companies use a purchasing
policy or procedure handbook to guide
interactions between internal users and
sourcing
 Purchase requisition is used to clearly
describe and communicate needs to sourcing
 Item description, requisitioning department,
authorizing signature, purchase quantity, delivery
day, and location are necessary information
13
Supplier Selection
1.
2.
Identification involves making a list of all potential suppliers. A
purchaser might look to the company’s purchasing database or
directories such the Thomas Register of American Manufacturers, which
lists over 150,000 companies.
Evaluation involves the identification of supplier selection criteria and
the gathering of performance information that can be used to assess and
compare possible suppliers.

3.
Approval identifies the suppliers that are eligible to receive an order.
The number of suppliers on the approved list depends on the nature of
the item being purchased.

4.
Frequently used criteria include quality, price, delivery dependability,
capacity (current and future), service responsiveness, technical expertise,
managerial ability (attitude, skills, and talent), and financial stability.
For commodity-type items, multiple suppliers are generally used; for unique
items, a sole-sourcing arrangement may be preferable.
Monitoring assures high levels of performance. Scorecards are often
used to provide an overall supplier rating.

John Deere uses categories to rate suppliers into one of four groups: partner,
key approved supplier, approved supplier, or conditional supplier
14
Transaction Management - Price
 Price is the factor used most frequently to
evaluate the sourcing group’s performance
 Best price is pursued using:
 List price – low-volume or low-value items
 Competitive bidding – relies on market forces to
obtain a fair price
 Reverse auctions may achieve 10-30% reductions
 Negotiation – high dollar value high uncertainty
items, or when a long-term relationship is desired
15
Transaction Management - Orders
 Purchase orders specify the terms and
conditions of the purchase agreement and
initiate supplier action
 Blanket orders specify the overall terms of
agreement for a given time period and cover
the entire quantity to be purchased
 Smaller quantities are periodically delivered
under this agreement
16
Transaction Management - Expediting
 Regular follow-up allows identification of
quality or delivery problems
 Expediting refers to efforts to speed up
delivery of an order
 Penalty clauses can be used in purchase
agreements
17
Transaction Management - Inspection
 Receipt and inspection matches the invoice
the contents via physical count and quality
inspection
 Primary reason for failure:
 The count is off (too much, too little)
 Quality is inferior
 Supplier certification programs focus on
improving suppliers’ abilities to produce high
quality products, eliminating the need for
inspection
18
Transaction Management - Payment
 Efficient procedures for invoice clearance
improve:
 Supplier relationships
 Financial performance
 Discounts for prompt payment
19
Performance Monitoring
 Performance monitoring allows identification
of candidates for increased collaboration and
long-term supplier relationships
 Four types of information should be tracked:
1.
2.
3.
4.
Current status of all purchase orders
Select evaluation criteria for all suppliers
Part or commodity information
Information regarding contracts of relationships
20
Purchasing Manager Skills
 Knowledge Management – commodity expertise and
understanding of supplier capacity and capability
 Relationship Management - alliance relationships
with critical suppliers, fair relationships with all;
design of efficient transaction mechanisms
 Process Management - continuous improvement,
collaborative processes, supplier education
 Technology Management - employed new
technology to reengineer the sourcing process
21
Production Management
 Also known as operations or manufacturing
management - creates value by transforming
capital, technology, labor, and materials into
more highly valued products and services
 Operations drive product of the growth,
innovation, and generates higher living
standards
22
Production Management
 Operational excellence is a prerequisite for
success
 Operations managers must manage two
groups of decision variables:
 Design Decisions
 Control Decisions
23
World Class Operations Management
24
Design Decisions
 Facility location – affect access to factor
inputs and customer markets
 Facility layout – determine the positioning of
equipment, the flow and handling of materials
 Product design – impact the ability to
profitably capture future market share
 Process design – involves technology
selection and work design
25
Control Decisions
 Forecasting – estimate of what needs to be produced
and when
 Inventory control – determines how much and when
to make specific products
 Scheduling – two types:
 Aggregate planning determines what needs to be
produced
 Process planning determines work done at each station
 Quality control – designing, building, and inspecting
quality into both the process and product
26
Product/Service Continuum
Pure
Products
Product/Service Solutions
Pure
Service
Tangible, Physical
Intangible, Perishable
Low Customer Contact
High Customer Contact
Can be Inventoried
Cannot be Inventoried
Economies of Scale Exits
Minimal Economies of Scale
Control is Highly Objective
Control is More Subjective
Output can be Transported
Location is Critical
27
Labor Productivity- Manufacturing
28
Labor Productivity- Services
29
Operations Management Skills
 Operational excellence is a prerequisite for
success; however, competition is now
between chains not just companies. Therefore,
managers must understand and develop skills
in dealing with:
 Outsourcing
 Supplier Integrated Manufacturing
 Best Practices Dissemination
30
Lean Production
Lean production relies on a number of interrelated
practices:
 Waste Elimination
 Waste is defined as anything more than the absolute
minimum necessary to add value
 Inventory covers up problems, Lean works to
systematically reduced inventory to identify problems
 Workforce Participation
 Jidoka - the authority to stop the line
 Requires training, personal responsibility, and integration
31
Basic 5S Principles
The 5 Ss
Sort
Basic Principle
Eliminate clutter. Remove all supplies, materials, tools, and paperwork
not required in the operation. Keep only that which is needed to
perform the process.
Organize the work area to make it easy to find what is needed.
Set In Order Everything has a place and everything is in its place.
Shine
Clean the work area. Make it shine. This includes aisles, walls,
meeting and storage places.
Standardize
Create and use policies, procedures, and practices to assure that the first
three of the 5S activities are performed regularly.
Sustain
Create a 5S culture by putting in place mechanisms that support,
enhance, and extend 5S practices. Involving, measuring, and
recognizing people is critical.
32
Lean Production
Managerial Responsibility
 Managers take on the role of teacher, team
facilitator, and motivator
 Process Development
 Line workers are trained and empowered to solve
problems and improve processes
 Network Orientation
 Lean should be practiced by critical suppliers
33
Lean Production
 Synchronization
 Synchronization of material movement is
accomplished by a pull or “kanban” system
 Continuous Improvement
 “Kaizen” - the quest for incremental productivity
gains and consistent innovation
34
Logistics Management
Logistics management is that part of SCM that
plans, implements, and controls the efficient,
effective forward and reverse flow and storage of
goods, services, and related information between the
point of origin and the point of consumption in order
to meet customers’ requirements.
- Council of Supply Chain Management Professionals
35
The Logistics Process
 Materials management is concerned with the
inbound movement and storage of raw
materials, purchased components, and
subassemblies entering and flowing through
the conversion process.
 Physical distribution focuses on the outbound
transportation and storage of finished products
from point of manufacture to where customers
wish to acquire them.
36
Basic Logistics Activities
Activity
Customer
Service
Demand
Forecasting
Basic Roles and Responsibilities
Customer service focus on understanding what customers want and
measuring logistics performance against these customer requirements.
Forecasts—estimates of demand—must be developed to help plan other
logistics activities, allocate resources, and provide high levels of service at
low costs.
Accurate documentation helps assure that the product gets to the customer
Documentation on time. Documentation is particularly vital in international shipments.
Information
Management
Data on carriers, customers, and inventories must be turned into useful
decision-making information. Information replaces inventory in today's
logistics systems.
Inventory
Management
Product must be available to meet production requirements and customer
demand. However, inventory is expensive. Inventory control must support
high levels of customer service with as little inventory as possible.
37
Basic Logistics Activities
Activity
Basic Roles and Responsibilities
Material
Handling
Because handling materials costs money and can lead to damage, factories
and warehouses are designed to minimize the total amount handling.
Order
Processing
Order processing initiates work. Many orders are transmitted
electronically, improving speed and accuracy of the fulfillment process.
Packaging
Packaging protects the product throughout the distribution process.
Packaging also conveys information about the product and presents an
attractive appearance.
Needed spare and replacement parts must be available to support sales.
Parts and
Caterpillar promises delivery of needed replacement parts anywhere in the
Service Support
world within 48 hours. This type of support increases customer loyalty.
Site Selection
Location
Location can provide access to inputs like low-cost labor and materials. It
can also affect customer service levels, providing access to important
consumer markets.
38
Basic Logistics Activities
Activity
Return Goods
Handling
Salvage and
Recycling
Transportation
Management
Warehouse/DC
Management
Basic Roles and Responsibilities
Defective products and inaccurate orders must be returned efficiently.
“Reverse logistics" is very important to achieving high levels of
customer satisfaction.
Handling excess materials is often overlooked. However, this is an
important logistics activity, especially when hazardous materials or
recyclable items must be managed.
Transportation is the most visible logistics activity. Five modal options
exist: rail, truck, air, water, and pipeline.
Storing products until they are ready for use is the role of warehousing.
A variety of products are also consolidated into a single customer
shipment.
39
The Order Cycle
40
Order Fulfillment Activities
41
Order Fulfillment Activities
 Placing facilities in the right location and leveraging
appropriate process technologies to reduce the combined
production and delivery time.
 Carrying the right quantity and mix of inventory.
 Streamlining order processing eliminating unnecessary steps.
 Assure order-entry accuracy
 Developing good relationships with reliable transportation
companies reduces transit times and increases on-time
delivery performance.
 Adopting appropriate technologies and implementing
innovative materials handling processes can increase flow
speed through warehouses.
42
Transportation Modes - Rail
Rail
Cost
Speed
Quantities
Geographical Coverage
Environmental
Concerns
Distances
Required Infrastructure
Product Variety
Reliability
High fixed, low variable cost structure
Inexpensive, especially for bulk goods
Relatively slow, average car speed 20 MPH (unless utilizing double stack unit trains,
effectively doubling speed)
Large quantities; full car load increments most cost effective
Widespread on some continents; limited by tracks, landmass
High impact of new tracks, low air pollution
Medium to long
Tracks, rolling stock
Large variety of products; ideally suited for bulk goods
Low loss, damage, less timely (delays at sidings, terminals)
Routing limited to track location, little door to door delivery (side spur required)
Flexibility
43
Transportation Modes – Motor Carrier
Motor Carriers
Cost
Speed
Quantities
Geographical Coverage
Environmental
Concerns
Distances
Required Infrastructure
Product Variety
High variable (90%), low fixed (10%)
More expensive than rail
Medium speed where sufficient roads exist, about twice as fast as rail (50 MPH)
Limited capacity of about 80,000 lbs; larger capacity combination vehicles are
geographically limited
Widespread on some continents; limited by roads, landmass
High pollution, especially in developing countries, high impact of new roads
Short to Medium
Roads, vehicles
Routing limited by road location
Large variety of products
Reliability
Limited loss, damage, more timely than rail
Flexibility
Routing limited to road locations, but still good for JIT, extensive access in countries
with well-developed highway systems, door to door delivery possible with appropriate
44
roads
Transportation Modes - Pipeline
Pipeline
Cost
Speed
Quantities
Geographical Coverage
Environmental
Concerns
Distances
Required Infrastructure
Product Variety
Reliability
High fixed, low variable
Very inexpensive
Nature of product makes speed a non-issue
Large quantities of limited products
Widespread on some continents; limited by unidirectional movement, and the availability
of landmass to support pipelines
Pipeline leakage, high impact on wildlife, scenic value
Medium most common
Pipeline between two points required
Primarily petroleum products; only practical for liquid, liquid-carried, or gas products
Very low loss or damage, usually timely
Routing limited to pipelines
Flexibility
45
Transportation Modes - Ship
Ship
Cost
Speed
Quantities
• High variable, low fixed
• Very inexpensive, about $.008 /ton mile (1/4 cost of railroad)
• Less fuel needed
• Inland waterway: Slow, about 4 to 5 MPH
• Ocean: faster, fewer stops (10-12 days Pacific crossing)
Large. Container ships carry up to forty equivalent unit containers.
Geographical Coverage
Global, but limited to natural and constructed waterways.
Environmental
Concerns
Spillage from accidents, leakage, high impact on fisheries
Distances
Required
Infrastructure
Product Variety
Flexibility
Long to very long
Ports, ships
Routing limited by waterway, ocean availability
Low variety of heavy, bulk, or low-value-by-weight items, often commodities
Port to port
46
Transportation Modes - Airplane
Airplane
Cost
Speed
Quantities
Geographical Coverage
Environmental
Concerns
Distances
• High variable, low fixed
• Very expensive (2 to 3 times as high as motor carriers, 12 to 15 times as high as
rail); lower packing costs than ship
• Fast speed within and between continents; measured in hours or days
Relatively small
Widespread on some continents; limited by air terminal availability
Noise pollution near major population centers
Medium to very long
Airports, navigational aids, airplanes
Required Infrastructure
Routing limited by airport location
Product Variety
Flexibility
Large variety of small, high-value-by-weight, often perishable items
Air terminal to air terminal
47
Transportation Modes - Internet
Internet
Extremely inexpensive, where infrastructure is in place.
Cost
Speed
Quantities
Geographical Coverage
Environmental
Concerns
Distances
Low fixed, low variable costs
Extremely fast
Limited by number of source transmission lines available, or satellite access
Widespread on some continents; limited by transmission capability availability
None except where new transmission line construction occurs, then less than
other modes
Very short to very long
Telephone lines, satellite, cellular transmission capability
Required Infrastructure
Routing limited by transmission path
Product Variety
Flexibility
Limited to digital information; software, music, video, documents, information
Computer to computer
48
Warehouse Activities









Shipping and receiving goods and materials
Materials handling and order processing
Consolidating and distributing shipments
Transportation management, such as routing, tracing, and
monitoring movements
Product packaging and labeling (form postponement)
Re-packaging and mixing of products
Preparation of in-store displays (ready store delivery pallets)
Light manufacturing or assembly
Scrap and disposal
49
Cross-Dock Operations
50
Logistics Manager Skills
Logistics may be the next source of competitive
advantage. To tap that advantage managers
must understand:
 Logistics Outsourcing
 Shared Logistics Services
 Network Rationalization
51
A Return to the Opening Story
Based on what you have now read and discussed:
 Why is Charlene interested in making the entire
order fulfillment process visible? What do you
think the root-cause of Coco Loco’s problems is?
 What questions would you ask Terry, Jack, and
Robert? Are the organization structure, reporting
relationships, and reward systems at Coco Loco
relevant to the current crisis? Why or why not?
 What mechanisms might help the order fulfillment
process better meet customer requests? Specifically,
what policies, procedures, processes, and measures
are needed?
52
Supply Chain Management:
From Vision to Implementation
Supplement E: Forecasting and Inventory
Management
Forecasting
 Forecast are estimates of future demand and
in some cases costs
 Companies use forecasts when making
decisions about purchasing, production,
logistics, and capacity planning.
 Forecasts can be:
 Quantitative – mathematically derived
 Qualitative – derived from surveys, test markets,
panel of experts, etc.
54
Simple Moving Average
 Averages actual demand/cost data for a specified
number of previous time periods.
 Each period has equal weight.
 The number of periods represent a trade-off between
stability and responsiveness
 Fewer time periods will be more responsive but less stable
 More time periods will be less responsive but more stable
 Managers should use MAD to test various forecast
periods to determine the best to accurately reflect their
environment
55
Simple Moving Average - Example
Week
Demand
1
350
2
397
3
375
4
342
3 Period Moving Average
Forecast8 
348  366  381
3
Forecast8  365
5 Period Moving Average
5
381
6
366
7
348
348  366  381  342  375
Forecast8 
5
Forecast8  362.4
56
Weighted Moving Average
 Newer/older data may be more representative
of the current environment
 Any combination of weights that sums to 1.00
may be used
 Any number of periods may be used
57
Weighted Moving Average - Example
Week
Demand
1
350
2
397
3
375
4
342
4 Period Weighted Moving Average
5
381
Forecast8  (0.1)(342)  (0.2)(381)  (0.3)(366)  (0.4)(348)
6
366
7
348
Using the data from the previous
example, calculate a 4 week weighted
moving average with the weights of
.1,.2,.3, and .4 (oldest to newest)
Forecast8  359.4
58
Exponential Smoothing
 Helps managers balance stability and
responsiveness
 Corrects the forecast by a percentage (α) of
the forecast error
 The greater the value of α, the more
responsive the forecast to changes in the data
59
Exponential Smoothing - Example
7
48
52.69
8
45
51.15
Using the given data, calculate
demand in week 12 using an
exponential smoothing forecast
with an alpha = 0.328
9
47
49.13
Forecast12  (0.328)(40 )  (1 - 0.328)(47.31)
10
45
48.43
11
40
47.31
Period
Actual
Forecasted
Demand Demand
Forecast12  44.91
60
Regression
 Least squares regression can be used to determine the
straight line that minimizes total forecast error.
 Capable of multi-year forecasts into the future

Y  b 0  b1x
Where :
b0
y
x


 intercept of the line 
b
b1  slope of the line 
n
1
n
n  xy -  x  y
n x 2   x 
2
61
Regression - Example
Week (x)
Number of
Repairs (y)
x
1
59
1
59
2
73
4
146
3
41
9
123
4
62
16
248
5
48
25
240
6
57
36
342
7
69
49
483
8
70
64
560
9
46
81
414
10
50
100
500
 x  55
 y  575

x
2
2
 385
xy
 xy  3115
62
Regression - Example
10(3115) - 55(575)
b1  the slope of the line 
 0.5758
2
10(385) - 55
575
55
b0  the intercept of the line 
 ( 0.5758)  60.67
10
10
Yˆ  60.67  ( 0.5758) x
Forecast for Period 15 would be:
Yˆ  60.67  ( 0.5758)15  52.03
63
Mean Squared Error (MSE)
 MSE is the average of all of the squared errors
 The forecast with the smallest MSE best fits the data
MSE 
2


Actual
Demand
Forecasted
Demand

Number of Periods
64
Mean Squared Error - Example
Period
Actual
Demand
Forecasted
Demand
Error
7
48
52.69
-4.69
22
8
45
51.15
-6.15
37.82
9
47
49.13
-2.13
4.54
10
45
48.43
-3.43
11.76
11
40
47.31
-7.31
53.44
Total
Squared
Error
129.56
129.56
MSE 
 25.91
5
65
Mean Absolute Deviation (MAD)
 MAD is the average of the absolute deviation between actual
and forecasted values
 The forecast with the smallest MAD best fits the data
Actual Demand - Forecasted Demand

MAD 
Number of Periods
66
MAD - Example
Period
Actual
Demand
Forecasted
Demand
Error
7
48
52.69
-4.69
4.69
8
45
48.97
-3.97
3.97
9
47
45.82
1.18
1.18
10
45
46.76
-1.76
1.76
11
40
45.36
-5.36
5.36
Total
Absolute
Error
16.96
16.96
MAD 
 3.39
5
67
Inventory Management
 Inventory can be either:
 Raw Materials
 Work-in-Process (WIP)
 Finished Goods
 Inventory is one of the largest expenses for
most companies
68
Inventory Management
 Inventory Management involves 2 questions:
1. How much inventory should be ordered?
2. When should orders be placed?
 Two basic models address these questions:
1. Fixed order quantity – orders the same quantity
at different intervals
2. Fixed order interval – orders different quantities
at fixed intervals
69
Fixed Order Quantity
 Orders the quantity, Economic Order Quantity
(EOQ), that minimizes the total cost of inventory
each time an order is placed.
 Orders are placed at different intervals.
 Assumptions:




Demand rate is constant and known
All of the consumer demand is satisfied (no shortages)
Lead time or order cycle time is constant and known
Price paid for the units of inventory is constant
70
EOQ Model Costs
Order Costs
 Placing order
 Tracking shipment
 Receiving shipment
 Inspecting shipment
 Document costs
 Invoice Costs
Setup Cost
 Labor and materials used in
setup
Carrying Costs
 Warehousing
 Overhead
 Capital
 Insurance
 Labor
 Tax costs
71
EOQ Costs
A
S
Q
1
1
Annual Carrying Costs  QCP or QW
2
2
1
A
Total Costs  QCP  S
2
Q
Where :
A  Annual Demand
Annual Order Costs 
Q  Order Quantity
C  Cost per Unit of Inventory
S  Cost per Order or Setup
P  Carrying Cost as a Percentage
W  CP or the Annual Cost to Carry One Unit in Dollars
72
EOQ – Total Cost Curve
2AS
2AS
EOQ 
or
CP
W
73
EOQ - Example
The manager of Hogan Kitchenware gathered the following data. He expects
to sell 44,000 measuring cups this year. Hogan purchases the measuring cups
for $0.75 each from its supplier, Shatter Industries. Every order that is placed
costs Hogan $8.00 to process. The manager at Hogan estimates his company’s
inventory carrying cost to be 12 percent. Hogan Kitchenware is open for
business 365 days per year. Calculate the number of measuring cups that
should be ordered. What is the order, holding, and total cost of inventory?
2(44,000)( 8.00)
EOQ 
 2,796.82 units
0.75(0.12)
44,000
8.00  $125.86
2796.82
1
Annual Carrying Costs  (2796.82)( 0.75)(0.12 )  $125.86
2
Annual Order Costs 
Total Cost of Inventory is $251.72
74
Fixed Order Quantity Approach
75
Reorder Point
 Reorder point is the level of inventory that triggers
an order in the amount of the EOQ
 Assumes demand and lead time is known and
constant
 If demand and/or lead time is not known and
constant, you must add safety stock to prevent
stockouts during periods of increased demand
76
77
Reorder Point - Example
Using the data from the previous example and an 8 days lead
time, calculate the reorder point for Hogan Kitchenware.
Reorder Point  Daily Demand X Order Lead Time
Reorder Point  120.55 X 8
Reorder Point  964.40 Units
78
Purchase Point Discount


When offered quantity discounts, the problem may be
restated in terms of a choice between total inventory cost on
two different orders.
To determine whether a quantity discount offers a true
advantage, you must:
1.
2.
Calculate the EOQ. If the EOQ is greater than the quantity required
to take advantage of the discount, then do so. If not, move to step 2.
Calculate the total annual costs of both options and select the option
with the lowest annual total costs.
1
A
Total Cost  QCP  S  AC
2
Q
79
Purchase Point Discount - Example
Using the data from the pervious example and a purchase
price discount of $0.73 for orders in excess of 5,000 units;
how many units should be ordered each time?
1
44000
Total Costs EOQ  2796.82(0.75)(0.12) 
8.00  44000(0.75)
2
2796.82
Total Costs EOQ  $33,251.72
1
44000
Total Costs 5,000  5000(0.73)(0.12) 
8.00  44000(0.73)
2
5000
Total Costs 5,000  $32,409.40
80
EOQ Implications
 EOQ Model is fairly robust despite
assumptions that are unrealistic for most
companies.
 Technology can reduce the order costs by
automating the process.
 By reducing order/setup cost, batch size can
be reduced meaning that companies can hold
less inventory but receive shipments more
often.
81