Supply Chain Managment - Chap 2,4,5

SUPPLY CHAIN
MANAGMENT
Dr. Nguyen Thi Yen
Foreign Trade University
Email: yennguyen87@ftu.edu.vn
Phone: 0915529787
CHAPTER 2: PURCHASING MANAGEMENT
You should be able to:
■ Describe the role of purchasing and its strategic impact on an

organization’s competitive advantage.
■ Describe the traditional purchasing process, e-procurement, public

procurement, and green purchasing.
■ Analyze and evaluate sourcing decisions and the factors impacting

supplier selection, including outsourcing, make-or-buy, and break-even
analysis.
2
How is purchasing management useful for you?
Not only for your everyday life.
But also for you to get a job
▪ Purchasing executive
▪ Purchasing planning executive
▪ Sourcing executive/officier
▪ Chuyên viên mua hàng

▪ Chuyên viên thu mua
▪ Chuyên viên quản lý tài sản
▪ Chuyên viên kế hoạch mua hàng
Not only for your everyday life. But also for you to get a job
Source: https://vietnamsalary.careerbuilder.vn/, 2021

Source: https://www.vietnamworks.com/muc-luong/Nh%C3%A2n-Vi%C3%AAn-Mua-H%C3%A0ng-Purchasing-Staff-sk, 2021

Definition of purchasing
■ Purchasing is understood as all activities to obtain goods, key operating
equipment, materials, services, maintenance, repair and operation
(MRO)
■ Purchasing is a key business function that is responsible for acquisition
of required materials, services and equipment
■ Purchasing is a process made up of all activities associated with
identifying needs, locating and selecting suppliers, negotiating terms,
and following up to ensure supplier performance
Different decisions among terminologies
Sourcing Purchasing
1. Which products and services, 1. Which supplier(s) should be

if any, should be outsourced in selected to make the
whole or part? outsourced products and
2. Which of these should be services?
supplied form offshore? 2. How should suppliers and
3. How should the supply base associated contracts be
be optimized? managed on an ongoing
basis?
Objectives
Mua đủ?
Mua đúng? Mua rẻ?
❖ Ensure timely supply of all necessary materials/goods for business operations
❖ → Responsiveness
❖ With a reasonable/effective cost
→ Efficiency
Objectives
i. Ensure continuous and stable material flow
ii. Buy with the lowest total cost and reasonable terms attached
iii. Improve the quality of the final product, in order to best meet customer expectations
iv. Finding and selecting good suppliers, maintaining business relationships with them
The Role of Supply Management in an Organization
The primary goals of purchasing are:
– Ensure uninterrupted flows of raw materials at the lowest total cost,
– Improve quality of the finished goods produced, and
– Maximize customer satisfaction.
Purchasing contributes to these objectives by:

– Actively seeking better materials and reliable suppliers,
– Working closely with and exploiting the expertise of strategic suppliers to
improve quality and materials
– Involving suppliers and purchasing personnel in new product design and
development efforts.
The Role of Supply Management in an Organization
(Continued)
The Financial Significance of Supply Management

Profit-Leverage Effect
Simplified Reduce
Profit & Loss Material Costs
Statement by $20,000
Gross Sales/Net Revenue $1,000,000 $1,000,000
−Cost of Goods Sold (Materials + $500,000 $480,000
Manufacturing Cost)
Gross Profits $500,000 $520,000
−General & Administrative Expenses $450,000 $450,000
(45% of Gross Sales)
Profits Before Taxes $50,000 $70,000
1.4. Different roles of purchasing
Purchasing activities have a direct impact on the company's profits
Current Increase Increase Reduce Reduce Reduce

sale amount price (+5%) labor cost management material cost
(+17%) (-50%) cost (-20%) (-8%)
Total revenue 100 117 105 100 100 100
Material costs 60 70
How60to double
60
the profit?
60 55
Labor costs 10 12 10 5 10 10
Management
25 25 25 25 20 25
costs
Profit 5 10 10 10 10 10
1.4. Different roles of purchasing
Purchasing activities have a direct impact on the company's profits
Current Increase Increase Reduce Reduce Reduce

sale amount price (+5%) labor cost management material cost
(+17%) (-50%) cost (-20%) (-8%)
Total revenue 100 117 105 100 100 100
Material costs 60 70 60 60 60 55
Labor costs 10 12 10 5 10 10
Management
25 25 25 25 20 25
costs
Profit 5 10 10 10 10 10
Types of product
2. PURCHASING PROCESS Purchasing situation
Requirements and practices of
enterprises
i. Traditional/manual/paper-based process
ii. E-procurement
iii. Global purchasing
iv. Green purchasing/sourcing

2. PURCHASING
PROCESS
Purchasing Cycle
is used for buying a
particular part, product,
or service.
Schroeder & Goldstein (2016)

The Purchasing Process – Manual Purchasing
(older system)
Step 1- Material Requisition/Purchase Requisition –
Stating product, quantity, and delivery date. May originate as a planned
order release from the MRP system. Traveling requisition used for
recurring orders.
Step 2- The Request for Quotation (RFQ) –
Buyer identifies suppliers & issues a request for quotation (RFQ) for
routine items or a Request for Proposal (RFP) for highly technical
products. Supplier Development is used to develop supplier capabilities.
Step 3- The Purchase Order (PO) –
Is the buyer’s offer & becomes a binding contract when accepted by
supplier. When initiated by the supplier on their own terms, the document is
a sales order.
The Purchasing Process – Manual Purchasing
Suppliers Purchasing Storage/Warehouse Users/Requisition Accounting
START
Materials Materials
Requisition Materials Requisition
No
MR 1 Available? MR 1
MR 2 MR 2
MR 3
Yes
Issue PO
Materials
Requisition
Purchase Purchase MR 1
Order Order MR 2
PO 1 PO 1 Accounting
PO 2 PO 2
PO 3 MR 2 Information
MR File Issue for charging the
PO 4
Materials
Materials + appropriate
department
DO 3
DO 2
Delivery PO File
Order PO 3
DO 1 MR File
DO 2
MR 2
Ship
Materials
MR 2
DO 2 + Accounts Payable
PO 2
Materials Materials +
PO 2
Delivery
Order Delivery
DO 1 Order
DO 1
INV 2
Invoice
INV 1 Invoice
INV 1
PR – Purchasing Requisition
Material requisition
Clearly state:
4 1. Information about products/materials requested to
purchase: product code, abbreviation or full name
of the product, product type, product color (if
needed),...
1 2 2. Quantity (state the unit)
3. Delivery time required
4. Purchase requisition date (will be used for
tracking and retrieving purchase information
loops from this date)
5. Approval signature or relevant departments (Law,
Technical, ...)
1 3
5 Price/Recommended supplier: can be stated or not
Note: Traveling-requisition: used for materials or goods
purchased frequently or in the past
Purchase Requisition (PR)
4
3
5
1 2
Yêu cầu mua hàng - Purchase Requisition (PR)

RFQ – Request for Quotation
▪ Use in case:
(1) the requested material is no
longer/not in stock;
(2) there is a list of suppliers that
provides the product but does not
meet the relevant requirements
(3) there are currently no suppliers on the
list of this business supplying this
item looking for a new supplier
▪ It can be through bidding (open or
closed), public bidding in newspapers or
sending bid letters to potential suppliers,
etc.
▪ Supplier will send quotation according to
the appropriate form: by email or by post
to Purchasing Dept.
Request for Quotation (RFQ)
1
PO – Purchasing Order
State clearly:
6 1. Order number
7 2. Information about products/materials
8 requested to purchase: product code,
abbreviation or full name of the product,
product type, product color (if needed),...
2 5 3
3. Quantity (specify purchase unit)
4
4. Quality requirements
5. Price
6. Delivery time required
7. Delivery method
8. Delivery address
9. Order due date
10. Confirmation signature of superiors or
Purchase Order (PO) relevant departments (Law, Technical, ...)
Purchase Order (PO)
The Purchasing Process – e-Procurement
Electronic purchasing (E-procurement) is an integrated purchasing

process that uses information technology application tools, computers, the
internet, etc. to perform transactions between companies/enterprises and
other customers. supplier.
An electronic purchasing system covers the processes involved in

purchasing activities, from identifying needs in the organization, to supplier
selection, to payment execution, to contract management, and to supplier
management.
Differences between E-procurement and E-commerce
E-procurement usually includes purchasing processes between companies

(buyers) and suppliers (sellers), commonly used in industrial purchasing.
→ SRM
E-commerce usually involves the buying process between consumers/retail
customers (buyers) and companies/businesses (sellers), often used in
commercial purchases.
→ CRM
Step 1- Material user enters a purchase request
- Relevant information such as quantity and date needed.
Step 2- Purchase requisition approved and transmitted electronically to buyer

- At purchasing department (hardcopy or electronically).
Step 3- Buyer reviews requisition, assigns a preferred supplier from the e-

procurement database
- Product description, closing date, & conditions are given.
Step 4- Buyer reviews closed bids & selects a supplier

Example
What are advantages of the e-procurement system?
(Continued)
Advantages of the e-Procurement System

– Time savings
– Cost savings
– Accuracy
– Real time use
– Mobility
– Trackability
– Management benefits
– Supplier benefits
Global Sourcing
Import Broker – Sales agent who performs transactions for a fee

(They do not take title to the goods)
Import Merchant – Buys and takes title to the goods and resells them
to a buyer
Tariff – An official list showing the duties, taxes, or customs imposed
by the host country on imports or exports
Non-tariff barriers – import quotas, licensing agreements, embargoes,
laws and other regulations imposed on imports and exports
Global Sourcing (continued)
Reasons for Global Sourcing –

Opportunity to improve quality, cost, and delivery performance
Potential Challenges –
Requires additional skills and knowledge to deal with
international suppliers, logistics, communication, political
environment, and other issues
Global Sourcing (Continued)
Issues for Global Purchasers

■ United Nations’ Contracts for the International Sale of Goods
(CISG)
– Terms of acceptance cannot be modified
■ Incoterms (commonly used term referring to the International
Commercial Terms - uniform rules that simplify international
transactions of goods with respect to shipping costs, risks, and
responsibilities of buyer, seller and shipper
Countertrade – goods and/or services of domestic firms are

exchanged for goods and/or services of equal value or in
combination with currency from foreign firms
Countertrade can include:
■ Barter - complete exchange of goods or services of equal
value without the exchange of currency
■ Offset - exchange agreement for industrial goods or
services as a condition of military-related export
Countertrade can include:

■ Direct Offset - involves coproduction, or a joint venture and
exchange of related goods or services
■ Indirect Offset - involves exchange of goods or services
unrelated to the initial purchase.
■ Counterpurchase - the original exporter agrees to sell goods
or services to a foreign importer and simultaneously agrees to
buy specific goods or services from the foreign importer
Green Purchasing
■ Green sourcing: not only finding new environmentally friendly technologies or

increasing recycled materials, but also helping to reduce costs in different ways,
including replacing some components. into products, reducing waste and using less
raw materials.
4. Develop
6.
3. Field-visit to strategic
1. Identify the 2. Negotiate 5. Execute the Institutionalize
supplier site to sourcing for
opportunity with Suppliers strategic plan the sourcing
evaluate green
strategy
purchasing
6 steps process for greener purchsing

INsourcing
3. DECISION: INSOURCING
OR OURSOURCING
OUTsourcing
Case studies on Make or Buy
❖ Grainger sells maintenance, repair, and operations (MRO) products:
• Having several hundred stores throughout the United States
BUY MAKE
• At first they outsource the entire shipping service from the
distribution center to the customer
→ Change: Buy more trucks to transport themselves to customers?
❖ Dell Computer Company:

• Until 2005, selling and transporting directly to customers (Drop-
shipping) MAKE BUY
→ Change: Since 2007, starting outsource Wall-Mart to sell private
computer. Why?
❖ Ford:
MAKE BUY
• In the early years, Ford Motor made nearly everything for its cars.
→ Change: Now, all automobile companies primarily engage in
engine production and assembly of the final product
❖ Apple & Intel:
• In 2019, Apple terminated the contract
with Intel - one of Apple's prestigious ❖ Apple & TSMC:
long-time suppliers. • 12/2022, Tim Cook says Apple will use
• → Change: From 2020, Apple produces chips built in the US at Arizona factories
its own processor chips for the MacBook
line of computers. Why?
Sourcing Decisions – The Make or Buy Decision
Outsourcing –
Buying materials and components from suppliers instead of
making them in-house. The trend has moved toward
outsourcing.
The Make or Buy decision is a strategic decision
(Continued)
Reasons for Buying or Outsourcing

– Cost advantage – Especially for components that are non-
vital to the organization’s operations, suppliers may have
economies of scale
– Insufficient capacity – A firm may be at or near capacity
and subcontracting from a supplier may make better sense
– Lack of expertise – Firm may not have the necessary
technology and expertise
– Quality – Suppliers have better technology, process, skilled
labor, and the advantage of economy of scale
(Continued)
Reasons for Making

– Protect proprietary technology
– No competent supplier
– Better quality control
– Use existing idle capacity
– Control of lead-time, transportation, and warehousing
costs
– Lower cost
Make-or-Buy Break-Even Analysis
Phân tích điểm tới hạn
A business has to decide whether to manufacture it in-house or buy it out to get the
parts it needs. Demand for the year is 15,000 units.
o If outsource, the cost for the order is 500$, the purchase price is 7$/SP;
o If insource, the investment in machinery and equipment is $25,000 and the cost
of components is $5/product
Cost Insourcing Outsourcing

Fixed costs $25,000 $500
Variable costs $5/SP $7/SP
Annual Demand: 15,000 SP
Should businesses self-produce or buy outside?
Assumptions
(1) All costs involved can be classified under either fixed or variable cost,
(2) Fixed cost remains the same within the range of analysis,
(3) A linear variable cost relationship exists,
(4) Fixed cost of the make option is higher because of initial capital
investment in equipment
(5) Variable cost of the buy option is higher because of supplier profits.
(Continued)
The Make-or-Buy Break-Even Analysis
Costs Make Buy

Fixed $25,000 $500
Variable $5 $7
Annual Requirements 15,000
Find break-even point Q by setting total cost of both options equal and solving for Q:
Total Cost to Make = Total Cost to Buy
25,000 + 5Q = 500 + 7Q
7Q − 5Q = 25,000 − 500
2Q = 24,500
Q = 12,250 units = Break-even point
(Continued)
Total Cost for both options at the Break-even Point

TCBE = 25,000 + 5×12,250 = $86,250
Costs Make Buy
Fixed $25,000 $500
Variable $5 $7
Total Cost for the Make Option at 15,000 units;
Annual Requirements 15,000 TCMake = 25,000 + 5×15,000 = $100,000
Total Cost for the Buy Option at 15,000 units;

TCBuy = 500 + 7×15,000 = $105,500 dollars
Cost Difference =TCBuy −TCMake

= 105,500 − 100,000
= $5,500
(Continued)

Meaning of Break-even Point
■ If the Demand < Break-even Point → Buy

■ If the Demand > Break-even Point → Make
Roles of Supply Base
Supply Base - list of suppliers a firm uses to acquire its materials, services,
supplies, and equipment
– Emphasis on long-term strategic supplier alliances, consolidating volume
into one or a few suppliers, resulting in a smaller supply base
Preferred suppliers provide:

– Product and process technology & expertise to support buyer’s operations
– Information on latest trends in materials, processes, designs, and the
supply market
– Capacity for meeting unexpected demand
– Cost savings due to economies of scale
Supplier Selection
The process of selecting suppliers, is complex and should be based on
multiple criteria:
– Product and process technologies – Order system & cycle time

– Willingness to share technologies & – Cost
information – Capacity
– Quality – Communication capability
– Reliability – Location
– Service
Example:
ATV, InC. assemble five different models of all-terrain vehicles (ATVs) from
various ready-made components to serve the Las Vegas, Nevada, market. The
company uses the same engine for all its ATVs. The purchasing manager,
Ms.Jane Kim, needs to choose a supplier for engines for the coming year. Due
to the size of the warehouse and other administrative restrictions, she must
order the engines in lot size of 1,000 each. The unique characteristics of the
standardized engine require special tooling to be used during the
manufacturing process. ATV agrees to reimburse the supplier for the tooling.
This is a critical purchase, since late delivery of engines would disrupt
production and cause 50 percent lost sales and 50 percent back orders of the
ATVs. Jane has obtained quotes from two reliable suppliers but needs to know
which supplier is more cost-effective. She has the following information:
Requirement 12,000 units
Weight 22 pounds
Order processing cost $125 per order
Inventory carrying cost 20 % per year
Cost of working capital 10% per year
Profit margin 18%
Price of finished ATV $ 4,500
Back-order cost $ 15 per unit backordered
The following freight rates from her carrier:

Truckload (TL>= 40,000 Lbs) = $0.8 per ton-mile
Less-than-truckload (LTL) = $1.2 per ton-mile
Note: per ton-mile = 2,000 Lbs per mile; number of days per year = 365
Two suppliers:
Unit price Supplier 1 Supplier 2
1 to 999 units/order $510.00 $505.00
1,000 to 2,999 units/order $500.00 $498.00
3,000+ units/order $490.00 $488.00
Tooling cost $22,000 $20,000
Terms 2/10 net 30 1/10 net 30
Distance 125 miles 100 miles
Supplier Quality Rating (defects) 2% 3%
Supplier Delivery Rating (late delivery) 1% 2%

How Many Suppliers to Use
Single sourcing - a risky proposition. Current trends favor a few sources.
Reasons Favoring a Single Reasons Favoring Two or

Supplier More Suppliers
▪ To establish a good ▪ Need capacity
relationship
▪ Spread risk of supply
▪ Less quality variability interruption
▪ Lower cost ▪ Create competition
▪ Transportation economies ▪ Information
▪ Proprietary product or process ▪ Dealing with special kinds of
purchases business
▪ Volume too small to split
Purchasing Organization
Purchasing Organization is dependent on many factors, such as
market conditions & types of materials required
– Centralized Purchasing – Single purchasing department
located at the firm’s corporate office makes all the
purchasing decisions
– Decentralized Purchasing - individual, local purchasing

departments, such as plant level, make their own
purchasing decisions
Purchasing Organization (Continued)
Advantages - Advantages - Decentralization

Centralization – Better knowledge of
– Concentrated volumes requirements
– Avoids duplication – Local sourcing
– Specialization – Less bureaucracy
– Lower transportation costs
– No competition between
units
– Common supply base
Purchasing Organization (Continued)
A hybrid purchasing organization

▪ Decentralized-centralized (large multiunit org)-
decentralized corporate and centralized at business unit
▪ Centralized-decentralized (large organization
w/centralized control) centralized large national
contracts at corporate level and decentralized items
specific to business unit
Purchasing strategy: Kraljic Model
End of Chapter 2
Chapter 4: Inventory Management
■ Concepts and Tools of Inventory Management
■ Inventory System Design
■ Dependent and Independent Demand
■ Inventory Models
Introduction
▪ Inventory can be one of the most expensive assets of an organization
▪ Management must reduce inventory levels yet avoid stockouts
▪ Managing perishable inventory presents a unique challenge
▪ Excessive inventory is a sign of poor inventory management
▪ Excessive inventory adversely affects financial performance
Concepts and Tools of Inventory Management
▪ Primary functions of inventory are to –
– Buffer from uncertainty in the marketplace
– Decouple dependencies in the supply chain (e.g., safety stock)
▪ Four broad categories of inventories

– Raw materials- unprocessed purchase inputs
– Work-in-process (WIP)- partially processed materials not yet ready for sales
– Finished goods- completed products ready for shipment
– Maintenance, repair & operating (MRO)- materials & supplies used in producing
products (e.g., cleaners & brooms)
(Continued)
Inventory Costs
– Direct costs- directly traceable to unit produced (e.g., labor)
– Indirect costs- cannot be traced directly to the unit produced (e.g.,
overhead)
– Fixed costs- independent of the output quantity (e.g, buildings, equipment)
– Variable costs- vary with output level (e.g., materials)
– Order costs- direct variable costs for placing an order
– Holding or carrying costs- incurred for holding inventory in storage
– Setup costs are related to machine setups
Holding cost
■ Holding costs are the costs incurred for holding inventory in storage.
■ The holding costs include handling charges, warehousing expenses,
insurance, shrinkage, pilferage, taxes, and the cost of capital.
■ H = kC ( k: holding rate, C: purchase cost per unit)
■ The fluctuations of inventory and the level of inventory turnover ratio will
impact on the holding cost.
■ How to minimize the holding cost?
62
Ordering cost
■ Order costs are the direct variable costs associated with placing an order
with the suppliers
■ Order costs includes managerial and clerical costs for preparing the
purchase, as well as incidental expenses that can be traced directly to the
purchase.
■ How to decrease the ordering cost???
63
Stockout cost
■ Stock out cost is the cost of losing customer. Those costs may
include lost sales, backorder costs, expediting, and additional
manufacturing and purchasing costs.
■ Measuring the stock out cost is very important, it shows the cost
that the customers have to pay when the inventory is zero
64
(Continued)
ABC Inventory Control System

Determines which inventories should be counted & managed more
closely than others
▪ Groups inventory as A, B, & C Items

– A items are given the highest priority with larger safety stocks. A items account for
approximately 20% of the total items & about 80% of the total inventory cost
– B items account for the other about 40% of total items & 15% of total inventory
cost.
– C items have the lowest value and hence lowest priority. They account for the
remaining 40% of total items & 5% of total inventory cost.
ABC classification example
Inventory items Item cost ($) Annual usage Annual volume % of total Class
number (units) ($) volume
A246 1 22000 22.000 35,2 A
N376 0,5 40.000 20.000 32 A
C024 4,25 1468 6239 10 B
R221 12 410 4920 7,8 B
P112 2,25 1600 3600 5,8 B
R166 0,12 25.000 3000 4,8 B
T049 8,5 124 1054 1,7 C
B615 0,25 3500 875 1,4 C
L227 1,25 440 550 0,9 C
T519 26,000 10 260 0,4 C
3/18/2024
Inventory system design
■ Two normal models:

- VMI (Vendor managed inventory)
- Supplier hub
67
Vendor Managed Inventory (VMI)
■ “Transferring responsibility for retail store replenishment from the retailer to
the wholesaler or manufacturer” (Ackerman 1995)
■ “VMI is an example of how it is impossible to improve the efficiency of
material flows in a vendor/buyer partnership.
■ The supplier is given the task of keeping the warehouse of the wholesaler
stocked with the supplier’s products. Now the supplier can align his
operations with the needs of the retail trade” (Holmstrom, 1998)
■ Variations:
- VMI with consignment: supplier owns inventory
- VMI without consignment: buyer owns inventory
Benefits of VMI
■ Reduction in administration costs
■ Reduction in inventory levels
■ Increase in inventory turns
■ Shorter cycle times
■ Fewer out-of-stock situations, and better service level
■ Customer-partner’s preferred status in shortage situations

Supplier Hub
“Inventory management involves balancing product
availability, or customer service, on the other hand,….
…….with the costs of providing a given level of

product availability on the other”
Dependent & Independent Demand
Inventory management models –
Generally classified as dependent demand and independent
demand models
▪ Dependent Demand – internal demand for parts based on demand of the

final product in which parts are used
▪ Examples include; Subassemblies, components, & raw materials
▪ Independent Demand – demand for end products & has demand pattern
affected by trends, seasonal patterns, & general market conditions
Replenishment for independent demand:
“when to order” decision
▪ When stocks are at a level that is able to satisfy demand, and until the
replenishment order is available.
▪ There are two methods:
- At a specific time period (ROP): the periodic review or the periodic inventory
time-based method; e.g. weekly at the time trigger
- At a specific remaining level of stock (ROL): continuous review or the perpetual

inventory action level method and the fixed order quantity method
Replenishment for independent demand:
“How much to order” decision
▪ The Economic Order Quantity Model

▪ The Quantity Discount Model
▪ The Economic Manufacturing Quantity Model
The Economic Order Quantity Model
Economic Order Quantity (EOQ) Model – quantitative decision model

based on the trade-off between annual inventory holding costs
& annual order costs
■ Seeks to determine optimal order quantity

■ Order Cost is direct variable cost associated with
placing an order. (Sometimes called setup cost)
■ Holding Cost is cost incurred for holding inventory in

storage. (Sometimes called carrying cost)
▪ Assumptions of the EOQ Model

1. Demand must be known & constant
2. Order lead time is known & constant
3. Replenishment is instantaneous
4. Price is constant
5. Holding cost is known & constant
6. Ordering cost is known & constant
7. Stock-outs are not allowed
Total Annual Inventory Cost (TAIC) formula
– TAIC = Annual purchase cost + Annual holding cost + Annual
order cost
– TAIC = APC + AHC + AOC = (R x C) + (Q/2 x (k x C)) + (R/Q x S)
Where
TAIC = total annual inventory cost C = purchase cost per unit
APC = annual purchase cost S = cost of placing one order
AHC = annual holding cost R = annual demand
AOC = annual order cost Q = order quantity
k = holding rate, where annual holding cost per unit = k x C
Costs
$
Total cost
Ordering cost
Holding cost
Purchase cost
Order size
■ Economic order quantity (EOQ):
Where:
2RS R: Annual Requirements
EOQ= -------- S: Setup cost
kC k: Holding rate
C: Unit cost
Exercise
■ The Las Vegas Corporation purchase a critical component from one
of its key suppliers. The operation manager wants to determine the
economics order quantity, along with when to reorder, to ensure the
annual inventory cost is minimized. The following information was
obtained from historical data:
Annual requirements (R) = 7,200 units
Setup cost ( ordering cost) (S) = $100 per order
Holding rate (k) = 20%
Unit cost (C) = $20 per unit
Order lead time (LT) = 6 days
Number of days per year = 360 days
The Quantity Discount Model
■ The quantity discount model must consider the trade – off between
purchasing in larger quantities to take advantage of the price discount
and the higher costs of holding inventory.
Total annual inventory cost = annual purchase cost + annual holding cost
+ annual order cost
TAIC = APC + AHC + AOC = (R x C) + [(Q/2) x (k x C)] + [(R/Q) x S]

Steps
❖ Define the EOQ for each price level
❖ If the EOQ is not associated with the particular price level because the order
quantity may not lie in the given quantity range for that unit price change
the EOQ to the minimum quantity required to get a price discount
❖ Define total annual inventory cost for each EOQ
❖ The order quantity that yields the lowest total annual inventory cost is the
optimal order quantity
Example: Finding the optimal order quantity with
quantity discounts at Kuantan Corporation
■ The Kuantan corporation purchase a component from a supplier who offers
quantity discounts to encourage larger order quantities. The supply chain
manager of the company, Dr. Hadilan Wijaya Ibrahim, wants to determine the
optimal order quantity to minimize the total annual inventory cost. The
company’s annual demand forecast for the item is 15,000 units, its order cost is
$40 per order, and its annual holding rate is 25%. The price schedule is:
Order quantity Price per unit
< 1000 $ 5.00
1001 – 2000 $ 4.50
2001 and above $ 4.00
■ 1. What is the optimal order quantity?
■ 2. What is the minimum total annual inventory cost?
The economic Manufacturing Quantity Model (
EMQ) or production order quantity (POQ)
■ The EMQ relaxes the instantaneous replenishment assumption by allowing
usage or partial delivery during production.
■ Assumptions:
■ - The demand is known and constant
■ - order leadtime is known and constant
■ - Partial delivery
■ - Price is constant
■ - The holding cost is known and constant
■ - Order cost is known and constant
■ - Stockouts are not allowed.
The Economic Manufacturing Quantity Model (
EMQ) or Production Order Quantity (POQ)
▪ EMQ : Q
▪ Demand rate (demand per day) : D
▪ The production rate ( manufacturer’s production per day): P
▪ The inventory builds up at the rate of (P – D ) during the production period (Tp), and the
maximum inventory Q, so:
P = Q/ Tp, QM = (P – D) x Tp
Therefore:
QM = (P – D) x Q/P = PQ/P x DQ/P = Q (1 – D/P)
Hence, the average inventory, QM /2 = Q/2 (1 – D/P)
Total annual inventory cost = annual product cost + annual holding cost + annual setup cost
TAIC = APC + AHC + ASC = [RxC] + [Q/2 (1 – D/P) x k x C] + [R/Q x S]
■ TAIC = APC + AHC + ASC = [RxC] + [Q/2 (1 – D/P) x k x C] + [R/Q x
S]
■ TAIC min when [Q/2 (1 – D/P) x k x C] = [R/Q x S]
■ 2RS P
■ and the EMQ = x
■ kC P-D
Example: calculating the EMQ at the
Lone Wild Boar Corporation
■ The Lone Wild Boar Corporation manufacturers a crucial component internally
using the most advanced technology. The operations manager wants to
determine the economic manufacturing quantity to ensure that the total annual
inventory cost is minimized. The daily production rate (P) for the component is
200 units, annual demand ( R) is 18,000 units, setup cost (S) is $ 100 per setup,
and the annual holding rate (k) is 25%. The manager estimates that the total
cost ( C) of a finish component is $ 120. It is assumed that the plant operates
year-round and there are 360 days per year.
Replenishment for dependent demand:
Material planning (MRP/MRP II)
▪ Material requirements planning (MRP) is a software-based production planning
and inventory control system that has been used widely by manufacturing firms for
computing dependent demand and timing requirements.
▪ It further involved into manufacturing resource planning ( MRP – II) by including

other aspects of materials and resource planning.
▪ MRP is used to calculate the exact quantities, need dates, and planned order
released for components and subassemblies needs to manufacture the final products
Example: MRP
Inventory at the start of week 1 800 units
Safety stock 100 units

Leadtime 2 week
Order units 600 units
Period 0 1 2 3 4 5 6 7 8
Gross requirement 210 250 300 300 300 250 200 180
Scheduled receipts
Projected on-hand 800

inventory
Planned order 0
release
End of Chapter 4
90
Chapter 5: Designing distribution
network and warehouse management
■ Identify the key factors to be considered when designing a
distribution network
■ Discuss the strengths and weaknesses of various distribution
options.
■ Warehouse management
Logistics, transportation and distribution
What is Logistics?
According to the Council of Supply Chain Management Professionals (2016)
Logistics is that part of supply chain management that plans, implements, and controls the
efficient, effective forward and reverse flows and storage of goods, services and related
information between the point of origin and the point of consumption in order to meet
customers’ requirements.
Logistics
What is Logistics?
According to the Association of Supply Chain Management (2019)
Logistics is:
1. In a supply chain management context, it is the subset of supply chain
management that controls the forward and reverse movement, handling,
and storage of goods between origin and distribution points.
2. In an industrial context, the art and science of obtaining, producing, and
distributing material and product in the proper place and in proper
quantities.
3. In a military sense (where it has greater usage), its meaning can also include
the movement of personnel.
Distribution
The activities associated with the movement of material, usually
finished goods or service parts, from the manufacturer to the customer.
These activities encompass the functions of transportation,
warehousing, inventory control, material handling, order administration, site
and location analysis, industrial packaging, data processing, and the
communications network necessary for effective management.
It includes all activities related to physical distribution, as well as the
return of goods to the manufacturer.
In many cases, this movement is made through one or more levels of field
warehouses.
Association of Supply Chain Management (2019)

Transportation
The function of planning, scheduling, and controlling

activities related to mode, vendor, and movement
of inventories into and out of an organization.
Association of Supply Chain Management (2019)
SUMMARY TERMINOLOGY DIFFERENTIATION
■ Logistics
o Kế hoạch tổng quan, tổ chức,… liên quan tới vận chuyển, lưu trữ và kiểm soát hàng hóa
o Chiến lược tổng quan nhằm tối ưu hóa dòng hàng vào và ra
o Bắt đầu từ điểm đầu, từ nguyên vật liệu cho đến sản phẩm hoàn thiện
■ Distribution
o Là một thành phần của logistics
o Liên quan tới dòng chảy vật lý của hàng hóa, chủ yếu liên quan tới sản phẩm hoàn thiện
o Nội dung chủ yếu liên quan tới thiết kế vị trí các trung tâm phân phối, kho hàng, mạng lưới phân
phối sp tới người tiêu dùng
■ Transportation
o Là một thành phần của logistics/distribution
o Liên quan tới dòng chảy vật lý của hàng hóa, từ nguyên vật liệu tới thành phẩm cuối cùng
o Nội dung nghiên cứu chủ yếu liên quan tới phương tiện, phương thức vận tải, chi phí vận tải liên
quan,…và các nọi dung liên quan đến kế hoạch và điều phối vận tải
5.2 Distribution Network
1. Factors effecting distribution network design

A manager must consider:
the customer needs to be met and
the cost of meeting these needs
when designing the distribution network
FACTORS AFFECTING DISTRIBUTION NETWORK DESIGN
Level of service (LoS) Cost

Mức độ đáp ứng nhu cầu của khách hàng Chi phí cần để đáp ứng nhu cầu của
khách hàng
Response time
Inventories
Product variety
Product availability Transportation
Trade-off
Customer experience
Facilities and handling
Time to market
Order visibility Information

Returnability
Desired Response Time and Number of Facilities
Figure 4-1 Relationship Between Desired Response Time and Number of

Facilities
Inventory Costs and Number of Facilities
Figure 4-2 Relationship Between Number of Facilities and Inventory Costs

Transportation Costs and Number of Facilities
Figure 4-3 Relationship Between Number of Facilities and Transportation

Cost
Facility Costs and Number of Facilities
Figure 4-4 Relationship Between Number of Facilities and Facility Costs

Logistics Cost, Response Time, and Number of Facilities
Figure 4-5 Variation in Logistics Cost and Response Time with Number of Facilities
Summary
A manager must consider:
■ the customer needs to be met and
■ the cost of meeting these needs
when designing the distribution network.
It is important to ensure that the strengths of the

distribution network fit with the strategic position of the
firm.
DESIGN OPTIONS FOR A DISTRIBUTION NETWORK
Two key decisions:
1. Where is the stock?

2. Are intermediaries used in inventory/delivery? Will product flow
through an intermediary (or intermediate location)?
3. Will product be delivered directly to the customers’ location, or
will customer pick up product from a prearranged site?
1. Manufacturer storage with direct shipping

2. Manufacturer storage with direct shipping and in-transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with customer pickup
6. Retail storage with customer pickup
1. Giao hàng trực tiếp từ nhà máy sản xuất → Dropshipping

(Manufacturer storage with direct shipping);
2. Giao hàng trực tiếp từ nhà máy sản xuất thông qua trung gian kết hợp
(Manufacturer storage with direct shipping and in-transit merge);
3. Giao hàng từ kho nhà phân phối
(Distributor storage with carrier delivery);
4. Giao hàng từ kho nhà phân phối kết hợp giao hàng chặng cuối
(Distributor storage with last-mile delivery);
5. Nhận hàng từ nơi lưu trữ của nhà sản xuất/nhà phân phối
(Manufacturer/distributor storage with customer pickup);
6. Nhận hàng từ nơi lưu trữ của nhà bán lẻ
(Retail storage with customer pickup).
Drop-shipping network
T1. Performance Characteristics of Drop-shipping Network
Cost Factor Performance

Inventory Lower costs because of aggregation. Benefits of aggregation are
highest for low-demand, high-value items. Benefits are large if
product customization can be postponed at the manufacturer.
Transportation Higher transportation costs because of increased distance and

disaggregate shipping.
Facilities and Lower facility costs because of aggregation. Some saving on
handling handling costs if manufacturer can manage small shipments or
ship from production line.
Information Significant investment in information infrastructure to integrate
manufacturer and retailer.
T1. Performance Characteristics of Drop-shipping Network
Service Factor Performance
Response time Long response time of one to two weeks because of increased
distance and two stages for order processing. Response time
may vary by product, thus complicating receiving.
Product variety Easy to provide a high level of variety.
Product availability Easy to provide a high level of product availability because of
aggregation at manufacturer.
Customer Good in terms of home delivery but can suffer if order from
experience several manufacturers is sent as partial shipments.
Time to market Fast, with the product available as soon as the first unit is
produced.
Order visibility More difficult but also more important from a customer service
perspective.
Returnability Expensive and difficult to implement.
In-transit merge network
Ex: Dell & Sony through in-transit

merge carrier
T2. Performance Characteristics of In-transit merge Network

Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs than drop-shipping.
Facilities and handling Handling costs higher than drop-shipping at carrier;

receiving costs lower at customer.
Information Investment is somewhat higher than for drop-shipping.

T2. Performance Characteristics of In-transit merge Network

Response time Similar to drop-shipping; may be marginally higher.
Product variety Similar to drop-shipping.
Product availability Similar to drop-shipping.
Customer Better than drop-shipping because only a single delivery is
experience received.
Time to market Similar to drop-shipping.

Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.
Carrier
T3. Performance Characteristics of Distributor storage with Carrier delivery

Inventory Higher than manufacturer storage. Difference is not
large for faster-moving items but can be large for very
slow-moving items.
Transportation Lower than manufacturer storage. Reduction is highest

for faster-moving items.
Facilities and handling Somewhat higher than manufacturer storage. The

difference can be large for very-slow-moving items.
Information Simpler infrastructure compared to manufacturer

storage.
T3. Performance Characteristics of Distributor storage with Carrier delivery

Response time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product availability Higher cost to provide the same level of availability as
manufacturer storage.
Customer experience Better than manufacturer storage with drop-shipping.
Time to market Higher than manufacturer storage.

Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
Carrier
Distributor
/Retailer
T4. Performance Characteristics of Distributor storage with Last-mile
delivery

Inventory Higher than distributor storage with package carrier
delivery.
Transportation Very high cost given minimal scale economies. Higher

than any other distribution option.
Facilities and handling Facility costs higher than manufacturer storage or

distributor storage with package carrier delivery, but
lower than a chain of retail stores.
Information Similar to distributor storage with package carrier

delivery.
T4. Performance Characteristics of Distributor storage with Last-mile
delivery
Response time Very quick. Same day to next-day delivery.
Product variety Somewhat less than distributor storage with package carrier
delivery but larger than retail stores.
Product availability More expensive to provide availability than any other option
except retail stores.
Customer experience Very good, particularly for bulky items.
Time to market Slightly longer than distributor storage with package carrier
delivery.
Order visibility Less of an issue and easier to implement than manufacturer
storage or distributor storage with package carrier delivery.
Returnability Easier to implement than other previous options. Harder and
more expensive than a retail network.
5. Manufacturer/distributor storage with customer
pickup
Ex: Metro, thương

mại điện tử kết hợp
cửa hàng bán lẻ -
New Look, iLogic
box,….
T5. Performance Characteristics of Distributor storage with Last-mile delivery

Inventory Can match any other option, depending on the location of
inventory.
Transportation Lower than the use of package carriers, especially if using
an existing delivery network.
Facilities and Facility costs can be high if new facilities have to be built.
handling Costs are lower if existing facilities are used. The increase in
handling cost at the pickup site can be significant.
Information Significant investment in infrastructure required.

T5. Performance Characteristics of Distributor storage with Last-mile delivery

Response time Similar to package carrier delivery with manufacturer or
distributor storage. Same-day pickup is possible for items
stored at regional DC.
Product variety Similar to other manufacturer or distributor storage options.
Product availability Similar to other manufacturer or distributor storage options.
Customer experience Lower than other options because of the lack of home
delivery. Experience is sensitive to capability of pickup
location.
Time to market Similar to manufacturer or distributor storage options.
Order visibility Difficult but essential.
Returnability Somewhat easier, given that pickup location can handle
returns.
T6. Performance Characteristics of Retailer storage with customer
pick-up
Inventory Higher than all other options.
Transportation Lower than all other options.
Facilities and handling Higher than other options. The increase in handling
cost at the pickup site can be significant for online and
phone orders.
Information Some investment in infrastructure required for online

and phone orders.
T6. Performance Characteristics of Retailer storage with customer pick-up

Response time Same-day (immediate) pickup possible for items stored
locally at pickup site.
Product variety Lower than all other options.
Product availability More expensive to provide than all other options.
Customer experience Related to whether shopping is viewed as a positive or
negative experience by customer.
Time to market Highest among distribution options.
Order visibility Trivial for in-store orders. Difficult, but essential, for online
and phone orders.
Returnability Easier than other options because retail store can provide a
substitute.

2. Manufacturer storage with direct shipping and in-transit merge
5. Manufacturer/distributor storage with customer pickup
How can we choose the most appropriate designs?

How can we choose the most appropriate designs?
1. Identify the strengths and weaknesses of different distribution networks –

comparative performance analysis
2. Product, Market and Competitive characteristics (Firm’s strategic position)

Warehouse management
What is a warehouse?
Warehousing is a critical component of logistics and supply chains.

It has been link between the producer and the customer and evolved
from a relatively minor facet of a firm’s logistics system to one of
its most important functions, performing two critical utilities of time
and place. It plays a vital role in providing a desired level of
customer service at the lowest possible total cost.
What is a warehouse?
■ A warehouse should be viewed as a temporary place to store

inventory and as a buffer in supply chains. It serves, as a static unit –
in the main – matching product availability to consumer demand and
as such as primary aim which is to facilitate the movement of goods
from suppliers to customers, meeting demand in a timely and cost –
effective manner
Importance of Warehouse
■ Warehouses are used to support purchasing, production, and

distribution activities:
- Temporary storage before usages
- Inventory
- Function warehouse activity

■ Consolidation warehouses are used to collect large numbers of LTL shipments, and the
consolidate and transport in TL shipments.
- Cross-dock centres: . Efficient consumer response and quick response within retail
require operations to be able to move goods quickly through the supply chain
- Sortation centres: Goods are collected from all parts of the country, delivered into hubs
or sortation centres, sorted by zip or post code, consolidated and delivered overnight to
their respective distribution areas for onward delivery.
- Fulfilment centres: The growth of e-retailing has seen an increase
in the number of customer fulfilment centres, fulfil the customer
order for ecommerce retailers
- Reverse logistics centres: Reverse logistics centres have been set
up to deal with return items. Other reverse logistics processes
include the return of reusable transit packaging equipment such as
roll cages, barrels, kegs, pallets, tote boxes and trays
Types of warehouses
■ Private warehouses: refer to warehouses that are privately owned and used by an
organization
■ Features:
- Reduce costs
- Firms are free to decide what to process, what to store, what types of security to
provide, and the types of equipment to use, among other operational aspects.
- It can enable the firm to better utilize its workforce and expertise in term of
transportation, warehousing and distribution center activities.
- Firms can also represent a significant financial risk and loss of flexibility to the
firms.
Types of warehouses
■ Public warehouses: are for-profit organizations that contract out or lease a wide
range of light manufacturing, warehousing, and distribution services to other
companies.
■ Features:
- Providing specialized services that firms can use to create customized shipments of
goods.
- Providing the short-term flexibility and investment cost savings that private
warehouses cannot offer.
- The lacked of control provided to the goods owners.

Services are providing by public warehouses:
- Breakbulk: Large-quantity shipments are broken down so that items can be

combined into specific customer orders and then shipped out
- Repackaing
- Assembly
- Quality inspections
- Material handling, equipment maintenance, and documentation services
- Short- and long-term storage

Three types of warehousing
■ Bonded warehouse
■ CFS warehouse
■ Tax-suspension warehouse
Bonded warehouse
■ Definition: Bonded warehouse is an area or yard which stored cleared

merchandise & waiting to be exported, or goods imported from overseas
to be re-exported or imported into Vietnam
■ Advantages:
- Unpay import tax
- Goods are easy to arrange
- Reducing costs and time
- Easily follow up the status of goods

■ Disadvantages:
-For inbound, goods owners or their representatives have to do customs procedures
- For outbound, goods owners or their representatives must declare information

goods to customs. In case of importing in Vietnam market, they must go through
customs procedures as applicable to imported goods from abroad in the form of
corresponding
- Goods stored in bounded warehouses subject to re-export under the decision of

the government authorities are not allowed to re-import into Vietnam market.
- The customs supervision is based on operation (in/out) in warehouse.

CFS warehouse
■ Definition: CFS warehouse is a place to collect LCL shipments, yard used to
perform cargoes collection, separation of various shippers transported into same
containers
■ Advantages:
- In case of enterprise has many retail shipments, wants to sell for many
customers in the same country, the CFS is a place to help businesses collect
retail shipments to combine them become a large plot to full-filled container to
conduct exported procedures, saving costs
- A place for many goods owners operation on same bill of lading of imported
goods will save transportation costs, facilitate imported procedures
■ Disadvantages:
- Exported and imported goods are stored in LCL shipments collection

sites overdue, if the goods cannot be shipped out of the LCL shipments
collection sites, it’ll be processed in accordance the provision of
Customs Law
- Retail consolidation, storage of goods at LCL shipments collection sites

and the activities, services carried out at LCL shipments collection sites
must be subject to inspection and supervision of customs
Tax-suspension warehouse
■ Definition: tax-suspension warehouses are warehouses used to store imported raw
materials, suppliers have been cleared but not paying taxes yet, to produce
exported goods of warehouse owners.
■ Advantages:
- For enterprises with large volume of exported and imported goods, importing goods
in form of exported goods production the establishment of tax-suspension warehouse
will serve timely material storage needs (but not have to pay tax when importing
export yet) put into service production
■ Disadvantages:
- Tax-suspension warehouse owners quarterly report on the
management and use of goods, goods inputting expected plans into
production in the next period with the customs authorities directly
management set by the Ministry of Finance issued.
- At the end of the plan year, not later than January 31th next year,
enterprise must make reports according to Customs Law and the
form prescribed by the Ministry of Finance
Beer Game
Bullwhip effect
“…bullwhip effect, in which fluctuations in orders increase as they
move up the supply chain from retailers to wholesalers to
manufacturers to suppliers,…” (Chopra & Meindl 2001)
“….the systematic distortion in demand information as it is passed

along the supply chain in the form of orders? (Lee, Padmanabhan &
Whang 1997)
Four major causes of the bullwhip effect
■ 1. Demand forecast updating

■ 2. Order batching
■ 3. Price fluctuation
■ 4. Rationing and shortage gaming
Demand forecast updating
■ Forecasting is often based on the order history from the company’s
immediate customer
■ When downstream operation places an order, upstream manager processes

that piece of information as a signal about future product demand
■ Based on this signal, demand forecast are readjusted, as well as orders

placed with supplier upstream
■ Demand signal processing is a major problem

Order batching
■ Companies often batch or accumulate demands before issuing an

order
■ Weekly, monthly orders, as order processing and fulfillment takes

time and results in costs
■ Order batching amplifies variability and contributes to bullwhip

effect
Price fluctuation
■ Even 80% of transactions in grocery SC made in a “forward buying”
arrangement
■ Reason: manufacturer’s attractive price offer
■ All kinds of promotions result in price fluctuations
■ Customers buy in quantities that do not reflect their immediate needs (they
stock up for the future)
■ Variation of the buying quantities is much bigger than the variation of the
consumption rate
Rationing and shortage gaming
■ How to counteract the bullwhip effect?

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SUPPLY CHAIN

■ Describe the role of purchasing and its strategic impact on an

■ Describe the traditional purchasing process, e-procurement, public

■ Analyze and evaluate sourcing decisions and the factors impacting

▪ Chuyên viên mua hàng

Source: https://vietnamsalary.careerbuilder.vn/, 2021

Source: https://www.vietnamworks.com/muc-luong/Nh%C3%A2n-Vi%C3%AAn-Mua-H%C3%A0ng-Purchasing-Staff-sk, 2021

1. Which products and services, 1. Which supplier(s) should be

❖ Ensure timely supply of all necessary materials/goods for business operations

Purchasing contributes to these objectives by:

The Financial Significance of Supply Management

Current Increase Increase Reduce Reduce Reduce

Total revenue 100 117 105 100 100 100

Current Increase Increase Reduce Reduce Reduce

Total revenue 100 117 105 100 100 100

iii. Global purchasing

iv. Green purchasing/sourcing

Schroeder & Goldstein (2016)

Yêu cầu mua hàng - Purchase Requisition (PR)

Electronic purchasing (E-procurement) is an integrated purchasing

An electronic purchasing system covers the processes involved in

E-procurement usually includes purchasing processes between companies

Step 2- Purchase requisition approved and transmitted electronically to buyer

Step 3- Buyer reviews requisition, assigns a preferred supplier from the e-

Step 4- Buyer reviews closed bids & selects a supplier

Advantages of the e-Procurement System

Import Broker – Sales agent who performs transactions for a fee

Reasons for Global Sourcing –

Issues for Global Purchasers

Countertrade – goods and/or services of domestic firms are

Countertrade can include:

■ Green sourcing: not only finding new environmentally friendly technologies or

6 steps process for greener purchsing

❖ Dell Computer Company:

Reasons for Buying or Outsourcing

Reasons for Making

Cost Insourcing Outsourcing

(3) A linear variable cost relationship exists,

The Make-or-Buy Break-Even Analysis

Costs Make Buy

The Make-or-Buy Break-Even Analysis

Total Cost for both options at the Break-even Point

Total Cost for the Buy Option at 15,000 units;

Cost Difference =TCBuy −TCMake

The Make-or-Buy Break-Even Analysis

■ If the Demand < Break-even Point → Buy

Preferred suppliers provide:

– Product and process technologies – Order system & cycle time

The following freight rates from her carrier:

1 to 999 units/order $510.00 $505.00

1,000 to 2,999 units/order $500.00 $498.00

3,000+ units/order $490.00 $488.00

Tooling cost $22,000 $20,000

Terms 2/10 net 30 1/10 net 30

Distance 125 miles 100 miles

Supplier Quality Rating (defects) 2% 3%

Supplier Delivery Rating (late delivery) 1% 2%

Reasons Favoring a Single Reasons Favoring Two or

– Decentralized Purchasing - individual, local purchasing

Advantages - Advantages - Decentralization

A hybrid purchasing organization

■ Concepts and Tools of Inventory Management

■ Inventory System Design

■ Dependent and Independent Demand