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Quantity Discount Economic Order Quantity (EOQ) Analysis Tools

Quantity Discount Economic Order Quantity (EOQ) Analysis Tools. Bernard Price Certified Professional Logistician. Why Use Range Quantity Discount EOQ Analysis Tools?. Quantity Discounts Commonly Applied Improved Decision Making with Better Information

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Quantity Discount Economic Order Quantity (EOQ) Analysis Tools

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  1. Quantity Discount Economic Order Quantity (EOQ) Analysis Tools Bernard Price Certified Professional Logistician

  2. Why Use Range Quantity Discount EOQ Analysis Tools? • Quantity Discounts Commonly Applied • Improved Decision Making with Better Information • Saves $ - Purchases Item Quantity Meeting Demands at the Lowest Total Ownership Cost • Commodity Independent • Generic Version Usable by All

  3. NSN 5999-01-269-5573 (CCA) Quantity Discounts Unit Cost $24,484 $ 7, 059 $ 6, 553 Vendor Quantity 1 – 29 30 - 59 60 & UP Purchase of 10 CCAs = 10 x $24,484 = $244,840 Purchase of 30 CCAs = 30 x $7,059 = $211,770

  4. Economic Purchase Quantities 1 - 8 30 - 55 60 & UP Unit Cost $24,484 $ 7, 059 $ 6, 553 Non-Recurring Buy Procurements Vendor Quantity 1 – 29 30 - 59 60 & UP • Buy 30 When Need 9-29 • Buy 60 When Need 56-59

  5. Recurring Demand Procurements Requirement: 60 Demands Per Year Forecast Alternatives: Buy 5 monthly = 5 x 12 x $24,484 = $1,469,040 Buy 30 twice = 30 x 2 x $7,059 = $423,540 Buy 60 once = 60 x $6,553 = $393,180

  6. Economic Order Quantity (EOQ) Best Buy Quantity Dependencies: • Purchase Cost • Ordering Cost • Holding Costs • Procurement Demand Rate Constraints/Adjustment Factors: • Minimum Reorder Cycles • Remaining Life • Shelf Life • Quantity Range for Unit Price • Delayed Reordering

  7. Holding Cost Factors • Storage Cost • Loss or Pilferage • Investment Opportunity or Discount Rate • Obsolescence Rate • Disposal Cost (End of Life Application Only)

  8. Procurement Demand Rate • Procurement Demand Rate Does Not Include Demands for Repair • Repair Costs Less Than Replenishment Buys Causing Repairs to be Pursued Before Purchasing Items • Good Model Output Will Depend on Good Input • Procurement Demands • Demand Rate associated with Throwaway Items • Certain Unserviceable Repairable Item Demands: • Item Not Returned by User or Field for Higher Level Repair • Item Washed Out Because Repair is Not Economical • If Demand Rate Data Includes Repairs, apply User Return Rate and Washout Rate Factors to Estimate Replenishment Demand Rate

  9. Determining EOQ • Objective: EOQ is the quantity to buy with Minimum Total Cost • Total Cost = Purchase Cost + Ordering Cost + Holding Cost Total Cost EOQ Unit Cost Holding Cost Ordering Cost

  10. Range 2 Range 3 Range 1 Range Quantity Discount EOQs Unconstrained EOQ Constrained EOQ

  11. Range 2 Range 3 Range 1 Additionally Constrained EOQs A B Unconstrained EOQ Constrained EOQ

  12. Generic Tool Version • Handles Quantity Discounts for Recurring & Non-Recurring Demand Buys • More Flexible than the Army Tool Version • Handles End of Life Purchase Alternatives • Within 2 Reorder Cycles • Best Combinations of 1 or 2 Buys Compared • Log Mod Version 4 with Help Files Covering All Inputs & Outputs

  13. Implementing Quantity Discount Analysis Tools • AR 710-1 Permits Army to Determine Reqts. & Procure Quantity Discounts in lieu of EOQ • At CECOM, LRC MyNSN + Contains Tool with Web Based Tie to CCSS • AMSAA and TACOM Reviewed Methodology in Tool & Recommend AMC Usage • Air Force, Veterans Administration & DLA in Philadelphia Distributed Generic Version Tool

  14. Quantity Discount Source Selection Evaluation Tool • Applies Quantity Discount EOQ Model Computations to Determine Likely Item Buy Quantities & Contract Purchase Costs • Bidders Provide Quantity Ranges & Prices for each Potential Contract Year • Improves Range Quantity Pricing Flexibility • Will Likely Yield Lower Proposed Prices vs. Government Specified Quantity Ranges

  15. Quantity Discount Source Selection Evaluation Tool • Buyer Inputs • Low, High and Likely Demand Rates for Items • Weighting Factors for Demand Rates • Contract Length • Minimum and Maximum Reorder Cycles • Inventory Holding Costs • Simulates Buys for Items over Contract Life • Automatically Selects Lowest Cost EOQ Buys • Computes Weighted Average Total Cost to Buyer

  16. Conclusion • Improves Acquisition & Inventory Management Decision Making • Determines & Compares Lowest Total Ownership Cost Buy • Provides Common Evaluation Baseline with More Accurate Source Selection Pricing • Distributed & Available for Widespread Use • Has Received Positive Feedback Saves Money

  17. Inventory Quantity Buildup IMPACTED BY LEAD-TIME INVENTORY ELEMENTS INV REQUIREMENT ON ORDER QTY* ON-HAND QTY INSURANCE / RESERVE STOCK X NO SAFETY LEVEL STOCK X YES RECEIVE ORDER ADMINISTRATIVE LEAD TIME X YES PRODUCTION LEAD TIME X YES REORDER POINT RE ORDER QUANTITY ECONOMIC ORDER QUANTITY X NO REQUIREMENT OBJECTIVE UNFUNDED INSURANCE / RESERVES X NO ECONOMIC RETENTION X NO MAX RETENTION LIMIT EXCESS TO DISPOSAL * ON-ORDER QUANTITIES ARE NOT IN INVENTORY

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