1. OMSAN LOJİSTİK

3. Forward Buying Procurement and Supplier Relationship Management Latin America Logistics Center Logistics Management Series

4. Forward Buying Example Your are the buyer of SaveMart Stores. You typically buy canned food that has a demand of 10 cans per week The supplier announces that price will increase from 9$ to $10 per can Ordering cost is $100. Carrying Rate for the Product is 26% What is the Optimal Quantity to Order before Prices are increased?

5. Important Notes To determine the optimal quantity consider:: (a) SaveMart can Use all their stock just before the prices are increased (b) In the future, SaveMart will simply buy according to the EOQ method (c) The decision is how much more inventory to buy to capitalize the one-time savings The answer follows a basic principle: Find the point in which the marginal benefit equals the marginal additional cost.

6. NewEOQ Forward Buy Qty Time Inventory Weeks Held in Inventory “Marginal” Unit Forward Buying

7. Solution El “trick” is to equate the marginal benefit ($1 price savings) against the marginal cost to carry the last can in inventory We know that the inventory carrying cost per year is currently $2.34 ($9 x 26%). Then, how long can SaveMart carry inventory to match the $1 savings? Solving algebraically: $1 = $9 x 26% x (W / 52)

8. Solution W = 52 / (9 x 26%) = 52 / 2.34 = 22.2 weeks Then forward buying 22.2 weeks of supply – that is 222 cans (10 x 22.2) – the marginal cost is equal to the marginal benefit then savings are maximised to $111 net. Gross Savings = $1 x 222 cans = $222 Average Inventory = Order Qty / 2 = 222/ 2 = 111 Average Inventory Cost $ = Avg. Inventory x Cost = 111 units x $9 = $999 Inventory Carrying Cost = Avg Inv.$ x 26% x (W/52) = $999 x 26% x (22.2/52) = $111 Net Savings = Gross Savings – Additional Inventory Costs = $222 - $111 = $111

9. . 50 100 150 200 250 300 350 400 450 Qty $150 $100 $50 0 -$50 -100 222.2 Graphically

10. Generalizing from this example, to compute an optimal forward buying quantity: (a) Compute the gross saving as a percentage of the lower price (e.g. $10 minus $9, divided by $9, equals 11.1%) (b) Determine the proportion that the percentage gross savings is relative to the annual inventory carrying rate (e.g. 11.1% / 26% =.427) (c) Apply the proportion to the number of weeks in a year to determine the optimal time in inventory (.427 times 52 = 22.2 weeks) (d) Multiply the weeks to carry by the weekly demand to determine the targeted forward buying quantity (22.2 times 10 = 222) (e) Subtract any inventory at the time of the forward by order to get the net forward buying order quantity.

11. Tracing the net savings across various order sizes illustrates the maximum at 222 units. At quantities less than 222, the carrying cost of the marginal unit is less than the price savings, so net savings aren’t yet maximized. At quantities greater than 222, the carrying cost of the marginal unit is higher than the $1 price savings, so net savings are reduced from the maximum.

12. Forward Buying NewEOQ Forward Buy Qty Time Inventory