132

CHAPTER 10
PURCHASING AND SUPPLY SCHEDULING DECISIONS
1
(a) The following requirements schedules will lead to the proper timing and quantities for
the purchase orders.
Desk style A
Week
1 2 3 4 5 6 7 8
Sales forecast 150 150 200 200 150 200 200 150
Receipts 200 300 300 300 300
Qty on hand 0 50 200 0 100 250 50 150 0
Releases to prod. 300 300 300 300
Desk style B
Week
1 2 3 4 5 6 7 8
Sales forecast 60 60 60 80 80 100 80 60
Receipts 100 100 100 100 100
Qty on hand 80 20 60 0 20 40 40 60 0
Releases to prod. 100 100 100 100 100
Desk style C
Week
1 2 3 4 5 6 7 8
Sales forecast 100 120 100 80 80 60 60 80
Receipts 100 100 100 100 100
Qty on hand 200 100 80 80 0 20 60 0 60
Releases to prod. 100 100 100 100 100
Summing the releases for these three desk release schedules gives a production
requirements schedule for desks in general and sheets of plywood in particular. That
is,
Week
1 2 3 4 5 6 7 8
Desk requirement 500 100 400 500 200 400 100 0
Plywood sheets
a
1500 300 1200 1500 600 1200 300 0
a
Desk requirements times 3
Now, find the purchase order releases for the plywood sheets.
Week
1 2 3 4 5 6 7 8
Sales forecast 1500 300 1200 1500 600 1200 300 0
Receipts 600 1000 1000 1000 1000
Qty on hand 2400 900 1200 1000 500 900 700 400 400
Releases to prod. 1000 1000 1000 1000
133
Therefore, purchase orders should be placed in weeks 1, 2, 3, and 4 for 1000 sheets
each.
(b) Using Equation 10-2 in the text, the probability of not having the plywood sheets at
the time needed would be:
P
P
C P
r
c
c c
=
+
=
+
= 1 1
5
01 5
0 02
.
.
From Appendix A, z
@1-.02
= 2.05. Therefore, the lead-time should be:
T LT z s
LT
*
. ( ) . = + = + = 14 2 05 2 181 days
Another week should be added to the current lead-time of 2 weeks.
2
(a) Using Equation 10-2, the probability of not having the item when needed for
production is:
P
P
C P
r
c
c c
=
+
=
+
= 1 1
150
0 2 35 365 150
0 0001
( . / )
.
The time to place an order ahead of need is:
days 28 ) 4 ( 6 . 3 14
*
= + = + =
LT
s z LT T
where z
@1-.0001
= 3.6 from Appendix A.
(b) Use part period cost balancing. The unit carrying cost is (0.2/52)35 = 0.134. Then,
(Q=250) Week 4
0.134[500 + 200]/2 = 46.9
(Q=1350) Weeks 4 + 5
0.134[(1350 + 1050)/2 + (1050 + 200)/2] = 244.6
The carrying cost closest to the order cost of $50 is Q = 250. Order this amount.
3
Using the requirements planning procedure, we can develop a schedule of material flows
through the network over the next 10 weeks.
Whse 1 1 2 3 4 5 6 7 8 9 10
Requirements 1200 1200 1200 1200 1200 1200 1200 1200 1200 1200
Schd receipts 7500 7500
On-hand qty 1700 500 6800 5600 4400 3200 2000 800 7100 5900 4700
Releases 7500 7500
134
Whse 1 1 2 3 4 5 6 7 8 9 10
Requirements 1200 1200 1200 1200 1200 1200 1200 1200 1200 1200
Schd receipts 7500 7500
On-hand qty 1700 500 6800 5600 4400 3200 2000 800 7100 5900 4700
Releases 7500 7500
Whse 2 1 2 3 4 5 6 7 8 9 10
Requirements 2300 2300 2300 2300 2300 2300 2300 2300 2300 2300
Schd receipts 7500 7500 7500
On-hand qty 3300 1000 6200 3900 1600 6800 4500 2200 7400 5100 2800
Releases 7500 7500 7500
Whse 3 1 2 3 4 5 6 7 8 9 10
Requirements 2700 2700 2700 2700 2700 2700 2700 2700 2700 2700
Schd receipts 7500 7500 7500 7500
On-hand qty 3400 700 5500 2800 100 4900 2200 7000 4300 1600 6400
Releases 7500 7500 7500 7500
Regnl whse A 1 2 3 4 5 6 7 8 9 10
Requirements 22500 0 0 15000 0 15000 7500 0 7500 0
Schd receipts 15000 15000
On-hand qty
52300 29800 29800 29800 14800 14800 14800 7300 7300 1300 1300
Releases to
plant 15000 15000
Whse 4 1 2 3 4 5 6 7 8 9 10
Requirements 4100 4100 4100 4100 4100 4100 4100 4100 4100 4100
Schd receipts 7500 7500 7500 7500 7500
On-hand qty 5700 1600 5000 900 4300 200 3600 7000 2900 6300 2200
Releases 7500 7500 7500 7500 7500
Whse 5 1 2 3 4 5 6 7 8 9 10
Requirements 1700 1700 1700 1700 1700 1700 1700 1700 1700 1700
Schd receipts 7500 7500
On-hand qty 2300 600 6400 4700 3000 1300 7100 5400 3700 2000 300
Releases 7500 7500
Whse 6 1 2 3 4 5 6 7 8 9 10
Requirements 900 900 900 900 900 900 900 900 900 900
Schd receipts 7500 7500
On-hand qty 1200 300 6900 6000 5100 4200 3300 2400 1500 600 7200
Releases 7500 7500
Regnl whse B 1 2 3 4 5 6 7 8 9 10
Requirements 22500 0 7500 0 15000 7500 0 7500 7500 0
Schd receipts 15000 15000 15000
On-hand qty
31700 9200 24200 16700 16700 1700 9200 1700 9200 9200 9200
Releases to
plant 15000 15000
135
Plant 1 2 3 4 5 6 7 8 9 10
Requirements 0 0 0 30000 0 0 30000 0 0 0
Schd receipts 40000 20000
On-hand qty 0 0 0 0 10000 10000 10000 0 0 0 0
Releases-matls 40000 20000
Summing the releases to the plant shows that the plant should place 30,000 cases into
production in weeks 4 and 7.
Because demand is shown to be constant, the average inventory must be one-half the
order quantity. For the six field warehouses and a shipping quantity of 7500, the average
long run inventory would be (7500/2)6 = 22,500 cases. For the regional warehouses,
the average inventory would be (15,000/2)2 = 15,000 cases. For the plant, the average
inventory would be 20,000/2 = 10,000 cases. The total system average inventory would
be 22,500 + 15,000 + 10,000 = 47,500 cases.
4
(a) The leverage principle shows the relative change that must be made in cost, price, or
sales volume to affect a given change in the profit level. Usually it is used in
reference to the cost of goods sold to show the impact that small changes in the cost
of goods will have on profits and the important role that purchasing plays in the
profitability of the firm. The following simple profit and loss statements will show
how much change is needed in various activities to increase profits by 10 percent.
Sales Price L&S OH COG
Current (+4%) (1%) (-3%) (-6%) (-2%)
Sales $55.0 $57.2 $55.5 $55.0 $55.0 $55.0
Cost of goods 27.5 28.6 27.5 27.5 27.5 27.0
Labor & salaries 15.0 15.6 15.0 14.5 15.0 15.0
Overhead 8.0 8.0 8.0 8.0 7.5 8.0
Profit $ 4.5 $ 5.0 $ 5.0 $ 5.0 $ 5.0 $ 5.0
Due to the magnitude of cost of goods sold, it requires less than a two percent
change in COG to increase profits by 10 percent.
(b) The current ROA as:
Profit margin = (4.5/55)100 = 8.2 percent
Investment turnover = 55/20 = 2.75
ROA = 2.758.2 = 22.6 percent
Reducing cost of goods by 7 percent will increase profits to 55 27.50.93 15 8
= $6.43 and the profit margin now is 6.43100/55 = 11.7 percent. Inventory at 20
percent of total assets is $4 million. If the cost of goods is reduced by 7 percent,
inventory value will decline to $40.93 = $3.72. Total assets will be 3.72 + 16 =
$19.72 million. The investment turnover is 55/19.72 = 2.789. The ROA now will be
11.72.789 = 32.63 percent.
136
5
(a) A mixed purchasing strategy will generally be beneficial when prices show a definite
seasonality, they are predictable, and inventory costs associated with forward buying
are not excessive. In the problem, we should consider forward buying in the first half
of the year and hand-to-mouth buying in the last half. To test the various strategies,
compare (1) hand-to-mouth buying, (2) forward buying every 2 months, (3) forward
buying every 3 months, and (4) forward buying for the first 6 months. The results are
summarized in Table 10-1.
The inventory for the hand-to-mouth buying strategy can be approximated as
50,000/2 = 25,000. The carrying cost would be 0.304.9825,000 = $37,350 per
year.
The carrying cost for the two month forward buying strategy is:
0.304.88[(0.5100,000/2) + (0.550,000/2)] = $54,900
For the 3-month forward buying strategy:
0.34.56[(0.5300,000/2) + (0.550,000/2)] = $119,700
From the total costs in Table 10-1, the best strategy is to forward buy the first six-
month's requirements in January and hand-to-mouth buy for the last six months.
(b) Some possible disadvantages are:
Prices may fall rather than rise in the first six months
There may not be adequate storage space to accommodate such a large purchase.
The materials may be perishable and not easily stored.
Uncertainties in the requirements and carrying costs may void the strategy.
1
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138
6
(a) On the average, a total expenditure of 1.1025,000 = $27,500 should be made for
copper each month.
(b) For the next 4 months, the dollar averaging purchases would be:
The average per-lb. cost would be $110,000/100,970 = $1.089. The inventory
carrying cost over 4 months would be 0.201.089(4/12) 12,622 = $916.
If hand-to-mouth were used, we would have:
(1) (2) (3)=(1)(2) (4)=(2)/2
Price, No. of Total Average
Month $/lb. lb. cost,$ inventory, lb.
1 1.32 25,000 33,000 12,500
2 1.05 25,000 26,250 12,500
3 1.10 25,000 27,500 12,500
4 0.95 25,000 23,750 12,500
a
100,000 $110,500 12,500
a
50,000/4 = 12,500
The average per-lb. cost would be $110,500/100,000 = $1.105. The inventory
carrying cost over 4 months would be 0.201.105(4/12) 12,500 = $921.
If 100,000 lbs. of copper were purchased, the two strategies can be compared as
follows.
Purchase Inventory Total
Strategy cost cost cost
Dollar averaging $108,900 + 916 = $109,816
Hand-to-mouth 110,500 + 921 = 111,421
Dollar averaging buying would be preferred.
7
For an inclusive quantity discount price incentive plan, we first compute the economic
order quantities for each range of price. Using

Q DS IC
*
/ = 2
we compute
(1) (2) (3)=(1)(2) (4)=(2)/2
Price, No. of Total Average
Month $/lb. lb. cost,$ inventory, lb.
1 1.32 20,833 27,500 10,417
2 1.05 26,190 27,500 13,095
3 1.10 25,000 27,500 12,500
4 0.95 28,947 27,500 14,474
100,970 $110,000 12,622
a
a
50,486/4 = 12,622
139
Q
1
2 500 15 020 4995 38 75
*
( )( ) / ( . )( . ) . = = cases

Q
2
2 500 15 020 4495 4085
*
( )( ) / ( . )( . ) . = = cases
Since Q
2
*
is outside of the second price bracket, Q
1
*
is the only relevant quantity. Now
we check the total cost at Q
1
*
and at the minimum quantities within the price break. We
solve:
TC PD DS Q IC Q
i i i i i
= + + / / 2
At Q = 38.75
TC = 49.95500 + 50015/38.75 + 0.249.9538.75/2
= $25,362
At Q = 50
TC = 44.95500 + 50015/50 + 0.244.9550/2
= $22,850
At Q = 80
TC = 39.95500 + 50015/80 + 0.239.9580/2
= $20,388
Floor polish should be purchased in quantities of 80 cases.
8
This noninclusive price discount problem requires solving the following relevant total
cost equation for various order quantities until the minimum cost is found.
TC PD DS Q IC Q
i i i i i
= + + / / 2
The computations can be shown in the table below given that D = 1,400, S = 75, and I =
0.25.
140
Q Price PD +DS/Q +ICQ/2 = Total cost
20 795 1,113,000.00 5,250.00 1,987.50 $1,120,237.50
50 795 1,113,000.00 2,100.00 4,968.75 1,120,068.75
100 795 1,113,000.00 1,050.00 9,937.50 1,123,987.50
200 795 1,113,000.00 525.00 19,875.00 1,133,400.00
300 200795+100750 1,092,000.00 350.00 29,250.00 1,121,600.00
300
400 200795+200750 1,081,500.00 262.50 38,625.00 1,120,387.50
400
500 200795+200750 1,068,200.00 210.00 47,687.50 1,116,097.50
+100725
500
550 200795+200750 1,063,363.64 190.91 52,218.75 1,115,773.27
+150725
550
600 200795+200750 1,059,333.33 175.00 56,750.00 1,116,258.33
+200725
600
The optimal purchase quantity is 550 motors.
9
(a) This problem is a good application of the transportation method of linear
programming. We begin by determining the costs for the current sourcing
arrangement.
Source Destination Price Transport Volume Cost
Dayton Cincinnati 3.40 0.05 5,000 $17,250
Dayton Baltimore 3.40 0.15 1,000 3,550
Kansas City Dallas 3.45 0.08 2,500 8,825
Minneapolis Los Angeles 3.25 0.24 1,200 4,188
Total $33,813
To optimize, we establish the following transportation cost matrix and solve it using
any appropriate method, such as the TRANLP module in LOGWARE.
Cincin-
nati Dallas
Los
Angeles Baltimore Capacity
Minneapolis
3.40 3.44 3.49
1200
3.46
1200
Kansas City
3.55 3.53 3.65 3.63
4800
Dayton
3.45
5000
3.52
2500
3.67 3.55
1000 9999
Requirements 5000 2500 1200 1000
The total cost for this solution is $33,788, or a savings of $25 over the current sourcing.
141
(b) Because Minneapolis is at capacity, this supplier should be examined further. If
unlimited capacity were available at Minneapolis, all requirements would be met by
this supplier for a total cost of $33,248, or a savings of $565 for this material.
(c) The above analysis does indicate that too many suppliers are being used. Only two
are needed if Minneapolis continues to supply at the current level. If Minneapolis can
be expanded, it becomes the only supplier. Of course, whether the company would
risk a single supplier for this material must be left unanswered.
10
(a) The deal-buying equation (Equation 10-5) can be applied to this problem. First, find
the optimal order quantity before the discount.
Q
DS
IC
*
( , )( )
. ( )
= = =
2 2 120 000 40
030 100
566 units
Next, find the adjusted order quantity after the discount has been applied.
!
( )
( , )
( )( . )
( )
( )
,
*
Q
dD
p d I
pQ
p d
=

=
10 120 000
100 5 030
100 566
100 5
42 700 units
A large order size of 42,700 units should be placed.
(b) The time that an order of this size will be held before it is depleted is given by:
!
,
,
.
Q
D
= =
42 700
120 000
0356 years, or 18.5 weeks