Purchasing Decisions and Transportation Cost

Topics: Supply chain management, Inventory, Operations research Pages: 2 (362 words) Published: June 6, 2007
For many years now, remarkable interest has been shown in supply chain management due to its significant potential to improve the efficiency of operations and to reduce costs. Each individual partner in a supply chain, from supplier to buyer in this case, can benefit when both partners work closer together.

Successful inventory management involves balancing the costs of inventory with the benefits of inventory. Many companies however fail to appreciate the true costs of carrying inventory, which include not only direct costs of storage, insurance and taxes, but also the cost of money spent in inventory. Keeping inventory is consequently a costly operation for any business. Therefore many attention has been given in optimal decisions for inventory management, where holding costs of carrying inventory is weighed against ordering costs of placing new orders. This optimal decision making is based on the economic order quantity of an organisation.

When placing new orders, many companies sometimes neglect the impact of hidden costs and advantages on optimal purchasing decisions. An instance is the transportation cost associated with the delivery of orders. Most companies assume transportation costs fixed per delivery, without knowing the exact impact of the number of units ordered on the transportation cost.

The economic order quantity actually not only depends on holding and fixed ordering costs, but other factors like transportation might also have an impact. Two identical companies handling exactly the same ordering and holding cost could have two different economic order quantities. Moreover when a company orders more units, a transportation discount might be given by the supplier. This discount could actually lead to a different order quantity where the total cost is minimized.

This paper deals with transportation costs on purchasing decisions. In a first paragraph, general concepts regarding inventory management are discussed. Next, the transportation...
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