Price Level Discounts and Free Freight In Inventory Management

Buying more of an item to reduce the purchase price or freight cost also has the negative effect of increasing the carrying costs. If an item stocked for a year has a carrying cost of twenty-four percent, then the carrying cost of an item stocked for a month has a carrying cost of two percent. The optimal level to buy is where the sum of the purchase price and freight cost plus the carrying costs result in the lowest total cost of inventory. For example, a price discount of three percent that results in an extra month of inventory being ordered at a two percent carrying cost is a good value.

Many software systems forecast demand, balance EOQ and line point equations, then modify the results to fit a price-level goal or a full truck while taking into account the case or pallet quantities required by the vendor.

By bringing inventory under good management, the result should be overall inventory levels decrease while order-fill rates increase. However, in some cases, like an economic downturn, it might be smart to reduce both inventory and order fill rates. Graham recommends reducing the overall inventory by using a higher number for carrying cost, perhaps ten or even twenty percent higher. Bodenstab would reduce the target-order fill rates. If the goal is improved order-fill rates, then the opposite measures are called for.

There are many special situations faced by purchasing agents and inventory managers. Becoming familiar with good warehouse control measures will provide a ready reserve of tools to make the best of those opportunities.

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