Purchase Method Optimization

Inventory Modeling Use Case

1. Executive Summary

The Challenge

Companies often use the same purchasing method (e.g., "order weekly") for all products, regardless of demand patterns, costs, and characteristics. This results in:

1-2% Cost Reduction
20-30% Inventory Reduction
Immediate Payback Period

2. Decision Framework

Decision Framework: Purchase Method Selection

Purchase Method Optimization Decision Matrix

Factors to Consider

Demand velocity: High velocity = more frequent orders, low velocity = less frequent. Ordering costs: High ordering costs favor larger, less frequent orders. Holding costs: High holding costs favor smaller, more frequent orders. Volume discounts: Evaluate trade-off between discounts and inventory. Vendor terms: Payment terms, minimum orders, lead times. Service requirements: Higher service may require more frequent orders.

Common Purchase Methods

Economic Order Quantity (EOQ): Optimal quantity balancing ordering and holding costs. Fixed Order Interval: Order at fixed intervals (weekly, monthly, quarterly). Min-Max: Order when inventory falls below minimum, order up to maximum. Volume-Based: Order larger quantities to capture discounts. Just-in-Time (JIT): Frequent small orders to minimize inventory.

3. Strategy

Purchase Method Optimization

Using inventory modeling, we optimized purchasing methods by SKU category:

Optimized Purchase Methods

Recommended Purchase Methods by Category

SKU Category Current Method Optimized Method Order Frequency Order Size Annual Orders
High Velocity (A) Weekly Bi-weekly + Volume Discount Every 2 weeks $1.5M 26
Medium Velocity (B) Weekly Monthly Monthly $2.5M 12
Low Velocity (C) Weekly Quarterly Quarterly $2.5M 4

Key Improvements

4. Use Case Example: Multi-SKU Distribution Company

Company Profile

Current State Analysis

SKU Category Annual Demand Order Frequency Avg Order Size Annual Orders Inventory Level
High Velocity (A items) $40M Weekly $770K 52 $2.5M
Medium Velocity (B items) $30M Weekly $577K 52 $1.8M
Low Velocity (C items) $10M Weekly $192K 52 $600K

Key Issues Identified

4.5 How Our Software Helps

Optimize purchase methods by SKU category using demand patterns, ordering costs, holding costs, and volume discounts. Reduce total costs while maintaining service levels.

SKU Categorization

SKU Categorization

Interface for categorizing SKUs by velocity (High/Medium/Low). See demand patterns, order frequency, and current purchase methods by category.

Purchase Method Configuration

Purchase Method Configuration

Configure optimized purchase methods: Economic Order Quantity (EOQ), order frequency, volume discount evaluation, and vendor terms for each SKU category.

Cost Optimization Results

Cost Optimization Results

Results showing optimized order frequencies, order sizes, and total cost savings. Compare ordering costs, holding costs, and purchase price discounts.

Total Cost Comparison

Total Cost Comparison

Before/after comparison showing total cost reduction: ordering cost savings, holding cost reduction, and volume discount capture. See ROI and payback period.

Key Software Features

5. Implementation Roadmap

Phase 1: Analysis & Modeling (Months 1-2)

Analyze demand patterns by SKU category. Calculate ordering costs, holding costs, and stockout costs. Model economic order quantities. Evaluate volume discount opportunities. Develop optimized purchase methods.

Phase 2: Vendor Negotiation (Months 2-3)

Negotiate volume discounts for larger orders. Align payment terms with order frequencies. Establish minimum order requirements. Update vendor agreements.

Phase 3: Phased Implementation (Months 3-6)

Start with high-velocity SKUs (biggest impact). Implement optimized order frequencies gradually. Monitor service levels and costs. Expand to all SKU categories.

Phase 4: Continuous Optimization (Ongoing)

Monitor performance vs. plan. Adjust methods as demand patterns change. Identify new optimization opportunities. Refine models based on actual results.

Key Success Factors

  • Different SKUs need different purchase methods (not one-size-fits-all)
  • Balance ordering costs, holding costs, and purchase price
  • Leverage volume discounts where beneficial
  • Monitor service levels during transition
  • Continuous optimization as patterns evolve

Key Success Factors

  • Different SKUs need different purchase methods (not one-size-fits-all)
  • Balance ordering costs, holding costs, and purchase price
  • Leverage volume discounts where beneficial
  • Monitor service levels during transition
  • Continuous optimization as patterns evolve

Best Practices

  • SKU-Specific Methods: Different SKUs have different characteristics. Use appropriate purchase method for each SKU category.
  • Total Cost Optimization: Optimize total cost (ordering + holding + purchase price), not just one component.
  • Volume Discount Evaluation: Evaluate whether volume discounts justify larger orders and higher inventory.
  • Vendor Collaboration: Work with vendors to align terms, discounts, and order frequencies for mutual benefit.
  • Continuous Review: Regularly review and adjust purchase methods as demand patterns and costs change.
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