ASSIGNMENT:SOURCING MANAGEMENT

SIDDHARTH KAUSHIK(15SECE106001)

1.Explain the Quantity

Discount Models in
Procurement/Sourcing.

Ans. Quantity discount model form of an

economic order quantity (EOQ) model that
takes into account quantity discounts.
Quantity discounts are price reductions
designed to induce large orders. If quantity
discounts are offered, the buyer must weigh
the potential benefits of reduced purchase
price and fewer orders against the increase
in carrying costs caused by higher average
inventories. Hence, the buyer’s goal in this
case is to select the order quantity that will
minimize total costs, where total cost is the
sum of carrying cost, ordering
cost, and purchase cost:
where C = carrying cost per unit, O =
ordering cost per order, D = annual
demand, P = unit price, and Q = order
quantity.
Advantages and Disadvantages of
Quantity Discount
As mentioned above, quantity discounting
comes with several benefits. Chief among
them are the ability to boost units per
transaction (UPT) and, by sourcing goods
and materials in bulk, the potential to
reduce per-unit costs. Larger quantities also
allow businesses to combine incidental per-
unit costs, such as shipping and packaging,
into one order.
Quantity discounting can also come in
handy when a seller is keen to lower
its inventory. Taking such action can be
particularly useful when the product in
question risks going out of fashion or
becoming obsolete, due to a technological
breakthrough.
There are several caveats to this strategy,
though. The main drawback of quantity
discounts is that the
discount squeezes profit per unit, also
known as the marginal profit, unless
sufficient economies of scale are realized.
So, if the per-unit cost for the coat company
is $10, the company makes $10 profit on
every single $20 sale. However, with the
quantity discounts, it makes only $8 in
marginal profit on an order of five and $6 in
marginal profit on an order of 10. That
would of course change if the coat
company is able to save money by, for
example, buying in bulk from its suppliers.
2. Explain Learning Curve and its
importance in Procurement.
Ans. A learning curve is a concept that
graphically depicts the relationship between
the cost and output over a defined period of
time, normally to represent the repetitive
task of an employee or worker. The
learning curve was first described by
psychologist Hermann Ebbinghaus in 1885
and is used as a way to
measure production efficiency and
to forecast costs.
In the visual representation of a learning
curve, a steeper slope indicates initial
learning translates into higher cost savings,
and subsequent learnings result in
increasingly slower, more difficult cost
savings.
The learning curve also is referred to as the
experience curve, the cost curve, the
efficiency curve, or the productivity curve.
This is because the learning curve provides
measurement and insight into all the above
aspects of a company. The idea behind
this is that any employee, regardless of
position, takes time to learn how to carry
out a specific task or duty. The amount of
time needed to produce the associated
output is high. Then, as the task is
repeated, the employee learns how
to complete it quickly, and that reduces the
amount of time needed for a unit of output.
That is why the learning curve is downward
sloping in the beginning with a flat slope
toward the end, with the cost per unit
depicted on the Y-axis and total output on
the X-axis. As learning increases, it
decreases the cost per unit of output initially
before flattening out, as it becomes harder
to increase the efficiencies gained through
learning.