Procurement

and Supply
Management
 Supply Process and
01 Technology
CONTENTS

Make or Buy, Insource

02
or Outsource
 Supply Process
01 and Technology
 Summary

q 9 steps in the supply management.

q Technology used in the supply management.
 9 steps in the supply management

q Major reasons for developing a robust process

q Large number of items
q Large dollar volume involved
q Need for an audit trail
q Severe consequences of poor performance
q Potential contribution to effective organizational operations inherent in
the function
 9 steps in the supply management

q Three steps for optimizing the supply process

q Strategy and Goal align
q “Where, when, and how can supply personnel contribute to short- and
long-term goals and strategies of the organization?”
q Vertical alignment:
q supply strategy and goals at the functional or business unit level
aligned with organizational strategy
q Horizontal alignment:
q supply strategy and goal alignment with other functional areas
 9 steps in the supply management

q Three steps for optimizing the supply process

q Ensure Process Compliance
q Process compliance is the regulation and maintenance of industry
standards and guidelines.
q Maverick buying: nonsupply staff make unauthorized buying decision.
q Higher total cost of ownership
q Undermine supply’s credibility internally and externally
 9 steps in the supply management

q Three steps for optimizing the supply process

information from within the
q Effectively manage information flows
organization sent to supply, such
information from external
as statements of need for
sources sent to supply, Inward flows
such as invoice materials
Outside Supply Other parts
company in company

information sent from supply to information from within supply

external sources, such as Outward flows sent to others within the
requests for quotes organization, such as supplier
pricing
9 steps in the supply management

sales
forecasting engineering
production control planning

new products production

inventory control budgeting

Purchasing

quality control financial control

receiving legal accounting

Internal Information Flows to Purchasing

9 steps in the supply management
general
market product
sources of
conditions information
supply
new product
suppliers’ information
capacity transportation
Purchasing
suppliers’ availability
production rates
sales and prices and
labor conditions discounts
use taxes,
customs
External Information Flows to Purchasing
9 steps in the supply management
General
Management Product
Engineering
Development
Source, product, Economic Product and
price information conditions price information
Production
Competitive Marketing
Product availability, conditions
lead time, price
and quality
Purchasing
Budget
commitments
Contracts
Costs, prices
Orders adjustments Finance
Legal placed

Stores Accounting
Internal Informational Flows from Purchasing
 Technology used in the supply management.

q ERP systems
https://www.youtube.com/watch?v=6qys-562kp4
q A suite of applications using a common data management system
q Integrates functions within the organization and facilitates connection to
supply chain stakeholders
q Allows users to share information internally and externally in real time
q Reduces opportunities for errors in transaction processes by eliminating
dispersed organizational information systems
9 steps in the supply management

One night, you feel hungry and decide to order

something on UberEATS for dinner, what does the
process looks like?
 9 steps in the supply management

q Feel hungry, order food for myself as soon as possible.

q Step 1: Recognition of need
q A person or a system identifies a definite need in the organization—what,
how much, and when needed
q The greatest opportunity to affect value is when needs are recognized
(step 1) and described – e.g., product conception and design (step 2)
q Supply and supplier(s) can contribute more in these steps than later in
the acquisition process
 9 steps in the supply management

q What to eat? Chinese food -> chicken fried rice

q Step 2: Description of Need
q Needs should be driven by external customers.
q External customer needs → Internal customers → Purchasers →
Potential suppliers

q An accurate description of the need (good, service, or combination) is

essential
q Unclear or ambiguous descriptions, or over-specified materials,
services, or quality = unnecessary costs
q Supply management and the internal customer or cross-functional
sourcing team share responsibility for accurate descriptions
 9 steps in the supply management

q Step 2: Description of Need

q Requisition
q A gatekeeping tool to manage the flow of information through three
gates:
q authority: Does the requisitioner have the authority to make the
specified request at the specified budget level?
q internal clarity: Is the need described in a clear and unambiguous
way? (maintain a database of common purchased items-coding to
standardizes purchase)
9 steps in the supply management

From https://proclick.mediclick.com/ematerials/help/procedures/Items/UNSPSC.htm
 9 steps in the supply management

q Step 2: Description of Need

q Requisition
q A gatekeeping tool to manage the flow of information through three
gates:
q authority: Does the requisitioner have the authority to make the
specified request at the specified budget level?
q internal clarity: Is the need described in a clear and unambiguous
way? (maintain a database of common purchased items-coding to
standardizes purchase)
q internal clearance: Is the description ready for communicating
externally with potential suppliers?
q Such as quantity, delivery date, substitute
 9 steps in the supply management

q Requisition
q Information Needed for Requisitions:
q Date
q Number (identification)
q Originating department
q Account to be charged
q Complete description of material or service and quantity
q Date material or service needed
q Any special shipping or service-delivery instructions
q Signature of authorized requisitioner
 9 steps in the supply management If I need 3 chairs, how
many Cross-bars I need?
q BOM: Bill of Materials 12

A list includes all materials and

parts, including allowance for
scrap, to make one end
products.
 9 steps in the supply management

q Open the UberEATS and looking for the Chinese restaurants.

q Step 3: Identification of potential sources

q One optional communication tool that is NOT a solicitation for business:
q request for information (RFI): information gathering
q Three options for soliciting business:
q request for quotation (RFQ): price comparison
q request for proposal (RFP): price is not the only key issue.
q a detailed description of the requirement and invites bidders to
use their expertise to develop and propose one or more solutions.
q request or invitation for bid (RFB or IFB)
q how the final selection take place.
 9 steps in the supply management

q Decide the restaurants.

q Step 4: Supplier Selection and Determination of Terms
q Analysis of qualified potential sources, source selection, and
determination of terms
q Applicable tools range from a simple bid analysis form to complex
negotiations
 9 steps in the supply management

q Place the order on app

q Step 5: Preparation and Placement of Purchase Order

q Several order placement tools available:
q A purchase order
q The supplier’s sales agreement
q A release against a blanket order
q Blanket and Open-End Purchase Orders: a purchase order which a
customer places with its supplier to allow multiple delivery dates over a
period of time (MRO service).
q Master Service Agreement: an agreement wherein the suppliers
provide predetermined services over a specified period of time with
total costs not to exceed an amount previously agreed upon.
 9 steps in the supply management

q Track the order.

q Step 6: Follow-up and Expediting
q Follow-up: routine order tracking to ensure the supplier can meet
delivery promises (RFID)
q Expediting: the application of pressure on a supplier to meet the
original delivery promise, to deliver ahead of schedule, or to speed up
delivery of a delay
q may be caused by poor planning inside the buying or the selling
organization
q may indicate the need for process improvements.
 9 steps in the supply management

q Receive and check the order.

q Step 7: Receipt and Inspection
q The prime purposes of receiving are to:
q Confirm receipt of order
q Confirm shipment arrived in good condition
q Ensure quantity ordered has been received
q Forward shipment to proper destination (storage, inspection, or use)
q Ensure proper documentation is registered and accessible to
appropriate parties
 9 steps in the supply management

q Receive and check the order.

q Step 7: Receipt and Inspection
q One goal of supply management is to ensure that quality is built in:
q internally during the design stage and
q externally in the suppliers’ processes
q When quality is assured, incoming inspection can be eliminated
 9 steps in the supply management

q Pay the order.

q Step 8: Invoice Clearing and Payment
q An invoice is a claim against the buying organization
q Payment for services may vary from payment for goods.
q Invoice clearance procedures are not uniform
q Checks and audits of invoices are based on cost-benefit analysis
q Often, payment terms are not met to improve working capital utilization
and conserve cash
 9 steps in the supply management

q Invoice Clearing and Payment

q Root causes of late payment:
q Slow cycle time in the accounts payable process
q Conflict between finance and supply policy
q Information systems and electronic fund transfers may shorten cycle times
q Having accounts payable part of the supply department can help to align
processes
q Procure-to-pay: a term used to describe the steps in the purchasing
process from step 5 to step 8.
 9 steps in the supply management
q Procure-to-pay: a term used to describe the steps in the purchasing process
from step 5 to step 8.
q Focuses on the transactional steps in the supply chain that control the flow of
information, delivery of materials and services, and financial transactions.
q Making this process as seamless as possible can reduce order cycle times,
decrease administrative costs, and improve the satisfaction of internal
customers and suppliers.
q Technology to improve this process: Examples include: Robotic process
automation (RPA), Blockchain, Artificial intelligence.
(https://www.youtube.com/watch?v=m-mXMkDlZeg)
 9 steps in the supply management

q Rate the order

q Maintenance of Records and Relationships
q Update records based on legal requirements, accounting standards,
company policy, and judgment
q Some records can be stored electronically, which simplifies
management of purchasing documents.
q Update supplier performance scorecards
q Link data to future decisions
9 steps in the supply management

1. Recognition of need
2. Description of need
3. Identification and analysis of possible sources of supply
4. Supplier selection and determination of terms
5. Preparation and placement of the purchase order
6. Follow-up and/or expedite the order
7. Receipt and inspection of goods
8. Invoice clearing and payment
9. Maintenance of records and relationships
 9 steps in the supply management

q Strategic spend: goods or services critical to the mission of the organization

q Typically high-spend products or services (e.g., “A” items)
q Can be low dollar value purchases if they critical to the organization
q Nonstrategic (non-mission critical) spend
q Usually low-spend products and service (e.g., “B” and “C” items
q Dollar value and repetitiveness drive decisions
q Establish a small dollar threshold
q Prequalify suppliers
q Use efficient order placement tools
 9 steps in the supply management

q Effectiveness Tools that Optimize Strategic Spend

q Goal: Assure continuous availability at the lowest total cost of ownership
q A cross-functional sourcing team, especially during need recognition
and description steps
q Early supply and supplier involvement (ESI)
q Use information management tools that enable communication and
support decision making
q Apply time, money, people and other resources
q Favor effectiveness over efficiency
 Technology used in the supply management.

q Potential Benefits of Information Systems Technology

q Cost reduction and efficiency gains
q Data accessibility
q Speedier communication
q Dedicate resources to strategic issues
q Data accuracy
q Systems integration
q Monetary control
q Transparency
 Technology used in the supply management.

q ERP systems
q Cloud computing
q Electronic procurement systems
q Electronic or online catalogs
q EDI
q Marketplaces
q Online auctions
q Radio frequency identification (RFID)
 Technology used in the supply management.

q Cloud computing
https://www.youtube.com/watch?v=mxT233EdY5c
q “…a model for enabling ubiquitous, convenient, on-demand network
access to a shared pool of configurable computing resources (e.g.,
networks, servers, storage, applications, and services) that can be rapidly
provisioned and released with minimal management effort or service
provider interaction.”
---The National Institute of Standards and Technology (NIST)
 Technology used in the supply management.

q Cloud computing
q Types of Cloud Computing
q Private (operated for a single organization, managed internally or by a
third party)
q Public (operated over a network for general public use)
q Community (operated for specific organizations, managed internally or
by a third party)
q Hybrid (some combination of private, community, and/or public)
 Technology used in the supply management.

q Cloud computing
q Elements of Cloud Computing Relevant to Supply
q Software as a Service (SaaS):
q Applications that reside in the cloud
q Users rent on a pay-for-use basis
q Platform as a Service (PaaS):
q Software development technologies
q Allow users to create customized processes or tools
q Infrastructure as a Service (IaaS):
q Shared server capacity
q Permits sharing of computing power and storage
q Accessed as needed on a pay-for-use basis
 Technology used in the supply management.

q Electronic Procurement Systems

q An applications software package
q Allows requisitioning, authorizing, ordering, receiving, invoicing, and
paying for goods and services through the Internet
q Frequently a module in the company’s ERP system
 Technology used in the supply management.

q Electronic or Online Catalogs

q A digitized version of a supplier’s catalog
q Buyers use a web browser to view information about supplier’s products
and/or services
q Product e-catalogs include:
q product specification data -- describe the products and are the same for
all buyers
q transaction data -- prices, shipping, billing addresses, and quantity
discounts customized to each buyer
 Technology used in the supply management.

q Electronic Data Interchange (EDI)

q Allows computer-to-computer exchange of business documents
q e.g., purchase orders, shipping schedules and notifications, and
invoices
q Widely adopted in manufacturing, retail and transportation
q Benefits of EDI
q Provides secure transmission and fast turnaround of large amounts of
data
q Greater accuracy internally and with trading partners
q Shorter process cycle time that may help to lower inventory
q Provides electronic logs and audit trails
q Reduces administrative costs
 Technology used in the supply management.

q Private Marketplaces: Extranets

q A private intranet that is extended to authorized users outside the
company
q Improves supply chain coordination and information sharing with key
business partners
q a web-based interface for suppliers to link into a customer’s systems, and
vice versa, to perform activities, such as checking inventory levels, tracking
the status of invoices, or submitting quotes
 Technology used in the supply management.

q Private Marketplaces: Intranets

q A private, secure internal Internet accessible to authorized users only; may
be linked to ERP system
q Communicate information and facilitate employee collaboration
q May display supplier catalogs, list of approved suppliers, and supply
policies
q Enhances supply processes by allowing employees to place orders via web
browsers, approve and confirm purchases, and generate POs
q Advantages: lowers transaction costs and reduces process cycle times
 Technology used in the supply management.

q Types of Online Auctions

q Open offer auctions
q Suppliers select items, see competitive offers, and enter offers up until a specified
closing time.
q Names not disclosed to other bidders
q Private offer auctions
q The buyer offers a target price and quantity
q Suppliers enter offer(s) by a specific time
q The buyer evaluates and posts a status level: Accepted; closed; best and final offer
(BAFO); open
q Posted price auctions
q Buyer posts price and accepts first supplier to meet price
q Reverse auctions
q Real-time, dynamic, declining price
q Suppliers see the status of their bids in real time
 Technology used in the supply management.

q When to Use Reverse Auctions

q Clearly defined specifications
q A competitive market with willing, qualified suppliers will to participate
q usually 3 to 6 suppliers
q Knowledge of market conditions: set a reserve price
q Buyer and seller competency with auction technology
q Clear rules of conduct
q Buyer is prepared to switch suppliers if necessary
q Projected savings justify a reverse auction
 Technology used in the supply management.

q Potential Buyer-Related Issues with Reverse Auctions

q Buyer knowingly accepts bids from suppliers with unreasonably low prices
q Buying firm submits phantom bids during the event to increase the
competition artificially
q Buyer includes unqualified suppliers to increase price competition
 Technology used in the supply management.

q Potential Supplier-Related Issues with Reverse Auctions

q Supplier collusion
q Suppliers bid unrealistically low prices and attempt to renegotiate
afterwards
q Suppliers “bird watch” or participate, but do not bid to collect market
intelligence. Buyer may require bids before entering the auction to
preclude this behavior
q Suppliers submit bids after the auction event in an attempt to secure the
business
 Technology used in the supply management.

q Potential Problems with Using Online Auctions

q Risk of interrupting good supplier relationships
q Risk of developing a reputation for aggressive price-buying over other
considerations
q Costs of running auction versus expected savings
q Cost savings potential of auctions versus sourcing processes, such as
RFP/RFQ and negotiation
q Significant up-front preparation and cost required compared to
determining price through an RFP/RFQ
q Actual price versus bid price given unforeseen costs
 Technology used in the supply management.

q Radio Frequency Identification (RFID) Tags

q Contain a chip and antenna that emit a signal, using energy from a radio
frequency reader, which contains information about a container or its
individual contents
q Can be passive, active, or battery-assisted passive
q Vary in memory, frequency, power source, and cost
q The most common are passive, read-only tag
q Three primary applications in the supply chain:
q real-time inventory tracking
q product tracking
q transportation
 Make or Buy, Insource
02 or Outsource
Summary

Make vs Buy

Stay vs Outsource Insource vs Stay

Make or Buy
What Product / Service to Create
in What Market Segment(s)?

What Do We Make or Buy?

100% 100%
Gray Zone
Make Buy

Stay Change Stay Change Stay Change

Outsource Insource
More More
Make Buy
Gray 100% Insource Outsource Gray 100%
Zone Buy Zone Make

100% Gray 100% Gray

Make Zone Buy Zone
 Make or Buy
q Reasons to Make Instead of Buy (making dinner?)
q Quantities are too small and/or no supplier
is interested
q Quality requirements are too exacting or
special processing methods needed
q Greater assurance of supply
q Preserve technological secrets and
intellectual property
q Lower cost
q To take advantage of unused capacity
q Keep our capacity utilization high and
outsource the rest
q Avoid supply dependency
q Reduce risk
q Purchase option too expensive
q Distance from the closest available supplier
is too great
q Customer requirement
q Future market potential for the product or
service is expanding
q Forecasts of future shortages in the market
or rising prices
q Management takes pride in size
q Desire to control quality of customer service
 Make or Buy
q Reasons to Buy Instead of Make (buying dinner?)
q Lack of managerial or technical experience
q Excess production capacity
q Reduce risk
q Challenges of maintaining technological
leadership for noncore activity
q Outsourcing is difficult to reverse
q Cost accuracy
q Large number of options for sources of
supply and substitutes
q Insufficient volume to justify in-house
production
q Forecasts show great demand and/or
technological uncertainty
q Availability of a highly capable supplier
q Flexibility and desire to stay lean
q Buying may open up markets
q The ability to bring a product or service to
market faster
q Customer preference for a particular brand
q Superior supply management expertise
q Opportunities to improve customer service
 Insourcing or Outsourcing

q Two ongoing questions for a cross-functional team including supply,

operations, accounting and marketing are:

q Which products or services are we currently buying that we should be

doing in-house? (Insource)

q Which products and services that we are currently doing in-house should
we be buying from suppliers? (Outsource)
 Insourcing or Outsourcing

q Reasons to Insource:
q The necessity argument: “We would prefer not to produce this product or
service in-house, but we really don’t have any other options.”

q The opportunity argument: “We would prefer to do this in-house because

it would give us a strategic competitive advantage.”
 Insourcing or Outsourcing

q Reasons to Insource:
q Anything that threatens assurance of supply
q An existing source of supply goes out of business or drops a product or
service line and no other supplier is available
q No opportunities for supplier development
q A sudden massive increase in price
q The purchase of a sole source by a competitor
q Political events and regulatory changes
q Lack of supply of a key raw material or component required for the
manufacture of the purchased product
 Insourcing or Outsourcing

q Reasons to Outsource:

q The necessity argument: “We would prefer not to outsource this product
or service, but we really don’t have any other options.”

q The opportunity argument: “We would prefer to outsource this product or

service because it would give us a strategic competitive advantage.”
 Insourcing or Outsourcing

q Deciding What Might be Outsourced:

q Determine strategic, critical, non-core activities

q An entire function or some elements of an activity may lend themselves to

lower cost purchase and management by a third party

q Identify a function as a potential outsourcing target, break that function

into its components, determine which activities are strategic or critical and
should remain in-house, and which can be outsourced
 Insourcing or Outsourcing

Concerns about outsourcing include:

A
A) layoffs, exposure to supplier's risks, and loss of control.

B) transitioning from supplier's operations to internal operations.

C) losing long-term buyer-supplier relationships and cost advantages.

D) Supplier’s ability to provide the required inputs at the right quality and price.
 Insourcing or Outsourcing

q Service Triads:
q Increasing prevalence of service outsourcing based upon triadic servicing
arrangements
q buyer contracts with a supplier to deliver services directly to the
buyer’s customer
q examples: outsourcing help desk services, repair or installation of
customer equipment
q Increasing use of performance-based contracts that focus on the outcome
rather than controlling how the service is delivered
 Insourcing or Outsourcing

q Service Triads:

Customer

Buyer Supplier

Servicing demand and financial flows

Servicing exchange
 Insourcing or Outsourcing

q Risks of Outsourcing:
q Loss of control
q Exposure to supplier risks
q e.g., financial, commitment to relationship, response time, quality,
service
q Unexpected/unanticipated costs
q Difficulty quantifying economies
q Conversion costs
q Supply constraints
q Attention required by senior management
q Possibility of being tied to obsolete technology
q Concerns with long-term flexibility
 Insourcing or Outsourcing

q Outsourcing Supply and Logistics

q Procurement of indirect or noncore spend is more likely to be outsourced
than procurement of direct or core spend
q Three types of procurement outsourcing contracts: procure-to-pay (P2P),
source-to-contract (S2C), source-to-pay (S2P)
q P2P: covers the procurement of day to day purchasing
q S2C: covers spending data management, strategic sourcing , supplier
and demand management.
q S2P: all in P2P and S2C.
 Insourcing or Outsourcing

q Outsourcing Supply and Logistics

q Most frequently outsourced logistics activities are transactional,
operational and repetitive
q e.g., transportation, warehousing and freight forwarding
q Three reasons for outsourcing logistics activities: improved services,
reduced costs, increased ability to focus on core competencies
 Insourcing or Outsourcing

q Purchasing’s Role in Outsourcing

q Provide a comprehensive, competitive process
q Identify opportunities for outsourcing
q Aid in selection of sources
q Identify potential relationship issues
q Develop and negotiate contract
q Monitor and manage relationship
 Break Even Analysis

q Example: The management of a large bakery is contemplating making pie.

Which will require leasing new equipment for a monthly cost of $6000.
Variable cost will be $2 per pie. The bakery has another choice, buys the
cooked pie from another store for $5 per pie. If you are owner of the bakery,
what kind of decision you will make?
 Break Even Analysis

q Break-even analysis focuses on the relationship between costs, revenue, and

volume.
q It is to determine the quantity at which the initial investment starts to make a
profit or more profit.
!"#$% &'()_+,-$
q Break-even point: 𝑄 = .,/",01$ &'()_0234.,/",01$ &'()_+,-$
Break Even Analysis
Fixed cost Variable cost
Make $6000 $2
Buy 0 $5

𝐴𝑠𝑠𝑢𝑚𝑒 𝐵𝑟𝑒𝑎𝑘 − 𝑒𝑣𝑒𝑛 𝑝𝑜𝑖𝑛𝑡 𝑖𝑠 𝑄

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑓𝑜𝑟 𝑏𝑢𝑦 = 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑓𝑜𝑟 𝑚𝑎𝑘𝑒
𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡!"# ∗ 𝑄 = 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 + 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡_𝑚𝑎𝑘𝑒 ∗ 𝑄

5 ∗ 𝑄 = 6000 + 2 ∗ 𝑄

𝑄 = 2000
done?
If demand is higher than 2000, then choose to
make, otherwise choose to buy
 Break Even Analysis

q Example: Mary Williams, owner of Williams Products, is evaluating whether to

introduce a new product line. After thinking through the production process
and the costs of raw materials and new equipment, Williams estimates the
variable costs of each unit produced at $6 and fixed costs per year at $60,000.
A) If the selling price is set at $18 each, how many units must be produced
and sold for Williams to break even.
B) After studying the market, Williams found one company in the other city
sold the same kind of products. Williams can buy the product from them
and sold in her store. The purchasing price is $12. What decisions should
Williams make?
Break Even Analysis

𝑃𝑎𝑟𝑡 𝐴
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡
= 𝑃𝑟𝑖𝑐𝑒 ∗ 𝑄 − 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 − 𝑢𝑛𝑖𝑡 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 ∗ 𝑄

= $18 ∗ 𝑄 − $60000 − $6 ∗ 𝑄 ≥ 0

𝑄 ≥ 5000

Williams at least needs to produce and sell 5000 units to break even.
 Break Even Analysis

q Example: Mary Williams, owner of Williams Products, is evaluating whether to

introduce a new product line. After thinking through the production process
and the costs of raw materials and new equipment, Williams estimates the
variable costs of each unit produced at $6 and fixed costs per year at $60,000.
B) After studying the market, Williams found one company in the other city
sold the same kind of products. Williams can buy the product from them
and sold in her store. The purchasing price is $12. What decisions should
Williams make?
Fixed cost Variable cost
Make $60000 $6
Buy 0 $12
Break Even Analysis

𝑃𝑎𝑟𝑡 𝐵
𝐶𝑜𝑠𝑡$%&' = 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 + 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡
= 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 + 𝑢𝑛𝑖𝑡 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 ∗ 𝑄
= $60000 + $6 ∗ 𝑄
𝐶𝑜𝑠𝑡!"# = 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 = $12 ∗ 𝑄

𝐶𝑜𝑠𝑡$%&' ≤ 𝐶𝑜𝑠𝑡!"#
𝑄 ≥ 10000
Williams’s best decision is
• when the forecast demand is higher than 10000 units, make by herself.
• when the forecast demand is lower than 10000 units, purchase and sell.