Exam 3, Section 1 Part 3 Acquisition Flashcards
How is an acquisition defined?
Pervasive government function, performed to some extent by all departments and agencies at all the both of the government
Broader than procurement
Acquisitions starts with determining what is needed to be procured and runs all the way through monitoring of procured goods or services, and contract close out
What is procurement?
The act of making the purchase
What are some of the products and services that may be procured through the acquisition function?
- capital and infrastructure assets (police stations, fire houses, roads)
- Defense materials (war planes, submarines, missile systems)
- Mobile capital assets (garbage trucks, school buses)
- repair parts and supplies for capital assets
- cleaning services for buildings and repair services
- food served in school, hospital
- transportation for school children or elderly
- IT support services (maintaining email or Internet)
- Social services (foster caring, homeless food and shelter)
- professional services (audit, legal, engineering)
What is the objective acquisition?
Get the right product or service at the right price, the right quantity, at the right time, to the right place
What’s the best way to focus on the acquisition, objective, and the processes, strategies, and internal controls, needed to accomplish it?
To consider the risks inherent to the acquisition function
What are some major risks government face in buying any product or service?
- Buy more or less than is needed
- Buying products or services a significantly greater or lesser quantity than what is needed
- not being able to obtain the goods or services at the time they are needed
- paying prices higher than necessary
- not specify what needs to be acquired, leading to costly changes and design or scope of the product/service after the contract is awarded
- failure of the wire to deliver a product/service in the quantity quality and time stated in a contract
- unreasonably admin costs in relation to the size of the purchases
- corruption phase of the procurement process
What does establishing requirements start with?
The development of a procurement plan
When should a procurement plan be developed? (Time of year)
At the beginning of the fiscal year
What should a procurement plan include?
- Identify types of goods/services needed
- The amounts needed
- timing of those needs
Consolidating of other entities with similar requirements should be considered to interest more vendors, and bring the price down
What do clear and precise requirements help?
They avoid the following risks:
- risk of obtaining products that are more or less than the government needs and/or wants
- risk that suppliers do not have sufficient quantities at the expected time or anytime
How should the requirements be stated?
In terms of performance expectations, rather than how the product is to be made, or the service delivered
Holding a vendor accountable for the results delivered by a product/service is far more important than being able to hold him accountable for whether or not, he followed a specific process
Should requirements be broad or specific?
What does selecting this type help with?
Requirements should be established in a manner that allows abroad potential vendor base as possible
Broad avoids limits on sources, products, services such as “Buy America” the vendor must maintain a facility within the state, or vendors must be above or below certain size
What are some other considerations of requirements?
Some government entities have adopted or maybe required to meet target (some as high as 35%) for certain types of vendors, such as a woman owned or veteran owned business and small business (a.k.a. set aside award goals)
Compatibility requirements and constraints, when establishing specifications should also be considered
Requirements for items, specified in an acquisition plan might need to consider the future availability of compatible parts, as well as the need to be compatible with existing equipment
Where is other considerations during the establishment of requirements that help keep cost down?
- requirements to be written in such a way satisfy user without favoring specific product or suppliers. Excessive detail an effect of limiting competition as well as increasing costs
- Requirements support buildings and equipment consideration cost of operating the buildings and equipment (build to reduce the number of operating personnel, maintenance, replacement cost)
- alternate designs
- Avoid bells and whistles are not necessary and thereby increase cost
What is one of the most important considerations about changing requirements?
Once the requirements for established, they may be frozen or locked
Nothing drives quicker than changing requirements.
Changing requirements also let’s vendors off the hook for both the quality and timeliness of the delivered product.
What is often a major contributor to a problem in acquisitions regarding requirements?
Lack of user involvement
Having the users sign off on the requirement is one to fix the specifications as well as establish accountability
What is the standardization committee? When is it established?
Broadly representative committee of all potential users, establish requirements and user needs and procurement cost down by reducing purchases of different items that accomplish the same basic purpose
Established, when two or more related entities may have similar needs, but desire to establish their requirements, slightly different in order to reflect the different products, even though one or the other product will perform just as well
In the federal government, who is designated to handle the various phases of the acquisition process?
A formally certified/warranted contracting officer
In smaller governments, who is designated to handle the various phases of the acquisition process?
Purchasing department or division
What are the advantages of having a contracting officer or purchasing department/division responsible for procurement?
Governments interest are better protected
Potential for complex of interest and favoritism is eliminated
Contracting officer continues to rely on program officials to provide technical advice and support Though
What services been increasingly contracted with for for profit and nonprofit entities?
Traditionally performed by government Such as:
- Streetlight maintenance services
- Public works departments
- Service in elementary and secondary school
- Trash removal
- Social services
- IT Experts for maintenance and expertise
What is the four basic phases of the acquisition process?
- Establishing specifications.
- Soliciting supply sources.
- Awarding contracts.
- Monitoring contractor performance.
What are some names used for using services outside the government?
- Outsourcing
- Competitive sourcing
- Privatization
What should be done before the make or buy decision?
Perform a complete and fully documented feasibility study and cost analysis
What should be done when performing the cost analysis for making or buying a product or service? What costs should be considered?
Care needs to be taken with overhead costs
Switching from using government personnel to contractor personnel to obtain a service may result in only a negligible reduction in central and departmental overhead cost
Only cost that can be avoided, should be factored into the decision
What must be considered when administrative cost during the make or buy decision making?
Switching into a contractor doesn’t necessarily reduce the cost of supervision and could create additional administrative cost of a type not incurred when government personnel are used
This happens because contractor performance needs to be monitored and complaints need followed up on
What other factors should be considered during the feasibility and cost analysis study for make or by decision?
Behavioral issues, expertise, available, security issues, quality of service
What does competition increase and promote?
Competition increases the likelihood that the government will get the best available price and promotes fairness in contracting with the business community
Competition is both a significant procurement strategy and internal control component
What does FAR part 6.101 discuss about competition?
- with certain limited exceptions, contracting officers shall promote and provide for full and open competition in soliciting offers and awarding government contracts
-Full and open competition means all responsible sources are permitted to eat - It recognizes the acquisitions from a sole source may be necessary in certain circumstances
What are New York states purchasing laws related to the legal requirements for competition?
- Objective of procurement is the facilitate each state agencies mission, while protecting the interest of the state, and its taxpayers and promoting fairness and contracting with the business community
- All contracts for public purchase contracts over specified amounts must be awarded to the lowest responsible bidder furnishing the required security after advertisement for sealed bids
- Document process is required for soliciting bids, proposals, or other offers
What should the government do to get the best price and deal fairly with potential suppliers?
Conduct abroad solicitation of potential suppliers, and seek the maximum (within reason) number of bids or proposals
What are two ways in which suppliers are solicited and obtain competition?
- Invitation for bid (IFB)/invitation to bid (ITB)
- Request for proposal (RFP)
What is an invitation for bid/invitation to bid?
A formal process in which a contract is awarded based primarily on price
evaluate proposals largely based on price
What are the ways in which potential suppliers must be solicited?
- Government laws and regulations frequently require that IFB or RFP be advertised in a specific government publications, government, Internet, sites, regularly, read, newspapers, and trade publications (example procurement of 25,000 or more on fedbizopps.gov)
- organizations and individuals on Bitter list prepare the list of previous suppliers, previous fitters, trade publications, sourced notices, and other sources can be contacted and advised of the opportunity
- Information obtained from other government governments about suppliers that have been used to fulfill similar requirements can be a source
- Trade associations can be advised and asked to notify their members
- small solicitations/less than $25,000 can be made through phone calls to potential vendors but they need to be thoroughly documented
What is a request for qualifications (RFQ)?
Used to prequalify vendors, based on such factors, as the level of their experience, to perform particular types of service; the background/education/certifications of employed staff; their previous work; and financial capacity
This process typically enables the government to limit number proposals. It Hass to evaluate plus expedites the review process process.
What is the selection procedures when proposals are solicited through ITBs?
Formal process
Sealed bids are date stamped on receipt, kept under lock and key until opening time, and then opened in public, announced, and recorded
Contract is awarded to the responsible bidder who submits the lowest price
What is the selection procedures when proposals are solicited through RFPs?
Less restrictive process
Potential contractors may be asked to describe in their proposals the approach they expect to take, and performing the requested service; their previous experience performing this kind of service; entities for whom they perform the service; and the classification, specific names, and relevant experience of personnel available to perform the service
Depending on the circumstances, proposing entities may also be asked to describe their production capabilities to ensure they can meet the delivery requirements and financial resources
What are the requirements for emergency or soul source procurements to avoid the risk of favoritism and overpricing?
- Maintaining a list of prequalified contractors
- seeking proposals within a specified number of days after the emergency
- preparation of a cost estimate by the reasonable government agency
- Receiving proposals from more than one contractor
- Documentation of the process and supervisory approval, which can include a written justification of the emergency
What are some possible situations in which aborting the work to a social source, with or, without a proposal, is the only feasible way to proceed?
- only one reasonable source
- Unusual or compelling urgency, such as the need for radios in the golf war
- Specific legislation, such as to overhaul naval vessels in a named shipyard
- The purposes of industrial mobilization or expert services
- International agreement
- National security
- Public interest
What are the 7 most common situations when using simplified procedures?
- Common supply and equipment items
- Small purchases.
- Prequalifying vendors.
- Buying from statewide and federal contracts.
- Blanket purchase agreements.
- Small purchase procedures.
- Credit cards.
What is an example of buying from statewide in federal contracts?
Entering into a statewide contract for common items of supply and equipment, allowing local governments to take advantage of bulk purchase discounts by issuing purchase orders against the contracts.
State and local governments are also loud and do purchase items from the federal governments, general service administration, catalog
How are blanket purchase agreements used?
Individual governments or agencies may enter into both contracts for specific items that are available for specific period of time. Components, may then issue purchase orders against the contract to meet their specific needs.
What are small business procedures?
Laws or regulations may define specific dollar amounts, up to $10,000, as representing small purchases. Agencies are permitted to use the simplified procedures, such as obtaining three telephone bids to acquire, needed, goods or services.
How are credit cards used for simplified procedures?
Credit cards can be authorized for used to acquire and pay for goods and services up to specified amounts. This enables the government or agency to write one check to settle one invoice rather than many checks to settle many invoices. Also, assuming the credit card users enter the appropriate information of the time of purchase, thanks processing the credit cards can be askedto provide machine readable records, identifying the various ledger accounts to what the purchases should be charged
What should all purchases regardless, if they were made through purchase order or formal contract, include in the written document?
- goods or services ordered
- Delivery dates
- Payment terms
When is the purchase order used versus a contract?
Purchase order for smaller, procurements and contract for larger procurement
What are some examples of items appropriate for addressing in contracts?
- Criteria performance will be addressed against and payments will be made for certain service type contract
- personnel, either by classification or name to be assigned on certain service type contracts
- Approvals required for replacing name personnel on service type contracts
- Labor law, to which contractors must adhere
- Warrant guardian Layton defecate, found in equipment, such as a mass transit equipment
- Required insurance coverage for construction contract
- Penalties for late delivery of products or late completion of construction
- Allowable and allowable cost for contracts and change orders
- Retain terms or construction contract
- Access to contractor records
What is the most desirable contract type?
One that is specific as to the goods or services to be delivered and the price
What are the two types of contracts to procure goods and services?
- Fixed price contracts.
- Cost reimbursement contracts.
What are fixed price contracts?
Contracts in which prices are not subject to adjustment, regardless of the contractors cost experience
If there are no changes in the scope of the contract, the contractor is expected to deliver the quantities and quality specified in the contract
Some permit contractors to deliver quantities more than the called for in the contract (example up to 5% more) at the same unit Price specified in the contract. Adjustments to fix Price contracts may also be made for authorized change orders which change the contract scope.
Why are fixed price contracts advantageous to both the government and the contractor?
The government knows at the time and enters into the contract, precisely what it will pay for the goods and services
The contractor has an incentive to control class because it knows it will be able to retain whatever profit it makes
Who has contract risk and fixed Price contracts?
Contractor
The contractor may cut corners by delivering a lesser quantity or quantity than what was ordered to increase profits. To reduce this risk, the procuring agency must make certain through the inspection process that it receives what was defined in the contract specifications.
When are fixed price contracts generally used?
For items that can be identified with a high degree of specificity, but only if the contractor believes the risk will be sufficiently manageable to bid a fixed price
Example: laptop, computers, furniture, and four services
What are cost reimbursement contracts? who typically uses them?
Contracts that provide for payment of allowable cost incurred to the extent specified in the contract
Frequently used by the DOD for weapons systems and NASA for space exploration equipment
What are the different types of cost reimbursement contracts?
- cost plus a fixed fee
- cost plus an incentive fee
- Cost with no fee
- Cost sharing contracts
- Time and materials contracts
What is the cost plus a fixed fee contract?
The contractor receives allowable cost plus a fixed amount of fee specified in the contract
What is a cost plus an incentive fee contract?
The contractor receives, allowable costs, plus a fee that varies inversely with the amount of cost incurred
What is a cost with no fee contract?
Contractor is reimbursable for only allowable costs.
This type of contract is often used when contracting with not for profit, entities, colleges, and universities and contracting for research and development
What are cost sharing contracts?
The contractor and the government share the cost, and the contractor receives no fee
What are material contracts? Why are they risky?
The contractor receives flat rates (covering costs and profit) per hour per day per labor plus the cost of materials.
This type of contract is a particular risky for the government because the contractor has no incentive to keep the number of hours worked to a minimum
When are cost reimbursement contracts preferable?
When the manner of meeting the requirement makes it difficult to establish a price without excessive provision for contingencies.
The contractor has less incentive to control cost so cost reimbursement contracts tend to be more expensive than fixed price contracts
The government can change the requirements without receiving much resistance. The contractor is paid the cost incurred for accommodating the change. There’s less incentive for the government to think through and established precise specifications in advance.
When should cost reimbursement contracts be used?
Limited to situations in which the uncertainties prevent contractors from estimating cost precisely in advance.
There are used in situations in which vendors have the ability to estimate precise cost in advance, unless are willing to accept a fixed price contract
What phase is the greatest risk in the acquisition process?
Performance phase
What are some risks in the contractor performance phase?
- Contractor may not deliver the goods/services within the time frame specified in the contract
- contractor may deliver a lesser quantity of goods than specified in the contract
- Quality problems may emerge after goods are delivered and accepted (latent defects)
- contractor may occur cost in a cost reimbursement contract that are significantly greater than what was anticipated when the contract was signed
- Agency may request changes in the scope of the contract or the contractor may encounter problems unforeseen in the specifications leading to the need for costly change orders
- Contractors may inadvertently or deliberately submit, excessive bills
Where is the monitoring for quantity delivered specified?
Inspection for performance of quantities, delivered to the amount, specified in the purchase, order or contract is a fundamental internal control when procuring goods
The likelihood of careful and accurate count of the quantities received will be increased if the receiving department are given copies of the purchase order or contracts, only after the amount ordered have been removed from the document
What is a control that might be used to ensure the contractors provide their appropriate quality of goods or service specified in the contract?
Quality assurance surveillance plans (QASP) that commits the government inspection in accordance with identified milestones and/or checkpoint
What are the steps to assuring expected quality?
- Writing contracts with clear performance specifications.
- Monitoring and inspecting.
What are the risks for billing?
- Overbilling the amount received
- Overpayment in relation to the contract Price
- duplicate billings 
What are cost over runs and how can they be prevented?
Cost an excess of the contract price caused by overruns. Most common with construction contracts, systems, installations, development of new military weapon systems. Caused by unanticipated circumstances.
Prevent by making sure the requirements are completely in explicitly thought through before the IFB, or RFP is written, and are clearly specified in the contract contract. The agency sign off on the requirements to ensure the specifications are complete, accurate, and precisely stated. Can’t be changed unless approved by high-level agency personnel.
What are the different types of government property?
- Real property
- Personal property
- Inventory
What is real property?
Leased or owned property that includes land, land, rights, and anything attached to the land (except natural resources), buildings, and infrastructures
What does personal property include?
Equipment, furniture and fixtures, supplies, and IT assets, such as hardware and software
Intellectual property (intangible assets) including copyrights, patents, financial assets, such as stocks and bonds
Can be low value (laptops, phones, firearms) but require same level of accountability as real and other personal property
What is inventory?
A tangible personal property that is held for sale, or in the process of production for sale, or to be consumed to the production of goods for sale, or in the provision of services for a fee
How much property is on the government balance sheet?
Plant property in equipment is almost $900 billion
What property data would be entered into a property information system when property is acquired and appropriately updated throughout the properties life?
- description of the item, including its type and use
- Legal interest (owned or leased)
- Identifiable characteristics such as manufacture, model number, and serial number
- acquisition date
- Acquisition cost
- Replacement value
- Location
- Status indicator, such as active, inactive, idle, retired
- Condition
- Accountability (who is responsible for the item)
What additional data should be recorded for assets acquired through grant funds as part of the grant program whether federal or other?
- the program under which the asset was acquired
- The portion of the assets cost paid for by the grant or sponsor
- Any continuing obligations or restrictions regarding the storage and/or use of the asset
- Any residual interest conditions or restrictions concerning disposal of the asset?
What is the federal real property profile (FRPP) and who is it maintained by?
-System where federal agencies are required, annually, to submit data on the real property
- It’s a single, comprehensive, and descriptive database of all real property under the custody and control of all executive branch agencies
- It’s maintained by GSA
What do organizations do to increase data integrity and ensure all assets are accounted for?
Conduct, periodic, physical inventories, particularly for those items recorded in the financial records, or that are deemed sensitive (firearms, laptops)
What is done during a physical inventory?
Workers locate the items and reconcile and update the inventory records
Missing items should be notated accordingly in the records
 what can property management systems be used for?
- to identify opportunities for better uses of existing property
- these opportunities may be based on current utilization rates of a property, proximity of other entities with similar missions, potential for space configurations to increase current utilization, or an assessment on how best to deliver the government service through alternate means (telework, hoteling)
What are safeguarding procedures dependent on?
The safeguarding process would differ, depending on whether the property is real property (land, or buildings) or personal property (equipment)
How is real property protected?
- erecting fences, and/or hiring security guards (to prevent unauthorized individuals from entering the property and/or causing damage; extra care is necessary for property in which terrace would have special interest, such as water treatment plants, and electrical facilities)
- protect against fires by ensuring proper materials, are used in the construction; installing smoke detectors/fire alarms/sprinklers and maintaining fire extinguishers
- Mitigating/preventing threats, such as weather, flood and earthquakes
How is personal property protected?
- Stored in locked facilities to prevent theft (authorization is required for a removal, removal/additions is recorded, transactions promptly posted to the asset or inventory records)
-construct facility to prevent damage such as flood
What is required for asset maintenance on financial statement records?
Certain accounting standards required that governments disclose how they maintain their assets so citizens can be better informed concerning their governments, asset management
Organizations should record an analyze the performance of the maintenance work, and it’s related cost
What is Heritage property?
Assets that are not used to support the provision of goods or services
They are held because of their historical, natural, cultural, educational, or artistic significance in the resultants importance of retaining them for enjoyment of current future generations
What are some examples of heritage property?
- The White House
- US capital building
- Lincoln Memorial
- National archives
- Library of Congress
- The US Constitution
- The first edition of a Mark Twain novel
How is heritage property recorded on the financial statement?
They cannot be easily replaced, and not comparable in today’s prices were values
No, dollar amount is reported in the financial statement for these properties, instead, their existence is disclosed in a footnote to the financial statements
When is property determined disposable or removable
The decision to dispose or move property from service is straightforward if the property is no longer serviceable or worth fixing
Example: a city vehicle is damaged in an accident and not possible to repair so it’s disposed
What is the OMB criteria that agencies can use when deciding whether to dispose or remove property that is still serviceable, but not used to capacity?
- Whether the property is needed to carry out a critical mission.
- The extent to which the property is utilized.
- The condition of the property.
- The cost to operate the property.
What should be factored into the consideration of whether property can be used for an alternate purpose?
- Managers should consider other possible uses and whether it would be economical to adapt the building for a different uses
- If renovations or construction would not be economical, or the building will not be serviceable in a new role, it should be disposed of
What can the government do if it wants to replace an asset?
Trade it in for a newer or better product
Often occurs with vehicles (firetrucks, emergency vehicles)
What must be done if an organization attempts to ascertain if another government entity can use the property?
Federal law requires that an agency that is planning dispose of property must coordinate with GSA to first determine if another federal agency or state or local government could use the property
States follow similar processes
What are some requirements for the disposal of grant funded property?
- some grant agreements stipulate that unneeded property is given to another grant program
- Grant agreements frequently require that a grantee disposing a grant funded property prior to the end of a grant give the grantor right of first refusal
- Agreement also state that Grant funded property, at the end of the grant term Reverts to the grantor
*/local government have fiduciary responsibility to comply with agreements and disposed property in accordance with provisions to prevent legal litigation and liability
How much inventory and related properties does the government maintain?
300 billion
Why does the government maintain inventory?
- consume such things as books, writing materials, other items held by elementary and secondary school systems; surgical supplies, bed linens, and drugs, held by hospitals
- Repair infrastructure, such as roadways, water mains, sewer pipes, subway, and railroad tracks
- Replace components of various items of equipment or repair the equipment, such as garbage trucks, firetrucks, and military hardware
- Sell to other units within the government or other government typically through state/local government, internal service, funds and federal agency, public enterprise and intra-governmental revolving funds
- Maintain stockpiles of strategic, critical materials for reasons of national defense, possible emergencies or conservation
What is inventory refer to as?
- Operating materials
- Supplies and items of equipment consumed in the normal course of operations
- Repair and replacement parts
- Inventory held for sale in internal service and revolving funds
- Other items of supply held for various reasons
What are the major risks that governments need to maintain and manage inventory?
- not having sufficient quantities of materials, repair and replacement parts, or supplies on hand to meet demand, which would adversely affect program performance
- having excess amounts of materials, repair and replacement, parts, or supplies on hand, which would needlessly increase the cost of holding inventory
- Losses due to peril ation, spoilage, deterioration, opulence
What must governments balance with inventory?
The need for certainty, and need management flexibility and fulfilling their responsibilities
What are the risks of storing inventory?
Inventory ties up funds that might be productively used elsewhere
Inventory requires storage facilities, which run the risk that they might be stolen, spoil, or become obsolete
What has been done to reduce inventory carrying costs?
Making arrangements with suppliers for delivery materials just in time to meet production needs
What is the risk of using just in time delivery?
Materials might not arrive just in time
What can be used to mitigate risks associated with just in time?
An effective inventory management system
What are the two components of an effective inventory management system?
- Supply control.
- Inventory control.
What do the basic and advanced supply control systems do?
- Basic: determine which items to stock, how much to have on hand, went to order them, and how much to order
- Advanced: carefully plan and coordinate with customers to see if new items are needed and/or if needed for existing items are likely to increase or decrease from previous periods
What are the elements of inventory control?
- receiving and inspecting the items ordered
- Establishing accountability for the items
- Safeguarding them against deterioration, breakage, proliferation
- Keeping track of the inventory whether loaned out, undergoing repair, sold, placed in production or used
- Periodic physical count of inventory and comparison of the physical count with inventory records
What can’t inventory management be done without doing?
- it can’t be done without keeping perpetual inventory records to record receipts and issuance
- can’t be done without making careful determinations of when, and how much to order
What do larger organizations need to stock different items and handle larger dollar amounts of inventory on hand?
- they need a more sophisticated system for determining when, and how much to buy
- they need an inventory IT system that keeps track of not only the quantities on hand, but also matters such as condition, time on the shelves, customer demand
What should an inventory information system be able to do?
- keep track of items on hand and their condition, time on the shelves, customer demand
- issue report for monitoring and managing inventory that are appropriate for the type of inventory and purposes for which it is held
- Integrated with the financial management system
- entry to record the physical edition of an item to the inventory should automatically update the financial value of the inventory plus triggered the need to pay the vendor
What is the basic objective of supply control?
To meet customer requirements for supplies, materials, and repair or replacement parts in a timely and cost-effective manner
What is the first step in supply control?
Meeting customer needs is planning and coordinating with the customers, so that supply managers will know what they need, when they are likely to need it, and how much they will need
For supply managers, this is part of the strategic planning, and budgeting processes
What type of questions does planning and coordinating raise?
- are you likely to need the same amount that you needed last year or you need more or less because the program is increasing or decreasing?
- Will you be buying new items of equipment this year or next year so that some supply items will no longer be needed?
- are some items critical to your needs that you should flag them as must have, and never out items?
What is the re-order point?
- The first element of supply control
- Knowing when to place orders for additional supplies to avoid running out of stock or accumulating too much stock
What does the re-order point take into account?
- usage
- The amount of time it takes to place and receive an order
- A reasonable level of stock to keep on hand for contingencies, such as a possibility of defective items in the supply, on hand, a spike, and demand or uncertain delivery
What other factors should be taken into account when re-ordering?
The possibility that suppliers plan to announce a price increase or close the plant for vacation
What influences how much to order?
- The cost of the item
- Usage of the item
- Administrative costs (the cost of ordering the materials and the cost of carrying the materials in inventory)
What are two types of administrative costs
- The cost of ordering the materials
- The cost of carrying the materials in inventory
What is included in ordering costs?
The cost of purchasing items and handling the delivery
What costs are incurred when caring items in inventory?
- Storage space
- Alternative uses (interest forgone) of the funds used to buy the inventory
- The cost of potential theft, damage, deterioration, obsolete of the inventory
What are the opposing effects of administrative costs?
- placing a greater number of orders increases the ordering costs, but decreases the carrying cost because less storage space is needed
- Placing fewer, but larger orders reduces ordering costs, but increases carrying costs (and may increased theft, damage, deterioration, obsolete)
