Short & sweet: Procurement costs

Procurement costs are the imputed costs incurred when ordering an item. Components of procurement costs can be, among others:

  • Ordering costs,
  • Discounts,
  • Bonuses,
  • Cash discounts,
  • Additional costs for unfavorable order quantities,
  • Transportation costs,
  • Insurance costs,
  • Packaging costs.

Procurement costs therefore consist of fixed and variable costs, direct and indirect costs.

Procurement costs play a decisive role in determining economical batch sizes in procurement. The higher the procurement costs are in comparison to the storage costs, the less often and the larger the batches are ordered and vice versa. An inaccurate determination of procurement costs results in an inaccurate determination of economic lot sizes.

Our tip:

Full costs are often used when calculating economic batch sizes. However, such a full-cost approach also includes fixed costs in the procurement costs, which are completely independent of the amount of an order lot. As a result, procurement costs and therefore order lots are far higher than would be the case if costs were considered realistically. When determining economic lot sizes, therefore, only the procurement marginal costs that actually change when the order lot size is increased or decreased, based on the current order lot size, are relevant.

Further information on this topic can be found here:

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Dr. Bernd Reineke

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