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Forward Buying Input Instructions

Forward Buying Input Instructions
The Forward Buying Calculator lets you analyze temporary extra vendor discounts, imminent cost increases, temporary extra payment terms, or any combination of these incentives.

Inputs:

Input the normal replenishment information.

  • Normal Replenishment Order Size (in Dollars)
  • Normal Replenishment Order Frequency (In Days)
  • Days to Next Regular Order (In Days).  Enter the appropriate number of days if you have to place the Forward Buy in advance of a normal replenishment order.

Incentives:

  • For Deals and Extra Discounts, enter the % value of the temporary Extra Discount (as a %) and a Weight Factor.  The Weight Factor defaults to 100%. 
  • For Orders Before a Price (Cost) Increase, enter the % of increase and a weight factor. 
  • For Extra Payment Terms, enter the number of days of extra terms, a weight factor, and a code for the use of the funds generated by the deferred accounts payable.  Code "R" means you will reduce bank debt and achieve an interest cost savings (at the Borrowing Interest Rate).  Code "I" means you have an alternate Investment, and will achieve a return at the Alternate Investment Earnings Rate.
  • On all these, a Weight Factor of 100% means you will get the full savings with no additional costs other than the computed handling and carrying costs. You might choose a weight factor less than 100% for a variety of reasons.  For example, an extra discount might not apply to all skus in the category you are ordering.  See the "Real World Considerations" in the About Forward Buying page.

Control Settings:

  • Total Inventory Carrying Cost (in % of average inventory investment per year).
  • Borrowing Interest Rate (in %).
  • Alternate Investment Earning Rate (in %).
  • Handling Cost Per Normal Order (in Dollars per regular replenishment order).
  • Handling Cost for Large Orders (In Dollars) as the handling cost for this one Forward Buying Order.  It might require extra handling for temporary "overstock" or other one time costs.
  • Forecast Standard Deviation (in %).  Deviations in demand patterns and forecasts generally mean it will be more difficult to accurately predict the savings from Forward Buying purchases.  This is an empirical correction to slightly scale down the savings and return on investment, and present a slightly smaller optimum Forward Buying Order.  Larger deviations increase the correction (and further reduce the suggested order sizes).

Interpreting the Chart:

Your purchasing strategy depends on your goal for Forward Buying Investments. 
If your goal is to optimize profits, then the peak of the Extra Profit line on the chart shows the order size that will give the most extra profit for this Forward Buying situation (after weighting savings and evaluating the impact on inventory carrying and handing costs).
If the incentive is Extra Payment Terms, and your goal is to maximize your company's cash flow, you could order up to the smaller of the number of days of extended terms or the level where the Extra Profit line crosses zero.  In that situation you will achieve the largest cash flow from deferred payments, and not lose any profit, even with inventory handling and carrying costs.
The chart shows the annualized return on investment (ROI On Average Extra Investment).  This is computed using the net savings over the duration of the Forward Buy order.  You might have some target minimum or optimum ROI as a benchmark for Forward Buying.

CAUTIONS:

This analysis only provides a guideline. You may need to run a number of simulations to determine if your firm can process and handle these extra orders, and this analysis makes a number of assumptions.  See the Real World Considerations in the About Forward Buying page.

Additions:

If you would like to see models with additional features, or models for other inventory management topics, please contact us with your suggestions.
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