Incorporating coordination costs into purchasing lot size decisions

Abstract

This paper proposes an addition to the EOQ model in order to take the coordination costs between the supplier and the customer into account. The coordination costs are part of the transaction costs (TC) and vary significantly from one relationship to another. We have incorporated a 'TC factor' into the EOQ formula to take the coordination costs into account when calculating the purchase order size. We have also conducted a pilot study in one industrial company to test the new updated formula with real data. A key issue from a customer point of view is to determine the TC factor uniquely for each supplier.