1) ANSWER

13 Important Function of Purchasing Department of an Organisation

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The purchasing department is an organisational unit of a firm whose duties include some part or
all of the purchasing function. This disconnection between function and, department is not
always appreciated or understood by top management.The purchasing function is usually
performed most economically and efficiently by a specialised, centralised purchasing
department, directed by a skilled purchasing manager.

The functions of purchasing department are varied and wide which are based upon different
approaches. The purchasing activities may be divided into those that are always assigned to the
purchasing department and those that are sometimes assigned to some other department. The
followings are some of the important functions which are necessary to be performed.

1. Receiving indents

2. Assessment of demand or description of need

3. Selection of sources of supply

4. Receiving of quotation

5. Placing order

6. Making delivery at the proper time by following up the orders.

7. Verification of invoices

8. Inspection of incoming materials

9. Meeting transport requirements of incoming and outgoing materials

10. Maintaining purchasing records and files

11. Reporting to top management

12. Developing coordination among other departments

13. Creating goodwill of the organisation in the eyes of the suppliers.

1. Receiving indents:
The first and foremost function of purchasing is receiving demand/requisition of material from
different departments of the organisation, such as from production, stores, maintenance,
administrative, drawing office, planning, tool room, packing, painting, heat treatment etc.

After receiving the indent from users’ departments it examines in details and takes action
according to the need and urgency of any item. This is called ‘recognition of need’. Sometimes,
needs can be met by transfer of a stock of one department to another department. In other cases,
the reserve stock or the stocks kept in bank can be utilized i.e., pledged stock with bank.

2. Assessment of demand or description of need:

After recognising the need with appropriate description, i.e., qualitative as well as quantitative, is
necessary for the sound and successful purchasing. An improperly described demand can cost
heavily money-wise as well as time-wise.

The real problem arises when the order is placed for want of preciseness in the description of
goods needed, the items are received and these are not acceptable to the user department and it
also becomes difficult to convince the suppliers to return the goods in case of faulty supplies.
Therefore, purchasing department must have adequate knowledge of items being purchased to be
able to secure full description.

The purchasing department should not have such alternative purchases of commodities, which
are not available easily, on their own responsibility or at a lower cost unless and until it gets the
consent from the user department.

In a nutshell, it is recommended that the description of items for purchase on the part of indenter,
purchaser and seller should be quite clear and without ambiguity to promote harmony in an
organisation.

3. Selection of sources of supply:

Most important function of a purchasing department or officer is the selection of the sources for
the requisitioned items of stores. There are different sources of supply which have no similarity
between them.
For majority of items, selection of one of the vendors should be made. While selecting the item,
the purchase officer has to see whether the item to be purchased is on a regular basis i.e., it is
being purchased time and again or it is a seldom purchase on non-recurring basis.

Whenever the items are to be bought from single manufacturer, such as branded or patented
item, there is no difficulty in the selection of the sources of supply; the order can be placed with
the party according to terms and conditions of their sale.

Selection of source of supply requires the services of shrewd purchasing officer who can keep
pace with policies of the organisation and market from where the materials have to be purchased.

4. Receiving of quotation:
As soon as the purchase requisition is received in the purchase division, sources of supply will be
located; a decision is then taken in respect of the method of tendering/limitation of quotations
from prospective suppliers.

Prices are also ascertained by preparing a comparative statement with the help of either of the
following documents supplied either by the supplier or taken from the previous records of
advertisements, like:

(a) Catalogues, price lists etc.

(b) Telephonic quotations.

(c) Previous purchase records.

(d) Quotation letter or tender i.e., letter of inquiry.

(e) Sample and related price cards.

(f) Negotiation between suppliers and the purchase department like catalogue, price lists etc.

It is in the interest of purchasing department to keep this information up to date. Even for the
items which are being purchased on a regular basis, the purchasing section should invite tenders
and know full well the market price. It will ensure that prices being paid to the existing vendor
are competitive.
5. Placing order:
Placing a purchase order is the next function of purchasing officer. Since purchase order is a
legal binding between the two parties, it should always be accurate, clear and acceptable to both.
The purchase order should contain the following particulars:

(a) Description and specifications of the material.

(b) Quantity order.

(c) Transport and packing charges and shipping instructions.

(d) Name and address of the supplier.

(e) Date, time and place of delivery.

(f) Price, discount and terms of payment.

(g) Signature of the purchase manager.

(h) The name and address of the buyer.

6. Making delivery at the proper time by following up the orders:

Since one of the objectives of successful purchasing is delivery of goods at right time so as to
ensure delivery when and where needed? In normal practice, the responsibility of the purchasing
department is upto the time the material is received in the stores and is approved by the
inspection department.

Every purchasing department has the responsibility for follow-up of the orders it places on
different suppliers. All items do not require extensive follow-up. For some less important and
low value items follow-up would be costly and wastage of money and time only.

7. Verification of invoices:
In normal course, it is also the responsibility of purchase department to check the invoices and
accordingly advise the accounts department for clearing the payment to the parties concerned.
Contradictory statements have been given as to who should be assigned this function.

Some are of the view that invoices should be checked by the purchase department placed by it
whereas other suggests that it should go to the accounting department. In support of this, the
experts add that it is part of the responsibility of purchase department that orders are accurately
executed and properly filled as per terms and conditions of the contract.

If there is any error in the bills, the purchase department can get the correction done or
adjustment effected. If the invoices are checked by the stores or accounts departments, there may
be some delay in attending to the errors.

8. Inspection of incoming materials:

The purchasing department should have a close contact with inspection department. On receipt
of the materials from different suppliers, they are to be inspected as per specifications indicated
in the purchase order to verify their quality and quantity.

Uninspected materials are a burden on the economy of the organisation. If inspection is delayed,
the payments of the suppliers also are likely to be delayed, resulting in bad relations between
suppliers and purchasers.

9. Meeting transport requirements of incoming and outgoing materials:

The purchasing officer must make goods/materials available at the right time they are required,
at the place they are needed, and at the lowest possible cost. It is a big responsibility, and even a
slight error amounts to delay in consignment required at a particular time.

In this regard, the purchase department should have a thorough knowledge of the means of
transportation. It should make a correct choice of carriers or routes because otherwise it may
entail delay and additional transportation costs.

10. Maintaining purchasing records and files:

Purchasing involves a lot of paper work. Daily a number of letters, bills, quotations, notes,
challans, railway receipts, parcel, way bills, bills of ladings, goods received notes, lorry receipt,
goods receipt (transport delivery notes), inspection notes have to be dealt with. It involves a lot
of clerical work.

This department has to refer to previous correspondence on purchase orders, notes, catalogues,
blue prints, price lists etc. very frequently which makes it imperative to maintain records in
appropriate manner. These records are essential for making the day to day purchase.
11. Reporting to top management:
It is also an important function of the purchasing department to prepare weekly, monthly,
quarterly, bi-annually and yearly reports regarding expenditures of this department and send the
same to top management along with details of purchases made and suggestions or improvements,
if any.

12. Developing coordination among departments:

A purchasing department has to fulfill the needs of other departments in the organisation. It is the
function of purchasing department to work in close coordination and cooperation with other
departments of the company.

To a considerable extent, the attitude and reactions of other departments towards purchasing
department extends to these other departments. Mutual trust and cooperation is essential between
the purchasing department and other departments to secure high degree of efficiency.

13. Creating goodwill of the organisation in the eyes of the suppliers:

Good vendor relationship has to be maintained and developed to reflect enterprise’s image and
goodwill. Maintaining such relations requires mutual trust and confidence which grows out of
dealings between the two parties over a period of time. Worth of a purchasing department can be
measured by the amount of goodwill it has with its vendors.

2) ANSWER 2

Organizational buyers (really, buyers of all types, including final consumers) use four
basic approaches to evaluating and buying products: (1) inspection, (2) sampling, (3)
description, and (4) negotiated contracts. Understanding the differences in these buying
methods is important in strategy planning. Let’s look at each approach:

1. Inspection buying means looking at every item. It’s used for products that are not
standardized and require examination. Here, each product is different – as in the case of
livestock or used equipment. Such products are often sold in open markets – or at
auction if there are several potential buyers. Buyers inspect the goods and either haggle
with the seller or bid against competing buyers.

2. Sampling buying means looking at only part of a potential purchase. As products

become more standardized – perhaps because of careful grading or quality control –
buying by sample becomes possible. For example, a power company might buy miles of
heavy electric cable. A sample section might be heated to the melting point to be certain
the cable is safe.
Prices may be based on a sample. Although demand and supply forces may set the
general price level, actual price may vary depending on the quality of a specific
sample. For example, grain markets use this kind of buying. The actual price is based
on a sample withdrawn from a carload of grain and analyzed.

People in less-developed economies do a lot of buying by inspection or sampli ng –

regardless of the product. The reason is skepticism about quality – or lack of faith in the
seller.

3. Description (specification) buying means buying from a written (or verbal)

description of the product. Most manufactured items and many agricultural commodities
are bought this way – often without inspection. When quality can almost be guaranteed,
buying by description – grade, brand, or specification – may be satisfactory, especially
when there is mutual trust between buyers and sellers. Because this method reduces the
cost of buying, buyers use it whenever practical.

Services are usually purchased by description. Since a service is usually not performed
until after it’s purchased, buyers have nothing to inspect ahead of time.

Once the purchase needs are specified, it’s the buyer’s job to get the best deal
possible. If several suppliers want the business, the buyer will often request competitive
bids. Competitive bids are the terms of sale offered by different suppliers in response to
the buyer’s purchase specifications. If different suppliers’ quality, dependability, and
delivery schedules all meet the specs, the buyer will select the low -price bid. But a
creative marketer needs to look carefully at the purchaser’s specs – and the need – to see
if other elements of the marketing mix could provide a competitive advantage.

4. Negotiated contract buying means agreeing to a contract that allows for changes in the
purchase arrangements.

Sometimes the buyer knows roughly what the company needs but c an’t fix all the details
in advance. Specifications or total requirements may change over time. This situation is
common, for example, in research and development work and in the building of special -
purpose machinery or buildings. In such cases, the general project is described, and a
basic price may be agreed on – perhaps even based on competitive bids – but with
provision for changes and price adjustments up or down. Or a supplier may be willing to
accept a contract that provides some type of incentive – such as full coverage of costs
plus a fixed fee of full costs plus a profit percentage tied to costs. The whole contract
may even be subject to renegotiation as the work proceeds.

To be sure of dependable quality, a buyer may develop loyalty to certai n suppliers. This
is especially important when buying nonstandardized products. When a supplier and
buyer develop a working partnership over the years, the supplier practically becomes a
part of the buyer’s organization.

ANSWER 3

The Five Types of Inventory:

1. Raw Materials – Raw materials are important for obvious reasons such as the
production of goods. The raw goods are what comes from your suppliers and their
suppliers. If you do not have a system in place that grants visibility of raw materials,
you cannot accurately gauge what you will produce over the next quarter or year. A
company can go bankrupt if it doesn’t properly manage its raw-material inventory. For
example, a multi-billion dollar business had to shut down business and halt production
for four days because they ran out of pallets on which to store and ship their supply.
Pallets are very important for shipping and manufacturing companies and if they are
ignored, then the business suffers.
2. Work in Progress – The second type of inventory is composed of the goods currently
being produced in your, or a contract manufacturer’s company. Because many
companies used to overlook this element, Enterprise Resource Planning (ERP) systems
have been implemented to completely track all goods, those even being converted from
raw to production, to accurately track profits and assist in the planning of future raw-
material purchases.
3. Finished Goods – This type of inventory is usually controlled by your distributors or by
your warehouse. For companies that have many distributors of their product it is
important for them to know how much of their product is on the market. Especially
when in the case of car manufacturers. It is hard to manufacture for multiple
distributors when there is no visibility of your finished goods.
4. Service Inventory – Distribution inventory barely holds a candle compared to the
difficulties of service industry, on of the most difficult of the five types of inventory.
Crucial to business, service inventory needs proper management. Global mandates such
as recycling and energy regulations need to be managed. You can gather information
about failed products, using failure analysis to design better products and be able to
leverage parts sales.
5. Transportation – A supply train of different inventories connected by transportation is
the traditional definition of a supply chain, although this has changed now though.
Talk to an accountant about the product in-transit and he or she will let you know that
the products are in the books or in the books of your trading partners. Accounting for
about 5% to 20% of your inventory, this often goes overlooked because the inventory
cannot be seen. Being on a plane, truck, or boat does not erase it from your inventory
and in-transit inventory is very important to keep track of. If shipments are delayed near
the end of accounting periods and there is not appropriate visibility of those products
you may receive a supply shipment at the end which would destroy your revenue
because in-transit revenue was not accounted for.
5) ANSWER

Managing our inventory as a retailer is a humongous task. Inventory

management grows more and more complicated with increase in sales
volume and diversification of product assortments. In this post, we will
discuss the various methods I have come across in retail industry for
inventory control.

Types of Inventory Control systems :

- ABC

- Two Bin Method

- Three Bin Method

- Fixed Order Quantity

- Fixed Period Ordering

- Just In Time

- Vendor Managed Inventory

ABC Method :

This is one of the common methods used across retail industry and it is at times coupled with

other methods for better control on inventory. This is more of an inventory classification

technique where in products are classified based on the sales contribution and importance of the
same in their assortment plan.
A- Category products will be the maximum grocers in sales and flagship products with higher

margin. Usually top 20% of the products in the assortment contributing to 80% of the total sales

are classified under A category where tight control on inventory is required to ensure no loss in
sales. 20% of products contributing to 80% of sales is known as 80-20 Rule or Pareto principle

C-Category products are bottom of the line contributing less to sales. These items are marginally
important for the business and are kept only for the sole purpose of customer requirement.

B-Category products are important to the retailer but are less important compared to A Category
products.

TWO BIN Method :

This is a simple method used usually in warehousing where in an item is stored in two locations

or bins in a warehouse and the stock is replenished in the first bin from the second bin once the

first bin is consumed completely. The required quantity to be filled in the second bin is placed
for ordering.
THREE BIN Method

This is a common method following in manufacturing where Kanban system is being followed.

It is similar to two bins system with a third bin at the suppliers' location. The supplier will not

manufacture spare parts for the manufacturer until the reserve bin is emptied. Three bins each

with a Kanban card tracking movement of inventory is available , one at manufacturing/ shop

floor, one at the shop/back store, one with the supplier. Once the inventory in

manufacturing/shop floor bin/display is consumed/sold, it is replenishmed with the complete bin

from the back store/shop. Later the back store bin is sent to the supplier and replace with a

complete bin from the supplier. Then the supplier will manufacture to fill the inventory in the
third bin with him. This will act as a complete loop until manufacturing of the product is ceased.

The availability of stock in each bin is calculated based on reorder lead time to ensure enough
stock is made available till the new stock arrives.

6) ANSWER
Models of Inventory Management:
While it is very necessary to maintain the optimum level of inventory, it is not so easy as well.

Nonetheless, some models or methods have been developed in the recent past for determining
the optimum level of inventories to be maintained in the enterprise.

All models are classified into two major types:

(i) Deterministic Models, and

(ii) Probabilistic Models.

In brief, the deterministic models are built on the assumption that there is no uncertainty

associated with demand and replenishment of inventories. On the contrary, the probabilistic

models take cognizance of the fact that there is always some degree of uncertainty associated
with the demand pattern and lead time of inventories.

Usually, the following three deterministic models are in use:

1. Economic Ordering Quantity (EOQ) Model,

2. ABC Analysis,

3. Inventory Turnover Ratio,

Let us discuss these one by one.

1. Economic Ordering Quantity (EOQ) Model:

One of the important decisions to be taken by a firm in inventory management is how much
inventory to buy at a time.

This is called ‘Economic Ordering Quantity (EOQ). EOQ also gives solutions to other

problems like:
(i) How frequently to buy?
(ii) When to buy?

(iii) What should be the reserve stock?

Assumptions:

Like other economic models, EOQ Model is also based on certain assumptions:
1. That the firm knows with certainty how much items of particular inventories will be used or
demanded for within a specific period of time.

2. That the use of inventories or sales made by the firm remains constant or unchanged
throughout the period.

3. That the moment inventories reach to the zero level, the order of the replenishment of
inventory is placed without delay.

The above assumptions are also called as limitations of the EOQ Model.

Determination of EOQ:

EOQ Model is based on Baumol’s cash management model. How much to buy at a time, or

say, how much will be EOQ is to be decided on the basis of the two costs:
(i) Ordering Costs, and

(ii) Carrying Costs.

These are just discussed. Hence are not repeated again. The above two costs are inversely

associated. If holding inventory cost increases, ordering cost decreases and vice versa. A balance

is, therefore, struck between the two opposing costs and economic ordering quantity is
determined at a level for which the aggregate of two costs is the minimum.
The various components of ordering costs and carrying costs are shown in the following

Table 27.3:

Table 27.3: Components of Ordering Costs and Carrying Costs:

Ordering Costs Carrying Costs

Requisitioning Warehousing

Order Placing Handling

Transportation Administrative

Storing Insurance

Administrative Deterioration and Obsolesce

EOQ can be determined by applying the following commonly used formula:

Q = 2UxP/S

Where:

Q = Economic Ordering Quantity (EOQ)

U = Quantity purchased in a year or month

P = Cost of placing an order

S = Annual or monthly cost of storage of one unit known as ‘carrying cost.’

Let us illustrate this with an imaginary example:

Let us assume the following data for a firm:

Annual requirements 800 units

Ordering Cost (per order) Rs. 50

Carrying Cost (per unit) Rs. 100

Now, using the EOQ formula, EOQ quantity will be as follows:

EOQ = 2 x 800 x 50/2

= 80,000/2

= 40,000

= 200 Units

2. ABC Analysis:
This is also called ‘Selective Inventory Control.’ The ABC analysis of selective inventory is

based on the logic that in any large number, we usually have ‘significant few’ and ‘insignificant

many.’ This holds true in case of inventories also. A firm maintaining several types of
inventories does not need to exercise the same degree of control on all the items.

The firm adopts selective approach to control investments in various types of inventories. This

selective approach is called the ABC Analysis. The items with highest value are classified as ‘A

Items’. The items with relatively low value as ‘B Items’ and the items least valuable are

classified as ‘C Items.’ Since the ABC analysis concentrates on important items, hence, it is also
known as ‘Control by Importance and Exception (CIE).’
The composition of these items in terms of quantity and value is lopsided. In a study

conducted sometimes ago, the shares of various items, viz. A, B and C in total number and

value of an automobile company were found as follows:

Items % of Numbers % of Value

A 9 57

B 10 18

C 81 25

Total 100 100

In case of ABC Analysis, stringent control is imposed on ‘A Items’ maintaining bare minimum

necessary level of inventories of these. While ‘B Items’ will be kept under reasonable control, ‘C
Items’ will be under simple control.

The FSN analysis classifying goods into Fast-Moving, Slow-Moving, and Non-Moving and

VED analysis classifying goods into Vital, Essential, and Desirable are similar to ABC Analysis
in principle.

3. Inventory Turnover Ratio:

Inventory can also be managed by using accounting ratios like Inventory Turnover Ratio.

Inventory ratio establishes relationship between average inventory and cost of inventory
consumed or sold during the particular period.

This is calculated with the help of the following formula:

Cost of Good Consumed or Sold during the year/Average Inventory during the year.
A comparison of current year’s inventory ratio with those of previous years will unfold the

following points relating to inventories:

Fast-Moving Items:
This is indicated by a high inventory ratio. This also means that such items of inventory enjoy

high demand. Obviously, in order to have smooth production, adequate inventories of these items

should be maintained. Otherwise, both production and sales will be adversely affected through
uninterrupted supply of these items.

Slow-Moving Items:
That some items are slowly moving is indicated by a low turnover ratio. These items are,
therefore, needed to be maintained at a minimum level.

Dormant or Obsolete Items:

These refer to items having no demand. These should be disposed of as early as possible to curb
further losses caused by them.

7 ANSWER

ABC Inventory Control System

Definition: The ABC Inventory Control System is applied by those firms that have to maintain
several types of inventories. Ideally, it is not desirable to keep the same degree of control over all
the inventory types, since each vary in terms of its value of annual consumption.

Thus, the ABC Inventory Control System is used to determine the importance of each item of the
stock in terms of its value of annual consumption and are categorized as A, B, and C.
The items of high value are categorized as “A” and generally consists of 15%-25% of inventory
items; that accounts for 60%-75% of annual usage value. The firm keeps strict control over these
inventory items.

The Category “ B”, is comprised of those items that are of relatively less value or has moderate
importance and consists of 20%-30% of inventory items, that accounts for 20%-30% of annual
usage value. A reasonable control is kept on the “B” category inventory items.

The least important items of the inventory are categorized as “C”. It consists of 40%-60% of
inventory items; that accounts for 10%-15% of annual usage value. Due to a low value of these
items, a simple or an ordinary control is kept on them.

Thus, the ABC Inventory Control System focuses on significant items of the inventory and hence
is also called as “Control by Importance and Exception.” Since the categorization of the
inventory items is done on the basis of their relative value, this approach is often known
as “Proportional Value Analysis.”

4 ANSWER

Assuming that we know what is inventory control, consider the following as functions of an
inventory control system:

 To keep better customer satisfaction.

 Maintain smooth and efficient production flow.
 To avoid delays in deliveries.
 To avoid problems during scarcity of materials in the market.
 To take advantage of quality discounts.
  To have an advantage amidst the market price fluctuation.
 To allow possible increase in output.
 To have better utilization of manpower and available machinery.
 Avoid rejection of material.
Method of perchesing

1. Purchasing by Requirement:
This method refers to those goods which are purchased only when needed
and in required quantity. The goods which are not regularly required are
purchased in this way. On the other hand it refers to the purchase of
emergency goods. These goods are not kept in store. Purchasing department
must be in knowledge of the suppliers of such goods so that these are
purchased without loss of time.

2. Market Purchasing:
Market purchasing refers to buying goods for taking advantages of
favourable market situations. Purchases are not made to meet immediate
needs but are acquired as per the future requirements. This method will be
useful if future needs are estimated accurately and purchases are made
whenever favourable market situations arise. The market situation is
constantly studied for forecasting price trends.

The advantages of this method are: lower purchase prices, more margin on
finished products due to lower material cost and saving in purchase expenses.
This method suffers from some limitations: losses in case of wrong judgment,
fear of obsolescence, higher storing expenses due to more purchases.

3. Speculative Purchasing:
Speculative purchasing refers to purchases at lower prices with a view to sell
them at higher prices in future. The attention in this method is to earn profits
out of price rises later on. The purchases are not made as per the production
needs of the plant rather these are far in excess of such requirements. A cloth
mill may purchase cotton in the market when prices are low with the attention
of earning profits out of its sales when prices go up.

Speculative purchasing should not be confused with market purchasing. The

former is done to earn profits out of future price rises where as the latter is
concerned with purchasing for own needs when favourable market situations
exist. Though speculative purchasing may result in profits but there are
chances of prices going down in future, fear of obsolescence and incurring
higher storage costs.

4. Purchasing for Specific Future Period:

This method is used for the purchase of those goods which are regularly
required. These goods are needed in small quantity and chances of price
fluctuations are negligible. The needs for specific period are assessed and
purchases made accordingly. The requirements for such purchases may be
assessed on the basis of past experience, period for which supplies are
needed, carrying cost of inventory etc.
Q-SYSTEM VS P-SYSTEM
FIXED ORDER INTERVAL SYSTEM OR P-SYSTEM
· Inventory position is monitored at discrete point in time
· Once an order is placed at time t, another order can not be placed until (t + T), and the second
order will not be filled until the lead time period has elapsed, at (t + T + L)
· Thus safety stock protection is needed for the lead-time L plus the order interval T
· In the fixed order size system, safety stock is needed only for the lead-time period,
because the inventory position is monitored with each transaction
· In the fixed order size system, a higher than normal demand causes a shorter time
between orders whereas in the fixed order interval system, the result would be a larger
order size
· Predetermined inventory level (E)
E = S + RT + LR
Where S is the safety stock considering demand variation during (T + L)
period and (RT + LR) is the average demand during (T + L) period · The order interval (T) 2
0==
HR

FIXED ORDER QUANTITY SYSTEM OR Q-SYSTEM

Safety stock is needed to protect against a stockout after the reorder point is reached
and prior to receipt of an order
· This period is usually called lead-time
The reorder point B is composed of the mean lead-time demand plus safety stock
· Average inventory level on hand just before the receipt of a replenishment order is the
safety stock.
Over many cycles, the inventory level will sometimes be more than the safety
stock and sometimes less, but it should average to the safety stock
· Larger the order quantity, fewer the annual orders, which means the fewer
opportunities for stockout to occur
· Safety stocks are dependent on stockout cost or service level, holding cost, demand
variation and lead-time variation
· Working stock quantity is determined before considering safety stock
· In the order quantity formulations, it is assumed that the order quantity can be
determined by an economic balance of the relevant cost, and that it is independent of the reorder
point EOI in years