VA Should Use Economic Order Quantity Principles in the Wholesale Supply System

PLRD-82-108: Published: Aug 18, 1982. Publicly Released: Aug 18, 1982.

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GAO reviewed the economic order quantity (EOQ) principles to determine the benefits of using these principles to compute order quantities for wholesale supply items at the Veterans Administration (VA). The EOQ principle is a mathematical method for determining the purchase quantity that will result in the lowest total cost to order and carry inventory.

GAO believes that, by using EOQ principles, the VA Marketing Center can save over $5 million annually in total costs to order and carry inventory, reduce the inventory investment by almost $35 million, and lessen its need for warehouse space. GAO found that the Marketing Center does not use variations in demand or leadtime to set safety and procurement leadtime stock levels. Rather, it uses fixed periods.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator of Veterans Affairs should direct the Assistant Deputy Administrator for Procurement and Supply to establish inventory management policies which relate safety stock levels to demand variances for individual items.

    Agency Affected: Veterans Administration

  2. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator of Veterans Affairs should direct the Assistant Deputy Administrator for Procurement and Supply to: (1) establish a continuing process to ensure that the costs to order and carry stocks are reasonable and current; and (2) provide the ability to determine that the lowest total overall costs are being incurred when replenishing depot stocks.

    Agency Affected: Veterans Administration

  3. Status: Closed - Not Implemented

    Comments: VA stated that the primary purpose of the Hines project is not to expand the storage facilities but rather to provide necessary dock space to accommodate incoming and outgoing shipments and to correct recognized fire and safety and administrative space deficiencies.

    Recommendation: The Administrator of Veterans Affairs should direct the Assistant Deputy Administrator for Procurement and Supply to assess the impact of EOQ on the need to expand the storage facilities at the Hines supply depot.

    Agency Affected: Veterans Administration

  4. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator of Veterans Affairs should direct the Assistant Deputy Administrator for Procurement and Supply to reduce existing inventories compatible with EOQ principles.

    Agency Affected: Veterans Administration

  5. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator of Veterans Affairs should direct the Assistant Deputy Administrator for Procurement and Supply to: (1) adopt EOQ principles in computing wholesale inventory order quantities at the Marketing Center; and (2) modify the principles, where necessary, to take advantage of quantity and transportation discounts.

    Agency Affected: Veterans Administration

  6. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator of Veterans Affairs should direct the Assistant Deputy Administrator for Procurement and Supply to establish inventory management policies which use actual leadtime data in determining procurement leadtime stock levels for individual items. In developing the data, vendors should be consulted.

    Agency Affected: Veterans Administration

 

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