On the economic tender quantity

Abstract

De Boer, van Dijkhuizen and Telgen (BDT) proposed the economic tender quantity (ETQ) model for determining how many suppliers should be invited to tender for the provision of certain types of product or service. They presented two general conclusions concerning the relationship between the optimal number of suppliers and the uncertainty in the bid price. We show, through counter-examples, that the BDT conclusions do not hold in general for all possible distributions of bid price. However, their first, and principal, conclusion does hold in those cases in which any change in the distribution of the bid price is equivalent to a positive linear transformation of the bid price. In addition, if this condition holds and an optimal policy is followed, we show that the ETQ value is an increasing function, and the expected total cost of tendering is a decreasing function, of the variance of the bid price. The degree to which the BDT conclusions can be said to be counter-intuitive for management decision-making, and the implications of the research presented in this paper, are also discussed.

Keywords:

• bidding
• economic tender quantity
• order statistic
• purchasing

Acknowledgements

I am grateful to the referees for their helpful and constructive comments, which included the correction of an error in an earlier version of Equation (6).