(e) TYPES OF MYC: NON-ECONOMIC ORDER QUANTITY (EOQ) AND EOQ

(1) There are two types of MYC: Non-EOQ and EOQ. (In much of the Air Force literature on multi-year since 1980, these forms of MYC have been termed "classic" and "expanded," respectively. Throughout this guide, the more descriptive terms "non-EOQ" and "EOQ" are used.) The basic difference between the two types is that EOQ MYC involves the use of EOQ purchasing effort by the contractor for the purpose of obtaining lower prices (for typically recurring costs); non-EOQ MYC does not involve such costs to lower prices.

(i) EOQ is a form of procurement that should be funded with advance procurement dollars (generally production funds earmarked for advance procurement). EOQ procurement is not the same as long-lead time advance procurement as detailed in Chapter 11, Paragraph A.1. (iii). Although both should be funded with advance procurement dollars, EOQ procurement is undertaken for the purpose of achieving cost savings, whereas long-lead time advance procurement is pursued to obtain materials for meeting a planned production schedule.

(2) Non-EOQ MYC. Using non-EOQ MYC, the Air Force could recommend award of a multi-year contract for the entire fleet of 100 flying saucers (extending the example from Figure 2). The Air Force would request funds in FY 1 for 20 flying saucers plus authority to purchase the 80 out-year units. The remaining funds to complete production of the 80 additional units would be requested by the Air Force in FY 2 through FY 5. Congress would not be bound to appropriate the funds for FY 2, FY 3, FY 4, or FY 5, but if it did not, the Air Force would have to pay a cancellation charge to the contractor. (The maximum cancellation charge for each year of the contract, called the "cancellation ceiling," is negotiated into the multi-year contract before award. It protects the contractor, since the contractor's sunk (nonrecurring) costs, amortized over the entire multi-year quantity, cannot be recovered as part of the price of out-year items if the contract is canceled and the out-year items are not purchased.)

(i) The advantage of the non-EOQ multi-year approach is that it can acquire the 100 flying saucers at a lower cost because it avoids annual start-up costs and provides a longer planning horizon for setting up production equipment and processes. It also enhances the stability of the program.

(3) EOQ MYC. Using EOQ MYC, the Air Force would recommend award of a multi-year contract for the entire fleet of 100 flying saucers. It would request funds in FY 1 for 20 saucers, authority to purchase the 80 out-year saucers, and advance procurement funds to initiate EOQ purchases and effort to benefit the out-year units. The remaining funds to complete production of the 80 out-year units would be requested in FY 2 through FY 5. Congressional prerogatives would be the same as in the non-EOQ multi-year situation. However, the cancellation ceiling would be higher due to the up-front investment being made in materials and labor through the EOQ purchases and commitments.

(i) The advantage of the EOQ multi-year approach is that greater economies of scale can be achieved by combining the production requirements of all 100 flying saucers. If economically feasible, the contractor can fabricate and assemble 100 sets of parts in one continuous run. The contractor can place orders for quantities of 100 on material purchases from subcontractors instead of separate orders for 20 each year. This purchasing and fabrication arrangement normally results in significant quantity price breaks that are not possible under non-EOQ MYC.