Ordering cost

Ordering cost
Primary topic
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Methods and techniques

Ordering cost is the type of cost that represents the expenses which are incurred for the supplier in the aim to make and adapt an order. Ordering costs are taken into account when determining the amount of an economic order for a warehouse element. Along with the amount of orders ordered the total ordering costs also are going to rise. This total cost can be toned down when we put the huge colevtive orders for long intervals, the next step is to put out an order for the colective orders.

The unit is able to accept the high total ordering cost unless the effect is an increase concerns the total cost of transporting stocks. It happens if the company places orders such as raw materials and goods only when required. In order to place more orders in a situation where there are not so many stocks within easy reach. To correctly equalize the volume of orders and thus minimalize overall costs the company is obligated to oversee the ordering costs and costs of running a warehouse incurred by the company.

"Examples of ordering costs are (S. Bragg, 2018):

  • Cost to prepare a purchase requisition
  • Cost to prepare a purchase order
  • Cost of the labor required to inspect goods when they are received
  • Cost to putaway goods once they have been received
  • Cost to process the supplier invoice related to an order
  • Cost to prepare and issue a payment to the supplier"

Economic order quantity(EOQ) inventory model[edit]

The EOQ model made his debute st the beginning of the 21st century and normally accepted in many trades so far. Many earlier deterministic inventory models are being prepared foreseeing demand being constant or depending on the inventory in the case of inferior items (M.Pattnaik 2013, p.58). "Economic order quantity (EOQ) is a decision tool used in cost accounting. It’s a formula that allows you to calculate the ideal quantity of inventory to order for a given product."(K. Boyd 2018). The aim of the calculations is to reduce orders and costs of carrying.

\(Q=\sqrt{\frac{2DS}{H}}\)

where:

  • Q represents EOQ
  • D - demand
  • S - ordering cost
  • H - cost of carrying (per unit)

Moreover the ordering costs are presented per order.

References[edit]

Author: Karolina Korbut