Optimum size of the order

Optimum size of the order
See also
Two-tier inventory control Inventory management techniques Inventory on hand Safety stock Production function Uniformity of production Costs of production Contract logistics Scrap rate

Optimal order size is used in the management of the company's stock levels. The main function of the stock in the company is to ensure the continuity of the business.

Inadequate stocks of materials and products can interrupt the continuity of the process of production and sales, and thereby result in loss of business. However, too much inventory causes unnecessary costs of storage.

Stocks decrease sensitivity to disruption in the process of supply and increase the company's flexibility in relation to the clients needs: execution of orders in the right quantities and at the right time. Under conditions of high inflation they allow to obtain the benefits associated with an increase in supply prices. Inventory management take into account the benefits and costs of holding stocks.

To determine the optimal size of a single order manager must take into account two factors:

• nature and volume of the demand for individual materials used in the production process (decided by the level of production and the level of consumption of raw materials and consumables for producing units of the product). Rate of production can be specified using the construction and technology documentation.
• purchase costs (including the costs associated with preparing contract, the insurance costs of transport, transport costs, the costs of entering into stock, etc.), and the cost of storage of these materials (e.g. the cost of the lease and rental of storage area, losses resulting from deterioration or loss of stored materials).

Fig.1. Optimum size of the order - example

Formula

Optimal order quantity is given by:

$Q={\sqrt {\frac {2SO}{C}}}$

where:

• Q - optimal quantity (in natural units) of the item, or range of items, in each delivery protecting performance of the production processes,
• S - material consumption of given material of group of materials (associated with technological standard specification of process) expressed in natural units in a given period for a given volume of production,
• O - unit cost of materials ordered (for example,. price)
• C - fixed costs associated with the storage of materials ordered for the period in question.

See also:

• Safety stock

Examples of Optimum size of the order

• The optimal order size depends on the company's inventory policies and the size of the item. In general, businesses will order enough items to cover the forecast demand for a period of time. For instance, a business with a six-month supply of a product may order a larger size order than a business with a three-month supply.
• An optimal order size also depends on the cost of each order. For instance, a company may find that ordering a larger quantity of an item reduces the cost per item due to discounts or reduced shipping costs. In this case, the company will order the largest quantity possible to take advantage of the reduced costs.
• In some cases, the optimal order size may depend on the lead time of the item. For example, if the lead time of an item is long, the company may order a larger quantity to reduce the risk of running out of stock before the item is restocked.
• For items with a high demand rate, the optimal order size should be increased to prevent stockouts. A company may also consider placing orders for items with a high demand rate more frequently than for items with a lower demand rate. This ensures that the company is always well stocked for its customers.
• For perishable items, the optimal order size should be based on how quickly the items need to be used. In this case, the company should order enough items to meet the demand for a certain period of time, but not so much that the items expire before they can be used.

Advantages of Optimum size of the order

Optimum order size is an important factor in managing effective supply chain operations and inventory levels. It can help companies reduce costs, increase efficiency and ensure that they have enough stock without overstocking. Following are the advantages of having an optimum order size:

• Improved efficiency: Optimal order size reduces the number of orders and decreases the time needed to place orders. This improves the efficiency of the supply chain and makes it easier to track the flow of goods and services.
• Reduced costs: Optimal order size reduces the costs associated with ordering and shipping products. It also helps to reduce the costs associated with packing and shipping materials.
• Reduced inventory levels: Optimal order size helps to keep the inventory levels at a minimum. This reduces the risk of overstocking, which can lead to higher costs and lower profits.
• Improved customer service: Optimal order size helps companies to deliver products in a timely manner. This helps to ensure that customers get their orders on time and provides them with better customer service.
• Increased profits: Optimal order size helps to reduce costs and improve efficiency, which leads to increased profits for the company.

Limitations of Optimum size of the order

Optimal order size is an important factor in the management of the companys stock levels. However, there are certain limitations to using this strategy:

• Firstly, the optimal order size can be difficult to calculate accurately, as it depends on numerous factors such as the lead time and the cost of carrying inventory.
• Secondly, the optimal order size is based on assumptions about the demand for the product and the availability of the product. If these assumptions are inaccurate, the optimal order size may not be optimal at all.
• Thirdly, the optimal order size is based on the assumption that the ordering cost is fixed. If the ordering cost is not fixed, the optimal order size may not be accurate.
• Fourthly, the optimal order size does not take into account the possibility of stockouts, which can have a negative impact on the company's reputation and sales.
• Finally, the optimal order size may not be optimal over the long-term, as the demand for the product may change over time.

Other approaches related to Optimum size of the order

Optimal order size is used in the management of the company's stock levels to ensure that there is enough inventory on hand to meet customer demand. Other approaches related to Optimal size of order include:

• Just in Time (JIT) inventory: JIT inventory is a system of inventory management that focuses on ordering and receiving goods only as they are needed, thus avoiding having too much inventory on hand.
• Economic Order Quantity (EOQ): EOQ is a formula used to determine the most cost-effective order size for a given product. It takes into consideration both the costs related to ordering and to holding inventory.
• Reorder Point (ROP): ROP is an inventory management technique that determines when new stock needs to be ordered to prevent running out of inventory.
• ABC Analysis: ABC Analysis is a method for evaluating the relative importance of different items in a company's inventory, based on factors such as frequency of use and cost.

In summary, optimal order size is a key element of effective inventory management, and there are several other approaches related to it, such as JIT inventory, EOQ, ROP and ABC Analysis. These approaches all aim to ensure that the company has the right amount of inventory on hand to meet customer demand.

References

• Simmen, D., Shekita, E., & Malkemus, T. (1996, June). Fundamental techniques for order optimization. In ACM SIGMOD Record (Vol. 25, No. 2, p. 57-67). ACM.