The economic order quantity is the ideal size of the order that minimizes the cost of holding adequate inventory and ordering costs to a minimum. According to Riza et al. (2018), this generally occurs when the holding cost is equal to the ordering cost. Based upon this, the previously stated, the economic order of quantity is at 100 units. It is at this point that the ordering costs and holding costs equate to 50. Thus, the company will minimize costs in holding and ordering inventory
When the inventory reaches how many units, do you replace another order?
The reordering point is the minimum inventory that a firm should reach to be triggered to reorder for more stock. The importance of calculating the reordering stock is to ensure that the firm does not run out of stock at any given time as they are waiting for the stock they had reordered (Laur et al., 2014). For example, according to the data provided in the assignment, the reordering point of the firm is 400. When a firm calculates its reorder point accurately, it minimizes its chances of investing high amounts of capital on stock and ensures continuity of its operations as customers will never fail to get the product they wanted to purchase.
A firm that calculates its reordering point minimizes its costs, and it has the added advantage of having higher financial flexibility, unlike the firms which do not calculate their reordering point (Teng, 2009). Calculating the reordering point enables the business to retain its customers and maintain a good business reputation. Reordering point enables a firm to forecast the future demand of their products and their services.
How many units do you order, including the safety stock?
In this context, safety might be operationally defined as the additional stock that decreases the risk that the product will run out of stock. Here, the safety stock is essential to a firm in that it ensures that the customer`s demands are satisfied at the right waiting time, quality and cost. As Yildiz (2015) described, the safety stock also protects the firm from suffering from suppliers who adhere to the supply schedule and suppliers who have inaccurate planning. For example, from the data provided for the assignment, the unis to order, including the safety stock, are 440.
Mohd-LaiR, N., Muhiddin, F., Laudi, S. A. I. M. O. N., Mohd-Tamiri, F., & Chua, B. (2014). The spare part inventory management system (SPIMS) for the profound heritage SDN BHD: A case study on the EOQ technique. International Journal of Research in Engineering & Technology, 2(1), 7-14.
Teng, J. T. (2009). A simple method to compute economic order quantities. European Journal of Operational Research, 198(1), 351-353.
Riza, Purba, & Mukhlisin. (2018). The implementation of economic order quantity for reducing inventory cost. Research in Logistics and Production, 207-216. Retrieved from NC State University: https://scm.ncsu.edu/scm-articles/article/economic-order-quantity-eoq-model-inventory-management-models-a-tutorial
Yıldız, R. (2015). Examining the economic order quantity for certain product group in a production company (Doctoral dissertation, Master Thesis, Balıkesir University Institute of Science Industrial Engineering). DOI: 10.24425/119531