Economic Order Quantity, Safety Stock & Lead Time

By Abdulla Israr & Simran Rani

EOQ, SAFETY STOCK & LEAD TIME

Description also available in video format (attached below), for better experience use your desktop.

Economic Order Quantity

·       It refers to the optimal quantity of orders that minimizes total variable costs required to order and hold inventory

·       EOQ in an organization

o   How much inventory should we order each month?

o   The EOQ tool can be used to modify the amount of inventory that we should order each month

o   Simply EOQ is useful in determining optimal order quantity

 

EOQ Formula

·       = √2UP/S

·       U = Annual usage quantity

·       P = Placement Cost of a Single order

·       S = Storage Cost/unit/annum

 

Example

Q. Calculate the EOQ by using above mentioned formula

·       Abdullah used to drink 1600 Coke Canes every year

·       The cost of a single order of Cane is Rs 100

·       The storage  cost of one Cane/annum is Rs 8

o   U= 1600 pcs

o   P= Rs 100

o   S= Rs 8

·       After putting the above values in the EOQ formula we get

·       EOQ = √2*1600*100/8

·       EOQ = 200 pcs

·       Hence, it can be stated that the order of 200pcs of Coke Canes will be economically benefitted for Abdullah. 

Complete Derivation of EOQ equation


Safety Stock

·       It refers to the level of extra stock that is kept to mitigate the risk of stock out due to any type of uncertainty in the stock supply

·       It act as a buffer stock in a condition of greater sales then the planned and the supplier is unable to deliver the supply at the expected time

·       It is extremely important for the smaller companies with a smaller financial cushion

 

Reasons to keep Safety Stock

·       To satisfy the customer demand

o   At right cost

o   At right time

o   In right Quantity

·       Prevents Stock out

·       Cover poor scheduling by a supplier

Video Description



Lead Time

·       It is the time period between the initiation and execution of a process

·       It express the average duration of days between placing an order and receiving of the order

·       It is mainly of two types

o   Internal lead time

§  Time taken to

·       Review the demand

·       Quotations and

·       Final approval from the competent authority

o   External lead time

§  Time taken by the supplier to supply the material after receiving the order from a company 

Video Description

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