- To provide maximum supply service, consistent with maximum efficiency and optimum investment.
- To provide cushion between forecasted and actual demand for a material.
Economic order of quantity
EOQ=average monthly consumption X lead time (in months) + Buffer Stock – Stock on hand.
|Economic order of Quantity (EOQ)|
|Purchasing Cost||Carrying Cost|
- Re-order level: stock level at which fresh order is placed.
- Average consumption per day X lead time + buffer stock.
- Lead time: Duration time between placing an order & receipt of material
- Ideal – 2 to 6 weeks.
(ABC=Always Better Control)
This is based on cost criteria.
It helps to exercise selective control when confronted with large number of items it rationalizes the number of orders, number of items & reduce the inventory.
About 10% of materials consumer 70% of resources
About 20% of materials consumer 20% of resources
About 70% of materials consumer 10% of resources
Small in number, but consume large amount of resources must have:
- Tight control
- Rigid estimate of requirements
- Strict & closer watch
- Low safety stocks
- Managed by top management
Larger in number, but consume lesser amount of resources must have:
- Ordinary control measures
- Purchase based on usage estimates
- High safety stocks
ABC analysis does not stress on items those are less costly but may be vital.
Intermediate must have:
- Moderate control
- Purchase based on rigid requirements
- Reasonably strict watch & control
- Moderate safety stocks
- Managed by middle level management
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