• 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

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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 Analysis

(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

 

“A” Item

 

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

 

“C” Item

 

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.

 

“B” Item

 

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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