How to calculate the "right amount" of inventory to the stock?
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The formula where equilibrium stock to be orderer is denoted as (2AO)/C
Where A is the annual requirement,
O is the ordering cost
C is the Cost of maintaining inventory p.u. p.a.
Then there is Safety margin. This the stock that has to be maintained regardless of the demand.
Then there is stock to be maintained for lead time. This is the stock we utilise from the time the order is placed to the time it is delivered.
Reorder level is the level at which new batch of stock is to be ordered. This is Safety stock+ lead time stock
Typically the right amount of stock is between the Safety stock and safety stock + Equilibrium order quantity
Where A is the annual requirement,
O is the ordering cost
C is the Cost of maintaining inventory p.u. p.a.
Then there is Safety margin. This the stock that has to be maintained regardless of the demand.
Then there is stock to be maintained for lead time. This is the stock we utilise from the time the order is placed to the time it is delivered.
Reorder level is the level at which new batch of stock is to be ordered. This is Safety stock+ lead time stock
Typically the right amount of stock is between the Safety stock and safety stock + Equilibrium order quantity
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