It is important to find the answer of two questions to manage inventory. (1) How much to order? and (2) When to order?
But if you go for non-instantaneous receipt for your restaurant, where raw materials are essential for your daily demand, which may not be produced by you. You need to purchase the raw materials every day. Then how could you maintain supply chain and inventory? Describe the logical factor with a very short manner.
Answers
Answer:
Demand rate is the amount of inventory a company sells each year.
Holding costs refer to all the costs associated with holding additional inventory on hand. Those costs include warehousing and logistical costs, insurance costs, material handling costs, inventory write-offs, and depreciation.
Ordering a large amount of inventory increases a company's holding costs while ordering smaller amounts of inventory more frequently increases a company's setup costs. The economic order quantity model finds the quantity that minimizes both types of costs.
Example of How EOQ Works
EOQ considers the timing of reordering, the cost incurred to place an order, and costs to store merchandise. If a company is constantly placing small orders to maintain a specific inventory level, the ordering costs are higher, along with the need for additional storage space.
For example, consider a retail clothing shop that carries a line of men’s shirts. The shop sells 1,000 shirts each year. It costs the company $5 per year to hold a single shirt in inventory, and the fixed cost to place an order is $2.
The EOQ formula is the square root of (2 x 1,000 shirts x $2 order cost) / ($5 holding cost) or 28.3 with rounding. The ideal order size to minimize costs and meet customer demand is slightly more than 28 shirts. A more complex portion of the EOQ formula provides the reorder point.
Drawbacks of Using EOQ
The EOQ formula inputs make an assumption that consumer demand is constant. The calculation also assumes that both ordering and holding costs remain constant. These assumptions make it difficult or impossible to account for unpredictable business events, such as changing consumer demand, seasonal changes in inventory costs, lost sales revenue due to inventory shortages, or purchase discounts a company might get for buying inventory in larger quantities.
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