Purchasing and Inventory Management
I hope that you have enjoyed the article "Purchasing & Inventory Management Hook Up!" As promised in that article, here's the EOQ formula:
Where:EOQ = Economic Order Quantity
ACPO = Acquisition Costs Per Order
AUU = Annual Usage in Units
UC = Unit Cost
CCP = Carrying Cost Percentage
So, if you know that it costs you $150 in overhead per order, you use 5,000 widgets a year, you pay $200 per widget, and your Finance Department tells you that annual carrying costs are equal to 20% of the value of the goods in stock, you should order...
Drumroll please...
194 widgets at a time.
I don't often place a link to this blog in my purchasing articles, so if you are reading this blog for the first time, please browse the posts below - I think you'll like them. I post educational and purchasing-related blurbs here about three times per week, so you may want to plan regular visits to this blog. Just remember to go to http://www.NextLevelPurchasing.com/blog, bookmark this page, or, if you're a techie, add this blog to your RSS feed reader using the Site Feed link to the right.
Hope to "see" you back here soon!
To Your Career,
Charles Dominick, SPSM
President
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM Certification Online At
http://www.NextLevelPurchasing.com
posted by Charles Dominick, SPSM @ 3:18 PM
27 comments
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27 Comments:
I found your equation very interesting and as a lean thinker I'm trying to see if I can validate it. I'm a little confused about the definition of ACPO = Acquisition Costs Per Order. Can you give me a better idea?
Acquisition costs per order include all costs associated with the life span of the order: the cost of the buyer's time, the cost of the pre-printed form, the cost of sending the order (by fax or mail), an amortized cost of the purchase order system including costs to implement that system, the cost to receive orders, pay invoices, etc.
I thought that was what you meant. In that case, is there an industry standard for this cost? You can imagine the arguments over what these costs are.
Those arguments are exactly why there isn't an industry standard. But these two links cite separate, independent studies that come up with similar numbers:
http://econ.gsia.cmu.edu/ecommerce/economist_1.htm
http://www.infor.com/infor/Industries_Distribution_eComm_940.htm
Those links seem to be too long. Try these:
http://tinyurl.com/wq6y3
http://tinyurl.com/y7a6gs
I have just stumbled upon this blogsite.
I have been challenged by a former school classmate to help look up and advise on the state of the Warehouse of his Engineering Company.
I have spent most of my career in Supply Chain handling Procurement, though I have also undertaken an oversight responsibility of a Warehouse. Can I please request that you volunteer ideas and tips on highlights for my audit?
Here's thanking you in advance for your anticipated professional camaraderie and espirit de corps.
Hi my name is Muhammad from Singapore. I would like to thank u Sir as u really save me. I did not have an idea of the equation for EOQ until i came to your website. I am a final year student with University of Northumbria and i am passing my assignment tommorow. Thanks to u i will have more confidence in submitting it.
You're welcome, Muhammad. Thank you for visiting the blog. Good luck with your assignment.
Hi, I am HM from Malaysia. I've been a purchaser for almost 5 yrs and never thought everything has a formula for it!Thanks Charles! Can I ask what is 'Average Lead Time'?
Lead time is the amount of time between the time that an order is placed and the time that the order is delivered. So average lead time is the mean or average amount of time that you observe over a series of orders for that product or service.
Hi,
Thanks for your valuable information. Can u give me some details of Warehouse manangement, like basic requirement for a new warehouse setup ( Standard rules like fire extinuguisher required for 100 sqft etc) if u able to
Thanks for stopping by the blog. A great resource for warehouse management is our podcast entitled "Should Purchasing Manage The Warehouse?" Check it out at our page for the Purchasing & Supply Management Podcast Series.
I hope that this helps.
Hi, I have found some very useful suggestions and information here. However there is one equation that I cannot figure out. The equation is for maximum SSL under the article "How much inventory is too much?"
Maximum SSL = MHDU x (MHLT - ALT)
For me, it does not make sense. I thought that a more reasonable formula would be SSL = MHDU x MHLT.
Pls enlighten me.
Thanks
Ron
Thanks for your comment, Ron.
SSL is a quantity of goods.
To get a quantity on one side of the equation, you must have quantities on the other side of the equation.
While MDHU is a quantity of goods, MHLT is a number of days not a quantity of goods. Multiplying number of days by usage per day (MHDU) gives you a quantity of goods.
Example: 3 days x 4 units per day equals 12 units over the period of days.
I suggest that you plug numbers into the variables and do the calculation a few times to get a good grasp on how the formula works.
Thanks again!
WHAT DA HELL IS ALL THAT??????????
I CAN WRITE A BETTER EQUATION THAN THAT,,,,,
ANKUT FELLOW CHARLES!!!!!!!!!!!
I didn't invent the EOQ formula...it has been around a lot longer than I've been in purchasing.
If your only variables are acquisition costs and holding costs, it is a very valid formula. In my current research, though, I am finding that it doesn't work all that well when there are other constraints. I hope to invent an alternate formula by the end of the year. Then you can feel free to assail me for a formula you don't like!
thank you very much sir, i got lots of useful information from your web and the formula which you have given for inventory and managment is really very useful and use that in our org , and i do apreciate your hard work and facilitating us .
Thanks
Fara sadat from Afghanistan
You're welcome, Fara Sadat! Thanks for visiting.
I am fresh graduate and currently working to a newly established korean construction company in the Philippines. We don't still have an accounting software to cater the needs of our expanding business because we still in the experimental stage. We spend over Php 500,000 expenses for a month about half came from the operating expense of the office alone. we also don't know how to make an effective inventory management because all we have hired were fresh graduates.
Can you give me any suggestions on how to solve these problems?
Thank you!
Hi Mary Jean,
Electronic accounting is quite essential. We use Quickbooks and it is quite affordable. Microsoft Money, while really geared for home use, can work for a small business if you can't afford Quickbooks. And Excel can even work if you have someone on staff who can set it up properly.
To learn the basics about inventory management, I recommend enrolling in our online class "Mastering Purchasing Fundamentals" (http://www.NextLevelPurchasing.com/fundamentals-purchasing.html) and checking out our list of articles on the topic at http://del.icio.us/supply_chain_articles/inventory
Good luck!
how does the formula changes, when there is a back - order cost involved.
thanks,
Ankit
DEAR
i didn't get the real meanning of EQO and how can i useful from this number, is it like reorder point?
please inform me
you really made me interesting
regardS
Thanks for stopping by, Ankit.
I'd be happy to answer your question. First, can you please clarify what a "backorder cost" means to you?
Thanks for stopping by, Raed.
EOQ is not a reorder point. It represents the quantity you should order when your inventory level reaches the reorder point.
I hope this helps...thanks again!
Hello there, I was wondering I am struggling with my team on what would be the best way code components in a raw material stores?
Hi,with big corporations having customized softwares to manage their stock..could you kindly give me some professional advice on a software I can use to manage my stock outside my office domains when I have to work from home and don't have access to the company's software? I have tried microsoft excel but need something more sofisticated.
Thanks.
Tog
Tog,
The answer to your question depends on a number of things like what inventory system your company uses, what transactions you will need to execute, and, if you use an offline system, how it will be integrated.
I recommend checking with your IT staff to explore this further. Perhaps there is a way to access your inventory system remotely through a VPN.
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