The optimal order quantity = lowest inventory costs for more efficiency
Depending on the industry, the requirements for warehousing differ greatly, depending also on the degree of organization of the company and the economic as well as logistical dependencies. The automotive industry, for example, often relies on just-in-time delivery, which is intended to minimize the cost of in-house warehousing. Others, such as the spare parts warehouse in industry, focus on the widest possible range of components.
What is the optimal order quantity to be economically efficient? Information on this is provided by the optimum order quantity, which is a key figure in business administration.
Optimal order quantity: definition and explanation
The more goods and merchandise are stored in a warehouse and the longer they remain there, the more liquidity is tied up. This is sometimes lacking elsewhere, which limits the company's ability to act. Companies of all kinds are therefore keen to determine the optimum order quantity for them. This refers to a key figure that expresses which order quantity is most likely to "pay off" for the company.
What is meant by this is that the individual cost of the order is weighed against the associated inventory cost. Specifically, the optimal order quantity represents the quantity of items/goods that is associated with the lowest total cost (variable + fixed inventory and ordering costs) - in parallel with the respective service or quality level that the company wants to achieve.
Procedure for calculating the optimal order quantity:
- Formula according to Andler (basis: a constant, static demand)
- Formula according to Wagner-Within (basis: one dynamic demand)
Basic considerations for the optimal order quantity
In the context of procurement logistics, an order quantity is defined that enables the company to keep the total costs for ordering and warehousing to a minimum in relation to the desired level of service. Provided that the annual demand is known and also spread over the calendar weeks or seasonally, the optimal strategy for orders can be developed. In this case, there are always enough goods in stock and the flow of goods is planned in such a way that it is possible with the least organizational and financial effort.
However: There is a trade-off between inventory costs and procurement expenses. If too small quantities are procured in manageable periods, procurement costs increase - not least because of the individual effort and lack of discounts due to too small quantities. In addition, higher storage costs (= tied-up capital) must be considered in this context, which are incurred for large quantities within a long period of time.
So there is a problem between the theory of optimal order quantity and the practically relevant aspects that a company can influence itself. To elaborate, it is worth taking a look at the components of each cost area.
- Order costs: This refers to all costs associated with the processing of the order. From the preparation to the actual order completion to the handling of the purchase. The greater the quantity of goods purchased, the more likely it is that purchase discounts can be achieved here.
- Warehousing costs: This refers to the costs incurred for the operation of the warehouse. On the one hand, through fixed costs for premises and personnel, and on the other hand, through the capital tied up in them. In addition, costs are incurred for insurance, impairments must be taken into account, and expenses for inventories as a whole must be considered.
