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Ordering Cost is the cost associated with ordering a new batch of materials. It includes the following: Purchase Order Cost Labor cost Cost associated with payment to supplier Inspection of goods received Supplier invoice preparation cost The Ordering costs that a business incurs increases with the number of orders placed. Ordering costs vary inversely with carrying costs. It means that the more orders a business places with its suppliers, the higher will be the ordering costs. However, more orders mean smaller average inventory levels and hence lower carrying costs. Example : Company XYZ is involved in special metal bar distribution to households and businesses through its network of pipelines. XYZ has only a few suppliers who produce these customized bars. The company advertised in 3 national and 2 international newspapers before placing a purchase order. This will cost $300,000 per order. The suppliers charge an amount of $1 million regardless of the size of order. T...

Holding Costs are the costs associated with maintaining inventory material throughout the year. It includes the following: Warehouse costs  Security Insurance Inventory protection Obsolete Inventory write-off Personnel Depreciation Example: A company XYZ manufactures plastic furniture that has to be stored in a warehouse and then shipped to retailers. XYZ will either lease or purchase warehouse space, and pay for utilities, insurance and security for the location. The company will also pay the labor to transport inventory into the warehouse, and then load the sold merchandise onto trucks for shipping. The firm also has some risk that the furniture may be damaged as it is moved in and out of the warehouse. All these cost comes under holding cost. (Part of Education Series: Operations Management) Also See:   Throughput Time Lean Six Sigma Logistics in Supply Chain Management Supply Chain Ordering Cost Economic Order Quantity Limitations of Economic Order Quant...

 There are a number of assumptions associated with Economic Order Quantity (EOQ) which makes them the limitations of EOQ. They are: The Total Ordering Cost has to be constant throughout the period. The Quantity is ordered in a single batch. There is no provision of any sort of discount. The ordered quantity is assumed to be known with exact certainty. Inventory Cost remains constant throughout the period. Ordered Quantity is received on time and there is no lead time. (Part of Education Series: Operations Management) Also See:   Throughput Time Lean Six Sigma Logistics in Supply Chain Management Supply Chain Ordering Cost Economic Order Quantity Holding Cost  

ECONOMIC ORDER QUANTITY Economic Order Quantity (EOQ) is the optimal order quantity that minimizes the ordering cost and holding cost for a company. It is used to to keep check on the inventory levels. It can be calculated as: EOQ = √(2*S*D/H) where, S = Setup costs (per order, generally includes shipping and handling) D = Demand rate (quantity sold per year) H = Holding costs (per year, per unit (Part of Education Series: Operations Management) Also See:   Throughput Time Lean Six Sigma Supply Chain Ordering Cost Holding Cost Logistics in Supply Chain Management Limitations of Economic Order Quantity