It can be tough to know how much to order when it comes to ordering products for your business. You don’t want to run out of products, but you also don’t want too much inventory that takes up space and costs money.
A lot-sizing technique called Period Order Quantity can help you navigate this challenge. This technique considers both supply and demand to determine how much of a particular product to order at regular intervals, depending on the needs and fluctuations of your business.
This blog post will disclose the definition, formula, calculation, and disadvantages of POQ. It also discusses different lot sizing techniques.
By using POQ, you can ensure that you are always ordering the right amount of products for your business, minimizing waste and maximizing efficiency. This will save you time and money in the long run and keep your customers happy.
Period order quantity is a lot-sizing technique under which the lot size equals the net requirements for a given number of periods.
It is a lot-size technique that orders to cover requirements for a variable number of periods based on order and holding costs instead of a fixed period quantity that uses a standard number of periods.
Period Order Quantity Formula and Calculation
When an order is placed, it covers the requirements of 3 weeks.
Lot sizing techniques
Period order quantity is one of the lot-sizing techniques. Other lot-sizing techniques are
- Fixed Order Quantity (FOQ)
- Economic Order Quantity (EOQ)
- Lot-For-Lot (L4L)
- Periods Of Supply (POS)
- Least Unit Cost (LUC).
- Least Total Cost (LTC)
- Part Period Balancing (PPB)
Choosing the proper lot-sizing technique is crucial because it affects inventory levels, capacity requirements, and ordering costs.
Disadvantages of period order quantity
- If there is an unexpected variation in demand for an item at the end of the usage period, there will be an increase in the risk of unavailable.
- When demand for the usage has been reduced or ended, there will be a chance of continuing supplier deliveries because of the lack of tracking records for these goods.
We know that Economic order quantity (EOQ) is a significant term in period order quantity. Let us explore EOQ.
What is Economic Order Quantity?
Economic order quantity is the absolute quantity an organization should buy to meet its demand while reducing many inventory costs like holding, shortage, and order costs. It is one of the techniques used in inventory management.
The EOQ formula is effective when the company’s demand, holding, and receiving costs stay constant.
The formula for the calculation of economic order quantity is Q = square root of [2DS] / H
Here, Q= Units of EOQ, D= Demand in units (Annual basis), S= Order cost (per purchase), H=Holding cost( per unit, per year)
Advantages of EOQ
- It helps the company to find out its optimal order quantity.
- It allows the company to manage its inventory efficiently.
- It helps reduce inventory costs by finding the exact order quantity in a specific period.
- It helps to avoid stock-outs by determining to reorder point.
- Calculating EOQ allows the company to make good decisions when ordering and managing inventories that increase overall efficiency.
Disadvantages of EOQ
- EOQ concept makes assumptions. It assumes that the demand for the item will be sustained. But in reality, it is not possible. It also takes that the ordering cost for items and holding price per item remain constant for a whole year. But it is not controllable because packing and transportation charges may vary depending on the market situation, and rental may vary for holding items.
- This concept assumes that the inventory will be refilled as soon as it moves to production. But in reality, it does not happen. It takes time to fill out the order. Also, delivery dates vary due to seasonal-related issues.
- Hence there will be a chance of late product supply and sometimes overstock.
Period order quantity is a lot-sizing technique that orders to cover requirements for a variable number of periods based on order and holding costs. This technique can help minimize waste and maximize efficiency in your business, saving you time and money in the long run.
However, it is crucial to keep in mind that this technique comes with some disadvantages, such as the potential for increased risk of unavailable items and lack of tracking records for certain goods. Overall, using POQ outweighs the drawbacks, making it a valuable technique for your business.