Period order quantity is a lot-sizing technique under which the lot size is equal to 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, as opposed to a fixed period quantity that uses a standard number of periods.
Calculation of Period Order Quantity
When an order is placed it covers the requirements of 3 weeks.
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 a right lot-sizing technique is very important because it affects inventory levels, capacity requirements, and ordering costs.
Disadvantages of period order quantity
- If there is an unexpected variation of demand for an item at the end of the usage period, there will be a chance of increasing 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 very important term in period order quantity. Let us explore EOQ.
What is Economic Order Quantity?
Economic order quantity is the absolute order quantity that an organization should buy to meet its demand while reducing several inventory costs like holding costs, shortage costs, and order costs. It is one of the techniques used in inventory management.
EOQ formula is effective when the demand, holding, and receiving costs of the company stay constant over time.
Formula for 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
- Allows company to manage its inventory efficiently
- Helps to reduce inventory costs by finding out the exact order quantity in a certain time period
- Helps to avoid stock-outs by determining reorder point
- Calculation of EOQ allows the company to make good decision when it comes to ordering and managing inventories that increases 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 assumes that the ordering cost for items and holding cost per item remain constant for a whole year. But it is not controllable because packing charges, transportation charges may vary depending on the market situations and also rental may vary for holding items.
- This concept assumes that the inventory will be refilled as soon as it moves for production. But in reality, it does not happen. It takes time to refill the order. Also, delivery dates vary due to seasonal-related issues.
- Hence there will be a chance of late product supply and sometimes overstock.
Get more definitions about Period order quantity and other ERP related terms here.