Supply Chains: A Manager's Guide

Determining Order Quantity

The preceding section answered the question of when to replenish inventory, and this answer provides the basis for tackling the second question: What quantity should be ordered with each replenishment? That quantity hinges on the relative costs of placing an order and holding inventory. The order cost is the basic cost of placing and receiving an order, independent of the quantities involved. The holding (or carrying) cost is the cost of stockpiling inventory in advance of consuming it. It includes the costs of storage and handling, the opportunity cost of the capital tied up in the inventory, the loss of value due to obsolescence or spoilage, and the cost of insuring against risks such as fire and theft.

These two ...