Purchasing and Financing 2024

7. ORDERING SYSTEMS
After it was determined what to purchase, we need to determine the quantities and the
number of orders to be placed throughout the year.
Constant Inventory Consumption
Students can calculate the Order Level for Constant Inventory Consumption.
If the depletion of inventory takes place at a constant rate, an average inventory
consumption rate can be determined. The inventory level at which we must place an
order, can then be calculated as follows.
Order Level = Safety Stock + (Average Inventory Consumption x Lead time), where
o The Maximum Inventory Size is determined by the size of the warehouse and the
optimal ordering size.
o The Safety Stock is determined by experience, lead time, average inventory
consumption and costs.
o The Average Inventory Consumption is determined by either consumer behaviour
in trade business or average production level in manufacturing business.
o The Lead Time is determined by the suppliers’ facilities.
EXAMPLE:
If the maximum inventory is 120 units, the safety stock 20 units, the average consumption
5 units per day and the lead time 8 days then.
Order Level = 20 + (5*8) = 60 (Meaning that we will place a order when the stock level
reaches 60)
Graphically it could be presented as follows:
120
100
80
60
40
20
0
4 8 12 16 20 24 28 32 36 40
EXAMPLE:
13