Purchasing and Financing 2024

There are three ways to find the optimal order size;
o Drawing a graph
o Using a table
o Using a formula
In this course we will only look at the last two methods.
EXAMPLE:
Annual consumption = 1800 units
Cost Price
= R100
Inventory costs = R30 per unit
Safety stock = 10 units
Daily consumption = 5 units
Order costs = R20
Lead time
= 10 days.
Using the table method
Order
quantity
Number
of orders
Cost per
order
Total
order
costs
Average
inventory
level
Average
inventory
costs
Total
costs
1800 1 R20 R 20 910 R27300 R27320
225 8 R160 123 R 3690 R 3850
100 18 R360 60 R 1800 R 2160
60 30 R600 40 R 1200 R 1800
50 36 R720 35 R 1050 R 1770
40 45 R900 30 R 900 R 1800
Thus, the total cost for acquiring and holding stock is minimised at R1 770-00 when 36
orders are placed per year and 50 units is ordered at a time.
Is this however practical in this case?
o 36 Orders per year means three orders per month or an order every ten days.
o Your re-order level will be at 60 units as 10 + (5x10) = 60
o The lead time is also 10 days.
It is clear from the above that you will have to place one order as you take delivery of the
previous order. It will also mean that some deliveries will have to take place over
weekends as your stock will run out if you wait two days.
In this case it seems as if paying a little more for additional peace of mind, might be well
worth it and you might settle for two orders per month which will work out in the region
of R2000-00 per year.
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