From the course: Supply Chain and Operations Management Tips

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Optimize your lot sizes

Optimize your lot sizes

From the course: Supply Chain and Operations Management Tips

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Optimize your lot sizes

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- When you work in a supply chain, you have to balance competing priorities. A good example is figuring out how much material you should order each time you need to replenish your inventory. We call this order quantity the lot size. Let's look at an equation called the economic order quantity that can help you choose a lot size by managing the trade off between the inventory holdings costs and replenishment costs. When we talk about the cost of holding inventory, there is several things we should include. For example, many businesses borrow money from a bank to finance their inventory. Then there's money wasted when inventory is lost, damaged or stolen. For replenishment costs, we need to include the time it takes for someone to issue a purchase order, and the cost for transportation and handling. Let's use an inventory chart to visualize the relationship between lot sizes, order frequency, and inventory levels. We start by receiving a shipment from our supplier. At this point our…

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