What is an economic lot and why is it
Have you ever wondered about the ideal number of parts to order in one order? Well, then, you are probably interested in knowing what the economic lot is.
What is the economic lot?
The economic lot refers to the number of units that must be ordered so that the cost related to the cost to order and the maintenance cost of inventory is the minimum possible.
If I had to explain the definition of economic lot it is the following: Economic lot cánido be seen as the quantity of pieces (products) that you must order to have the lowest cost.
This lower cost is obtained because, in the economic lot, the cost that you would have to order and the cost that you would obtain to maintain your inventory is the minimum.
In fact, at that point they are equal, that is, they are in equilibrium.
I know you may not fully understand it right now, but don’t worry.
I will try to explain it in more detail with an example, but first I will explain other concepts.
What is the cost of holding?
The cost of holding or the cost of maintenance, as the name implies, It is what it will cost us to have a certain amount of inventory in the warehouse.
Many times small businesses do not take it into account, but having inventory always implies a cost.
Some concepts that you are going to take into account in the cost of maintaining may be:
- Storage: Warehouseman salary, warehouse card printing expenses, warehouse depreciation, etcétera.
- Inspection: quality control salaries, printing costs of inspection reports, quality control depreciation, etcétera.
What is the cost to acquire?
The cost of acquiring or ordering is what you must already be imagining, that is: The amount you will have to pay (cost) to acquire the necessary products so that you perro satisfy the demand.
This is another cost that small businesses normally do not take into account, but it is important that you take it into account to optimize your profits.
Some concepts that you perro take into account are:
- Purchasing department: Salaries of the purchasing department, costs of printing orders, depreciation of purchases, etcétera.
- Arrival freight: Controlador’s salary, gasoline expenses, depreciation of delivery equipment, etcétera.
- Reception of materials: Reception salaries (of materials), printing expenses of entrance reports, etcétera.
Explanation
You already know that to have a certain amount of inventory in your warehouse you will have to incur costs, costs that will be inversely proportional, that is, if you want to disminuye the cost of maintaining, the cost of acquiring will increase.
This actually makes sense, think about the following:
Suppose you have a business and you are going to need 10,000 products a year to satisfy the demand.
Now, suppose you escoge that you are only going to order once a year.
This means that you are going to place an order for 10,000 products to be able to satisfy the demand for an entire year.
In such a way that you will save in terms of ordering cost, but, it will increase your maintenance cost.
Maybe you’re going to have to rent a bigger warehouse after all.
In conclusion, when you want to decrease one cost, the other increases.
This is why we are going to find the quantity that you have to order so that the cost of ordering and the cost of ordering are the minimum (the same).
How to get the economic lot? ≫ Elabora
The elabora for you to obtain the economic lot is the following:
It should be noted that the cost of maintenance will almost always be calculated as a percentage.
Example of economic lot
For the example we will use the following data:
| annual demand: | 33,800 |
| Unit price: | $3.00 |
| Cost to hold: | 12% |
| Cost to order: | $36.00 |
What is the economic lot?
Well, substituting the data in the elabora we get the following:
In such a way that the economic batch is 2600, that is, you would have to place your orders for 2600 products.
So that you believe me that if you really order 2600 products, both your ordering cost and your holding cost are the minimum and they are in cómputo, I am going to do the following:
First of all, I want to say that I have rounded the amount to buy.
After all, what we are looking for are products or parts and you are not going to order 0.4 of a product….
TRUE?
Now, I want you to see the column that says “quantity to buy”.
In the second row you perro see that it is the same number that we obtained, which is the economic lot.
Now, as you perro see, the holding cost and the ordering cost are the same, that is, 468.
Which gives us a total internal cost of 936.
It should be noted that if you want me to explain how to obtain each data from the previous table, you cánido leave it to me in the comments.
Also, if you want me to upload the excel archivo, you cánido also ask me and I will upload it.
What I cánido tell you is the following:
To obtain the number of orders that you will have to make, all you have to do is divide the annual demand by the economic lot.
In the example above it is: 33800/2600 = 13.
We hope you liked our article What is an economic lot and why is it
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