Ideal Buying Quantity

The next judgement is — how much to buy? Your supplier may have minimum quantities and pricing breaks to encourage you to buy more at one drop. If you do not buy enough, you may have to re-order quickly, and not get the best price break; if you order too much, it may fill your warehouse and take months to sell.

This is another area on which much has been written. Small orders attract higher prices and cost you in administration every time you place an order. Large orders attract better prices, but take up warehouse space (you may have to take on more space), may attract higher insurance premiums, and risk obsolescence and potential wastage. In other words, the real cost of an item to you is not just its cost price from the supplier, but also should include all the other costs associated with stocking it, expressed per unit.

The diagram on the right illustrates the issue. One line shows the cost per unit of buying in larger quantities, falling as the quantity gets larger to the limiting point. Another line shows the other costs of stocking the item, expressed as a cost per unit for quantities purchased, and starting to increase as the quantity goes up. The third line shows the overall cost per unit, combining the two lines.

The theories say there is a point somewhere in the cost curve where the cost per unit, taking everything into consideration, is at its least. This is the ideal buying quantity, as illustrated in the drawing above.

We do not attempt to do these calculations for you, but provide a field for each stock item in which you can record the figure which you deem to be the ideal buying quantity.This may owe more to practical realities and your suppliers’ terms than to abstruse calculation. We print this value on the appropriate stock reports.