The Optimal Amount

The Optimal Amount9YOU SHOULD BE ABLE TO:Calculate the correct order quantities and order times using the par stock, Levinson, and theoretical methods.Determine the optimal inventory level.Explain the benefits and problems of using only the theoretical method for determining inventory levels.OPTIMAL INVENTORY LEVELA principle objective of inventory management is maintain only the necessary amount of products to serve guests without running out of anything, but not to have so much that the products suffer from spoilage or incur other storage costs.CORRECT ORDER SIZE AND ORDER TIME Par Stock Approach – the maximum amount of a product you want to have on-hand; order just enough to bring the stock to parLevinson Approach – takes into account forecasted sales, portion sizes and yield percentages planning an orderTheoretical Approach – takes into account storage costs, carrying costs and ordering costs when planning purchasesPAR STOCK APPROACHMost small operations utilize this modelUtilized when buyer accepts ordering procedures and delivery schedules of sellerMethod: Decide on order amount needed to bring product stock level up to parAccount for banquets, safety stock, and stock needed between order and delivery time Reevaluate par stock levels oftenLEVINSON APPROACHAccept suppliers’ ordering procedures and delivery schedulesDetermine best time to order (dairy products may be ordered daily)Forecast the amount of product that will be needed between deliveriesCalculate order sizeAdjust for stock on hand, etc.Revise oftenLEVINSON APPROACH (CONT.)Based on historical dataForecast expected number of guestsForecast orders of specific menu items based on popularity indexDetermine raw pounds of each ingredient needed for projected salesCalculate portion factorCalculate portion dividerLEVINSON APPROACH (CONT.)Portion Factor – e.g., 16 divided by the number of ounces needed for one servingPortion divider – an item’s portion factor multiplied by the edible yield percentageEdible Yield Percentage – servable weight i.e., a menu item divided by its original weight, multiplied by 100ECONOMIC ORDER QUANTITY MODELUtilized in large and multi-unit foodservice operationsA mathematical model for determining the optimal order amountWeighs total annual cost of storage and purchases against order sizeECONOMIC ORDER QUANTITY MODELTakes into considerationStorage costsCarrying costsInsuranceSecuritySpoilageOrdering costsOpportunity costsCORRECT ORDER TIME The order time that minimizes the ordering costs, inventory storage costs, and stockout costs.CORRECT ORDER TIMESafety stockReorder point (ROP)Product usage patternJust-in-time (JIT) inventory managementStockout costsPROBLEMS WITH THEORETICAL APPROACHESUsage rates vary from day to dayStorage and ordering costs varyStockout costs are difficult to assessA buyer may only quality for once-a-week delivery, not best for EOQ and ROP conceptsDifficult to make the decision as to which items to consider for EOQ and ROPPROBLEMS WITH THEORETICAL APPROACHES (CONT.)A supplier buys from someone else – a buyer’s EOQ may not be consistent with the supplier’s EOQItems get discontinuedEOQ assumes adequate storage facilitiesEOQ assumes products will be used before spoilingBENEFITS OF THEORETICAL APPROACHSubstitutes fact for fiction There exists a range of order sizes where the total cost per year (ordering and storage costs) doesn’t vary dramaticallyComputers help with calculating EOQ and ROPLarge operations can benefit greatly from implementing these concepts