What are the advantages of Fixed-Order Quantity System?

A fixed order quantity system is the arrangement in which the inventory level is continuously monitored and replenishment stock is ordered in previously-fixed quantities whenever at-hand stock falls to the established re-order point.

In other words it is an Inventory Control Systems. An inventory system controls the level of inventory by determining how much to order (the level of replenishment), and when to order.

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The fixed order system has been used for some time and keeps stock levels fairly stable. As a result this ensures that there are no stock outs unless there is a great level of fluctuations in demand.

The fixed order will also have been set after the economic order quantity has been established, so the fixed order ensures that orders are placed when they are economically viable, so there is less wastage in terms of ordering supplies.

The fixed point also enables the stock to be monitored and replenished with little human input. The technology assists to monitor stock levels and orders are generated automatically, so there is no risk of someone simply ‘forgetting’ to place an order.

I agree with the experts and I may add that the advantages of fixed order quanteties is :

• Provides real time view of inventory level.
• Provides greater system responsiveness.

A fixed-order quantity system is one of the most important in inventory management. For that reason we need to look at how to compute the two variables that define it: the order quantity Q and the reorder point ROP. Before we do that, however, we need to look at the assumptions this system makes. Most importantly, the system assumes that all the variables occur at a constant rate and their values are known with certainty. For example, the system assumes that the demand, D, occurs at a constant rate and that there is no variability in demand. Also, the lead time, L, is constant, the holding cost, H, is known and fixed, as are stockout cost, S, and unit price, C. Although these assumptions are not realistic the model is highly robust and provides excellent results despite these assumptions.

How Much to Order?

The first decision in the fixed-order quantity model is to select the order quantity Q. Recall that there are a number of inventory costs, most notably inventory holding cost and ordering cost. We want to select the “best” order quantity that minimizes these costs—the EOQ mentioned previously. This is computed by looking at the total annual inventory cost and finding the order quantity that minimizes it. Consider that the total annual cost is comprised of annual purchase cost, annual ordering cost, and annual holding cost, and looks as follows:

• Total cost = Purchase cost + Ordering cost + Holding cost
• TC = DC + (D/Q) S + (Q/2) H

where

• TC = Total cost
• D = Annual demand
• C = Unit cost
• Q = Order quantity
• S = Ordering cost
• H = Holding cost

The first term in the equation, DC, is the annual purchase cost for items. It is comprised of annual demand (D) times the unit cost of each item (C). The second term (D/Q) S is the annual ordering cost. It is computed as the number of orders placed per year (D/Q), times the cost of each order, S. Finally, the third term is annual holding cost where (Q/2) is the average inventory held. Remember that our maximum inventory is Q units when the order is received. When inventory is depleted we have zero. Therefore on average we have Q/2 units in inventory. H is the annual holding cost per unit of inventory.