Question

You are the Manager of Eclectic Eastern, a Multi-Cuisine Restaurant serving a fusion of Indian, Thai, and Chinese cuisines. All three cuisines hold inventory of spices, rice, vegetables, and meat. Discuss the nature of the purchase cost, ordering costs, and holding costs that affect the raw materials, work in process, and finished goods inventory in this restaurant.

Answer 1

Purchase Cost, Ordering Cost and Holding Cost are constituents of the Economic Order Quantity(EOQ) of the Inventory model. It basically determines how much to order and when tto order so as to minimize the Total Cost

Therefore, the formula of total cost is

Total Cost(TC) = Purchase Cost (PC) + Ordering Cost (OC) + Holding Cost (HC)

For the decision as to how much should be ordered, there are two basic cost namely, inventory carrying costs and the ordering or aquisition costs. As the quantity ordered increased, the inventory carrying cost increases while the ordering cost decreases. Economic order quantity is calculated by balancing the two costs. In other words economic order quantity is the size which minimizes total costs of carrying and cost of ordering. Because their main investment is in the inventory they should consider the periodic review approch. Here, rather than ordering at pre determined re-order level, the periodic approach orders at a fixed and regular intervals of time. The level is calculated to cover demand between replinishment order being placed and the following replinishment order arriving..