The Optimal Amount

2. 9 The Optimal Amount

3. You 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.

4. Optimal Inventory Level • A 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.

5. 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 par • Levinson Approach – takes into account forecasted sales, portion sizes and yield percentages planning an order • Theoretical Approach – takes into account storage costs, carrying costs and ordering costs when planning purchases

6. Par Stock Approach • Most small operations utilize this model • Utilized when buyer accepts ordering procedures and delivery schedules of seller • Method: Decide on order amount needed to bring product stock level up to par • Account for banquets, safety stock, and stock needed between order and delivery time • Reevaluate par stock levels often

7. Levinson Approach • Accept suppliers’ ordering procedures and delivery schedules • Determine best time to order (dairy products may be ordered daily) • Forecast the amount of product that will be needed between deliveries • Calculate order size • Adjust for stock on hand, etc. • Revise often

8. Levinson Approach (cont.) • Based on historical data • Forecast expected number of guests • Forecast orders of specific menu items based on popularity index • Determine raw pounds of each ingredient needed for projected sales • Calculate portion factor • Calculate portion divider

9. Levinson Approach (cont.) • Portion Factor – e.g., 16 divided by the number of ounces needed for one serving • Portion divider – an item’s portion factor multiplied by the edible yield percentage • Edible Yield Percentage – servable weight i.e., a menu item divided by its original weight, multiplied by 100

10. Economic Order Quantity Model • Utilized in large and multi-unit foodservice operations • A mathematical model for determining the optimal order amount • Weighs total annual cost of storage and purchases against order size

11. Economic Order Quantity Model • Takes into consideration • Storage costs • Carrying costs • Insurance • Security • Spoilage • Ordering costs • Opportunity costs

12. Correct Order Time The order time that minimizes the ordering costs, inventory storage costs, and stockout costs.

13. Correct Order Time • Safety stock • Reorder point (ROP) • Product usage pattern • Just-in-time (JIT) inventory management • Stockout costs

14. Problems with Theoretical Approaches • Usage rates vary from day to day • Storage and ordering costs vary • Stockout costs are difficult to assess • A buyer may only quality for once-a-week delivery, not best for EOQ and ROP concepts • Difficult to make the decision as to which items to consider for EOQ and ROP

15. Problems with Theoretical Approaches (cont.) • A supplier buys from someone else – a buyer’s EOQ may not be consistent with the supplier’s EOQ • Items get discontinued • EOQ assumes adequate storage facilities • EOQ assumes products will be used before spoiling

16. Benefits of Theoretical Approach • Substitutes fact for fiction • There exists a range of order sizes where the total cost per year (ordering and storage costs) doesn’t vary dramatically • Computers help with calculating EOQ and ROP • Large operations can benefit greatly from implementing these concepts