Period order quantity definition

/

What is the Period Order Quantity?

The period order quantity is a standard number of units to be ordered over a fixed period of time. This approach is used when the amount of raw materials or supplies usage is consistent and predictable. The purchasing staff can simply arrange for certain quantities to be delivered at regular intervals under a master purchase order agreement. When received, the purchasing staff logs in the number of units delivered against the grand total authorized under the related master purchase order, and may also track the ability of the supplier to deliver as of a designated date and time. This is one of the easiest and lowest-cost ways in which to order goods.

Related AccountingTools Courses

Inventory Management

Purchasing Guidebook

Problems with the Period Order Quantity

The problems with the period order quantity concept are as follows:

  • Investment size. A single delivery is usually planned to last for a fairly long period of time, such as a month or a quarter of usage, which can result in an excessively large amount of inventory on hand. If management wants to reduce the investment in inventory, it will need to use a more precise ordering system, such as a material requirements planning or just-in-time system. However, this is not much of an issue when the cost per unit is low.

  • Demand variation. If the level of demand for an item increases unexpectedly near the end of a usage period, there is an increased risk of a stockout. This issue can be resolved by employing some amount of safety stock, though doing so also increases the investment in inventory.

  • Demand termination. The method can result in continuing supplier deliveries even when usage has declined or been terminated. The problem is the lack of a tracking system for these goods. The issue can be resolved by instituting a periodic visual check of on-hand stocks by the purchasing staff.

In short, the period order quantity method is a simple way to ensure that approximately correct quantities are ordered on a regular basis, with minimal supporting systems. Its use should be limited to those items for which there is a high degree of confidence that demand will be consistent over a fairly long period of time.