A Business Encyclopedia

Fixed Order Quantity

Definition: The Fixed Order Quantity is the inventory control system, wherein the maximum and minimum inventory levels are fixed, and maximum and fixed amount of inventory can be replenished at a time when the inventory level reaches the auto set reorder point or the minimum stock level.

In other words, an auto-reorders point is linked with the pre-fixed amount of inventory in the system, which automatically places an order with the supplier for the maximum stock capacity, as soon as the inventory level reaches its minimum set-point. The firm is required to set the maximum and minimum stock capacity based on its storage space and the sales trend.

The Fixed Order Quantity system is followed by many firms since it helps to reduce the reorder mistakes, manage the storage capacity efficiently and prevent the unnecessary blockage of funds, which can be used elsewhere. Also, this method ensures the regular replenishment of inventory items, which are currently being used in the production process.

The Fixed Order Quantity method assumes that all the variables are known with certainty and remains constant. Such variables could be the sales, unit cost, holding cost, Lead time, stock out cost, etc. But, however, this assumption could not be true in the real life situations and despite this, the method is frequently applied by the firms and yields excellent results.

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