Ordering Cost — OC — Definition

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Ordering Cost — definition

Let’s talk about the Order­ing Cost — OC or coût de pas­sa­tion de com­mande in French. Indeed, the OC rep­re­sents a sig­nif­i­cant cost.

In gen­er­al, the OC is cal­cu­lat­ed as fol­lows: sum of fixed and vari­able costs relat­ed to pro­cure­ment / num­ber of orders and is expressed in cur­ren­cy or by pro­cure­ment order. Anoth­er defin­tion tells us: 

Used in cal­cu­lat­ing order quan­ti­ties, the costs that increase as the num­ber of orders placed increases. 

APICS Dic­tio­nary©, APICS 2008

It must be tak­en into account in the costs (includ­ing hid­den) of inven­to­ry management!

The Ordering Cost will take into account

• the cost of the order process itself. It will include the costs asso­ci­at­ed with issu­ing an order. Not to men­tion the admin­is­tra­tive costs asso­ci­at­ed with invoice pro­cess­ing and accounting.
• some­times, the costs of upstream logis­tics: trans­port and recep­tion (unload­ing, inspec­tion…). Also include the costs asso­ci­at­ed with insurance.

Note: low inven­to­ry lev­els result inlow­er inven­to­ry car­ry­ing costs. On the oth­er hand, it gen­er­ates high costs of plac­ing or launch­ing orders because of a more fre­quent choice of replenishments.

What is an order placement?

The comit­ment of a cus­tomer to buy a prod­uct and the sub­se­quent admin­is­tra­tive and data pro­cess­ing steps fol­lowed by the supplier.

• Sup­pli­er deliv­ery in accor­dance with quan­ti­ty, qual­i­ty and deadlines
• Pay­ment by the cus­tomer accord­ing to the estab­lished conditions
• Any oth­er con­trac­tu­al oblig­a­tions defined beforehand.

It can take the form of an order form, phone call, email etc.

Hos to calculate the acquisition cost?

The acqui­si­tion cost required to obtain one or more units of an item It is cal­cu­lat­ed as fol­lows : order quan­ti­ty times unit cost.

It is not to be mis­tak­en with the order­ing cost. 

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