Concept

Inventory ordering cost (S)

Direct answer

Ordering cost S is the fixed cost incurred per order regardless of order size. It includes PO admin labour, receiving, inspection, and payment processing. Typical SMB range is $50 to $300 per PO; EDI and automated supplier portals drive the bottom of the range, manual purchasing the top^[1].

Concept

S (cost per order)

Fixed cost per order, independent of order quantity Q.

S = PO_admin + receiving + inspection + payment_processing

When it matters: S is the numerator of Q* = sqrt(2DS/H). Doubling S inflates Q* by sqrt(2), about 41 percent. SMED programs in manufacturing target S directly: cut setup time, cut S, shrink Q*.

Components

PO admin: buyer time to draft, approve, send a PO. For SMBs with a part-time purchasing role, $15 to $40 per PO.
Receiving: labour to unload, check against PO, put-away. Often the biggest piece for warehoused goods.
Inspection: quality inspection if applicable. Typically $0 for COTS goods, $50+ for fabricated parts.
Payment processing: AP labour, bank fees on international wires.

Why S is independent of Q

Drafting a PO for 100 units takes the same buyer time as drafting one for 1,000. Receiving a single pallet takes about the same time as a stack-of-pallets receipt. This is the assumption that makes (D/Q)*S the right total-cost-of-ordering term: the fixed cost per order, multiplied by the number of orders per year^[2].

S in manufacturing context: setup cost

In EPQ, S is called "setup cost" rather than "order cost." It captures changeover labour, scrap during ramp, and first-article inspection. Identical math; the Toyota Production System made cutting S the central focus of process improvement (SMED), which compounds: Q* shrinks with sqrt(S), so cutting S by a factor of 16 cuts Q* by 4.

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