Professional Documents
Culture Documents
Demand is uniform, constant and continuous over time; The lead time is constant; There is no limit on order size due either to stores capacity; The cost of placing an order is independent of size of order; The cost of holding a unit of stock does not depend on the quantity in stock; Exactly the same quantity is ordered each time that a purchase is made.
The EOQ tool can be used to model the amount of inventory that we should order.
Costs
Unit Cost: the cost of the units themselves, assumed to be fixed, regardless of the number of units ordered Inventory-Holding Cost: the cost of holding units in inventory Fixed order cost: represents all the costs associated with placing an order excluding the cost of the units themselves (any administrative costs of placing and/or receiving an order)
Category
% of Inventory Value
Housing (building) cost 6% Material handling costs 3% Labor cost 3% Inventory investment costs 11% Pilferage, scrap, & obsolescence 3% Total holding cost 26%
EOQ Model
Annual Cost Holding Cost
Order Quantity
Purchase Order Purchase Order Purchase Order Description Qty. Purchase Order Description Qty. Description Qty.1 Microwave Description Qty. Microwave Microwave 111 Microwave
Order quantity
EOQ Model
Order Cost
Order Quantity
EOQ Model
Holding Cost Order Cost Optimal Order Quantity (Q*) Order Quantity
Taking the derivative of both sides of the equation and setting equal to zero to find the minimum value of the function, one obtains:
P = Purchase cost per unit R = Annual usage in units C = Cost per order event (not per unit) F = Holding cost factor
10
11
P = Purchase cost per unit R = Annual usage in units C = Cost per order event F = Holding cost factor
12
Forecasted Amount
Ordering Costs
13
14
R = Annual demand C = Fixed ordering cost P = Cost per case F = Holding Cost Factor
P = $2
F = 20% of value of inventory per year
15
EOQ =
Wrapping It Up
EOQ, or Economic Order Quantity, is defined as the optimal quantity of orders that minimizes total variable costs required to order and hold inventory.
16
Conclusion
EOQ is useful for minor stock items of low values with known steady prices, demands and supply lead times; Where there is demand variability, such as seasonality, EOQ can still be calculated but using shorter time period.
EOQ Example
Youre a buyer for SaveMart. SaveMart needs 1000 coffee makers per year. The cost of each coffee maker is $78. Ordering cost is $100 per order. Carrying cost is 40% of per unit cost. Lead time is 5 days. SaveMart is open 365 days/yr. What is the optimal order quantity?
17
SaveMart EOQ
R= C= P= F= H= H=
EOQ
EOQ = 80 coffeemakers
Homework
Calculate the EOQ of A materials if: The annual demand for material "A" is 2,800 pieces The purchase price per unit is $80 The rate of storage cost is of 20% of the purchase price per unit Fixed costs are $500 per order
How many times should we order to meet the annual demand for material "A"?
18