eoq
TRANSCRIPT
Economic Order Quantity
Presented by : Rajneesh
Ranjan
IntroductionEconomic order quantity is the level of inventory that minimizes the total inventory holding costs and ordering costs. The framework used to determine this order quantity is also known as Wilson EOQ Model. The model was developed by F. W. Harris in But still R. H. Wilson is given credit for his early in-depth analysis of the model.
The Definition of EOQ
EOQ, or Economic Order Quantity, is defined as the optimal quantity of orders that minimizes total variable costs required to order and hold inventory.
How to use EOQ in organizationHow much inventory should we order each month?
The EOQ tool can be used to model the amount of inventory that we should order each month.
How EOQ Works The Principles Behind EOQ
Interest
Obsolescence
Storage
How EOQ Works
&
The Principles Behind EOQ: The Total Cost Curve
How EOQ Works The Principles Behind EOQ: The Holding Costs
Keeping inventory on hand
Interest
Insurance
Taxes
Theft
Obsolescence
Storage Costs
Order Quantity SizeOrder Quantity Size
Co
st(R
s)C
ost
(Rs)
Carrying costCarrying cost
EOQ Model
Order Quantity sizeOrder Quantity size
Co
st(R
s)C
ost
(Rs)
Carrying costCarrying cost
Ordering costOrdering cost
EOQ Model
Order Quantity sizeOrder Quantity size
Co
st(R
s)C
ost
(Rs)
Carrying costCarrying cost
Ordering CostOrdering Cost
EOQ Model
Total cost curve
Order QuantityOrder Quantity
Carrying costCarrying cost
Total Cost CurveTotal Cost Curve
Ordering CostOrdering Cost
EOQ Model C
ost
(R
s)C
ost
(R
s)
EOQ
How EOQ Works The EOQ Formula
P = Purchase cost per unitR = Forecasted monthly usageC = Cost per order event (not per unit)F = Holding cost factor
Example: Q. Calculate the economic order quantity if annual demand for the product is 5,000 unit. The ordering cost is Rs 30 per order and holding cost is Rs 6/- per unit per annual.
Sol:- Given R=5000 unit
C= Rs. 30
H=Rs. 6
Now, _____
EOQ = √(2CR/H)
_____
= √(2*5000*30/6)
______
= √ 50000
= 223.6
≈ 224
Total No of events per year(order per year) = 5000/224= 22.32≈ 23
EOQ Assumptions Demand is assumed to be known with certainly.
The size of each order is constant.
The procurement cost is assumed to be linearly
related to the number of order.
The time between placement of the order and the
receipt of the order is known and constant.
The receipt of inventory is instantaneous
the cost of the placing an order and the cost of
holding or storing inventory overtime.
Advantages of EOQ EOQ is the order quantity that minimizes total
holding and ordering costs for the year. EOQ technique is highly useful in as much it
answers the question of how much to order. An inventory-related equation that determines the
optimum order quantity . EOQ may not apply to every inventory situation,
but most organizations will find it beneficial in at least some aspect of their operation.
Weakness of EOQ formula Erratic usages
Faulty Basic Information Costly Calculations No formula is Substitute for commonsense EOQ ordering must be tempered with judgment Materials Requirement Planning (MRP) The cost assumptions are rational and are not
found in real life, unit cost of purchased varies in practice.
The lead time is not constant, the demand is erratic.
References:
1) Khanna, Dr O.P. and Sarup, A. (2003), Industrial Engineering and Management, Dhanpat Rai Publications (P) Ltd, New Delhi
2) Badi, R.V. and Badi, V.N. (2005), Modern Production Management, Vrinda Publication, New Delhi.
3) Chunawalla, S.A. and Patel, D.R. (2008), Production and Operation Management, Himalaya Publication, Mumbai.
4) http://en.wikipedia.org, viewed on 04 Feb. 2010
5) http://managementhelp.org, viewed on 04 Feb. 2010
Thank you