DefiniIicn cf ECC

Hcw Ic u:e Ihe ECC mcce| in c Lu:ine:: crgcnizcIicn

Hcw Ihe ECC mcce| wcrk:
Fec| wcr|c excmp|e
LCC or Lconom|c Crder uant|ty ls deflned as Lhe opLlmal quanLlLy of orders
LhaL mlnlmlzes LoLal varlable cosLs requlred Lo order and hold lnvenLory
How 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.

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
TheIt
Obsolescence
Storage Costs
How EOQ Works
The Principles Behind EOQ. The Procurement Costs
!rimarily the labor costs associated
with processing the order
Ordering and requisition
A portion oI the Ireight iI the amounts
vary according to the size oI the order
Receiving, inspecting, stocking
Invoice processing
How EOQ Works
The Total Cost Formula
Total Cost !urchase Cost + Order Cost + Holding Cost
How EOQ Works
The Total Cost Formula
This represents the
unchanging Iixed costs
P Purchase cost per unit
R Forecasted monthly usage
How EOQ Works
The Total Cost Formula
This represents the
variable order costs
P Purchase cost per unit
R Forecasted monthly usage
C Cost per order event 349 per unit)
Q The number oI units ordered
How EOQ Works
The Total Cost Formula
This represents the
variable holding costs
P Purchase cost per unit
R Forecasted monthly usage
C Cost per order event 349 per unit)
Q The number oI units ordered
F Holding cost Iactor
How EOQ Works
The EOQ Formula
Total Cost
Formula
Taking the derivative of both sides of the equation and setting equal to
zero to find the minimum value of the function, one obtains:
The result of differentiation
How EOQ Works
The EOQ Formula
The Economic Order Quantity
How EOQ Works
The EOQ Formula
Review and Summary oI the EOQ Formula
P Purchase cost per unit
R Forecasted monthly usage
C Cost per order event 349 per unit)
F Holding cost Iactor
How EOQ Works
The EOQ Formula
Review and Summary oI the EOQ Formula
Here is the a graphic representation oI the EOQ equation
Real LiIe Example
Real LiIe Example
Real LiIe Example
First, Recall the
EOQ Equation
P Purchase cost per unit
R Forecasted monthly usage
C Cost per order event 349 per unit)
F Holding cost Iactor
Real LiIe Example
ext let`s identiIy the
correct variables.
Real LiIe Example
ext let`s identiIy the
correct variables.
Forecasted
Amount
Real LiIe Example
ext let`s identiIy the
correct variables.
Ordering
Costs
Real LiIe Example
ext let`s identiIy the
correct variables.
Cost per
Unit
Real LiIe Example
ext let`s identiIy the
correct variables.
Holding
Cost Factor
Real LiIe Example
R Annual demand
C Fixed ordering cost
P Cost per case
F Holding Cost Factor
Real LiIe Example
R 5200
C $10 per order
P $2
F 20 oI value oI
inventory per year
Real LiIe Example
R 5200
C $10 per order
P $2
F 20 oI value oI
inventory per year
EOQ
2(10) (5200)
(2 )(.20)
Real LiIe Example
EOQ
2(10) (5200)
(2 )(.20)
EOQ 510 cases
ou're a buyer for SaveMarL
SaveMarL needs 1000 coffee makers per year
1he cosL of each coffee maker ls $78 Crderlng
cosL ls $100 per order Carrylng cosL ls 40 of
per unlL cosL Lead Llme ls 3 days SaveMarL ls
open 363 days/yr
WhaL ls Lhe opLlmal order quanLlLy 8C?
H
S D
EOQ
L L

2
20 . 31 $
100 $ 1000 2 L L
EOQ
nnual Demand = 1000
Fixed ordering cost = $100
Purchasing Cost per unit =$78
Holding Cost=40% of inventory
HCF = 78 x 0.4
HCF = $31.20
EOQ 80 coffeemakers
SaveMart ROP
#P = demand over lead time
= daily demand x lead time (days)
= d x l
D = annual demand = 1000
Days / year = 365
Daily demand = 1000 / 365 = 2.74
Lead time = 5 days
ROP = 2.74 x 5 = 13.7 => 14
vg. CS = " / 2
= 80 / 2 = 40 coffeemakers
= 40 x $78 = $3,120
nv. CC = $3,120 x 40% = $1,248
Note: unrelated to reorder point
SaveMart
Average (Cycle Stock) Inventory
EOQ, or Economic Order Quantity, is deIined as the optimal
quantity oI orders that minimizes total variable costs required to
order and hold inventory.
LCC ls a Lool noL a slmple
soluLlon
LCC ls useful ln deLermlnlng
opLlmal order quanLlLy
undersLand Lhe equaLlon and whaL
you are Lrylng Lo flnd
llnd accuraLe lnpuLs for Lhe
equaLlon