Q. Outlook Gateways has a demand of 75 Lakhs per year.

Setup cost and holding cost are 29 and 35

per unit. Number of pieces in a order includes 2.3 Lakhs per order. Printing is done 300 days and
2 days to deliver this magazine.
Q. What can be the EOQ of this? With above data find the Setup Cost and Holding cost for a year.
What is the Reorder Point?
ANS:
Economic order quantity (EOQ), refers to the optimum amount of an item that should be ordered at any
given point in time, such that the total annual cost of carrying and ordering that item is minimized. EOQ is
also sometimes known as the optimum lot size. Simply put – how much product should you purchase to
maintain a cost-efficient supply chain?
The EOQ helps companies minimize the cost of ordering and holding inventory. As explained by the
economic concept known as economies of scale, the cost per unit of ordering a product falls, the larger the
total quantity of the order. However, the larger the total quantity of an order, the higher the cost to hold and
carry your inventory.

Fig 01: Economic Order Quantity

For this particular EOQ we can calculate it as below:

Demand(D) = 75 lakhs
Setup cost (Ordering cost) (S) = 29/unit
Holding cost (H) = 35/unit
Order Quantity = 2.3 lakhs
Working days = 300 days
Delivery/ Lead time = 2 days

Economic Order Quantity = √[(2*D*S)/H]

= √ [(2*75*29)/35]
=3524.42
 Annual Holding cost = Avg. inventory level * Holding
cost (Yearly)
= (Order Quantity/2) * H
= (2300000/2) * 35
= 40250000

Annual Setup cost = No. of orders * cost per

order (Yearly)

= (Annual demand/Order quantity) * cost per order

= (75000000/230000) * 29
= 945.65

Time between orders = 300/32.61

= 9.2 days

Daily Demand =D/300

= 75,00,000/300
= 25000

Re-order point = (D/300) * 2

= (7500000/300) * 2
= 50000

Q. What is the annual demand to production ratio in this case? What does it indicate for the
company?
ANS:
In order to get the demand to production ratio we need to understand the overall demand and production of
the products, this can be either done by using production order quantity or Economic Production Quantity. In
either of the cases, we need data for daily production so as to get the overall annual production rate, but as
the data is not available for this particular instance, we will go by the ratio that was provided. Outlook India
suggested that for every order they print an extra magazine which that the ratio of demand to production is
9:10

For Economic Production Quantity or Production Order Quantity we use,

 Fig 02: Economic Production Quantity

Economic Production Quantity- Square root of {2xDx O/ H(1-x)}

Since we don’t have the required data, we use the ratio that was provided
If we go by that,
Ratio= 9:10
Demand =
75000000
Production = X
= 9:10
=Demand: Production
=7500000: X
=75000000:8333333.33
=9:10

The Annual Demand to Production Ratio is 9:10 i.e., for 75000000 Magazines we have 8333333.33
Magazines in production.
Indication/Assumption for the Company:
In spite of producing more than demand, there are stock outs mentioned by the company. The probable
reasons can be:
1. Inaccurate forecasting
2. Failure to re-order in a timely manner
3. Poor management of people, processes, and technology
4. Poor communication or relationships with your
suppliers
5. Not enough working capital