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# ECONOMIC ORDER QUANTITY

. One of the technique of the inventory management is EOQ.EOQ • INTRODUCTION: Effective inventory management requires an effective control over inventories. Inventory control refers to a system which ensures supply of required quantity and quality of inventories at the required time and at the same time prevent unnecessary investment in inventories.

It is fixed mainly after taking into considerations the following costs: Ordering costs Carrying costs .EOQ • Meaning: Economic Order Quantity refers to the size of the order which gives maximum economy in purchasing any item of raw material or finished product.

Carrying costs are the costs incurred on holding the inventories. The former cost may be referred as the “cost of acquiring” while . Ordering costs are totalled up for the year and then divided by the number of orders placed each year. the costlier it becomes by 20 percent every year.EOQ Ordering costs are the costs related to purchasing or ordering expenses. The longer the materials kept in stock.

EOQ • Formula: Q = 2U*P S Where Q= Economic order quantity U= Quantity(units) purchased in a year(month) P= Cost of placing an order S= Annual (monthly) cost of storage of one unit. .

purchases 1600 units of a certain component from B. calculate EOQ. His annual usage is 1600 units. The order placing cost is Rs. Q= √2U*P S =√2*1600*100 = 200 UNITS. 100 and the cost of carrying one unit for a year is Rs. a refrigerator manufacturer. 8.EOQ • Example: • A. .

• The rate at which the firm uses the inventories or makes sales is constant through out the year.EOQ • Assumptions: EOQ model is based on the following assumptions: • The firm knows with certainty the annual usage or demand of the particular items of inventories. • The orders for replenishment of inventory are placed exactly when .

Behaviour of inventory costs .EOQ.

In order to determine the reorder level. • Reorder level= average usage* lead time • For eg. information is required about things such as: (i) lead time and the (ii) usage rate. • Reorder level is the level of inventory at which the firm should place an order to replenish the inventory. if the lead time is 3 weeks and the average usage is 50 units per week.REORDER POINT • Point at which the firm may place an order for replenishment when the inventory level drops to zero. the reorder level will be Reorder level= lead time* average usage .

. safety stock is the stock which the firm maintains in order to meet any uncertainty.REORDER POINT The formula for determining the reorder level when safety stock is maintained will be as follows: Reorder level= lead time* average usage+ safety stock.

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