economic order quantity

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economic order quantity

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You are on page 1of 31

Bus M361-2

Sabrina Wu

11/28/2005

Economic Order Quantity

Definition of EOQ

How to use the EOQ model in a

business organization

How the EOQ model works

Real world example

The Definition of EOQ

defined as the optimal quantity of orders

that minimizes total variable costs required

to order and hold inventory.

How to use EOQ in your organization

should we order each

month?

amount of inventory that we should order

each month.

How EOQ Works

The Principles Behind EOQ: The Total Cost Curve

&

How EOQ Works

The Principles Behind EOQ: The Holding Costs

Interest

Insurance

Taxes

Theft

Obsolescence

Storage Costs

How EOQ Works

The Principles Behind EOQ: The Holding Costs

Interest

Obsolescence

Storage

How EOQ Works

The Principles Behind EOQ: The Procurement Costs

with processing the order:

Ordering and requisition

A portion of the freight if the amounts

vary according to the size of the order

Receiving, inspecting, stocking

Invoice processing

How EOQ Works

The Total Cost Formula

How EOQ Works

The Total Cost Formula

unchanging fixed costs

R = Forecasted monthly usage

How EOQ Works

The Total Cost Formula

variable order costs

P = Purchase cost per unit

R = Forecasted monthly usage

C = Cost per order event (not per unit)

Q = The number of units ordered

How EOQ Works

The Total Cost Formula

variable holding costs

P = Purchase cost per unit

R = Forecasted monthly usage

C = Cost per order event (not per unit)

Q = The number of units ordered

F = Holding cost factor

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:

How EOQ Works

The EOQ Formula

How EOQ Works

The EOQ Formula

R = Forecasted monthly usage

C = Cost per order event (not per unit)

F = Holding cost factor

How EOQ Works

The EOQ Formula

Real Life Example:

Real Life Example:

Real Life Example:

EOQ Equation:

R = Forecasted monthly usage

C = Cost per order event (not per unit)

F = Holding cost factor

Real Life Example:

correct variables…

Real Life Example:

correct variables…

Forecasted

Amount

Real Life Example:

correct variables…

Ordering

Costs

Real Life Example:

correct variables…

Cost per

Unit

Real Life Example:

correct variables…

Holding

Cost Factor

Real Life Example:

R = Annual demand

C = Fixed ordering cost

P = Cost per case

F = Holding Cost Factor

Real Life Example:

R = 5200

C = $10 per order

P = $2

F = 20% of value of

inventory per year

Real Life Example:

R = 5200

2(10) (5200)

C = $10 per order EOQ =

(2 )(.20)

P = $2

F = 20% of value of

inventory per year

Real Life Example:

2(10) (5200)

EOQ =

(2 )(.20)

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.

Closing Comments

EOQ is a tool, not a simple solution.

quantity

Understand the equation and what you are

trying to find

Find accurate inputs for the equation

Additional Resources on EOQ

• http://www.findarticles.com/p/articles/mi_m0KAA/is_5_31/

ai_94771293

• http://www.inventoryops.com/economic_order_quantity.htm

• http://en.wikipedia.org/wiki/Economic_order_quantity

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