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ECONOMIC ORDER QUANTITY

 The model was developed by F. W. Harris in


1915
 R. H. Wilson is credited in-depth analysis of
the model
 It gives optimal quantity to order that
minimizes total variable costs required to
order and hold inventory.


DEFINATION…

 EOQ, or Economic Order Quantity, is defined as The


most economical quantity of a product that should
be purchased at one time. The EOQ is based on all
associated costs for ordering and maintaining the
product..

GRAPHICAL REPRESENTATION…
WE GET…
EQUATION…

2× D × S
EOQ =

H
 D = Annual demand
S = Cost per order
 C = Cost per unit

 H=Holding cost


ALSO KNOWN AS….
ASSUMPTUONS
 Known & constant demand
 Known & constant lead time
 Instantaneous receipt of material
 No quantity discounts
 Only order (setup) cost & holding cost
 No stockouts

OPTIMAL ORDER QUANTITY
&
QUANTITY DISCOUNTS
BASIC MODEL FOR FIXED REORDER QTY.
ORDER 
 QUANTITY


DEMAND 
 INVE RATE
 NTO
RY 

LEV
ROP
 ELS

LEAD  LEAD 
TIME TIME
QUANTITY DISCOUNTS

 IT is a policy of allowing item cost to vary


with volume ordered, usually the item cost
decreases as volume increases due to
economies of scale in production and
distribution.
Therefore when demand
is known for certain ,
delivery is
instantaneous and item
cost varies with volume
ordered , the result is
a modified simple lot
size situation called
as quantity discount
case .
Steps to follow in quantity discounts…
 Calculate the EOQ for the lowest unit price using
simple lot size formula.

 Determine if the EOQ in step 1 is feasible by


determining whether it is in the quantity range for
that price.

 If the EOQ in step 1 is not feasible, compute the total


cost for the smallest feasible quantity at the lowest
nit price.


Cont…

 If the EOQ for the lowest unit price is feasible, compute the
total cost for this quantity at each unit price and choose the
quantity yielding the lowest total cost. Skip the remaining
steps.

 Repeat step 1 through 4 for the remaining unit prices until a
feasible EOC is found or all unit prices are evaluated. If the
EOC for each unit is not feasible, choose the price break
with the lowest total cost.
The Basic EOQ
Model
Inventory Costs for
Production Order Quantity

 Holding costs - associated with holding or “carrying”


inventory over time


 Setup costs - cost to prepare a machine or process
for manufacturing an order
SETUP COST

Clean-up costs
Re-tooling costs
Adjustment costs
These costs are primarily
determined by the labor time
necessary to perform the tasks.
DIFFRENCE BETWEEN EOQ AND
POQ MODELS

 When material is ordered from a supplier outside the


firm, the EOQmodel and with it “quantity discount”
information is used when appropriate.
 When sub-assemblies are fabricate within the firm,
the Production Order Quantity (POQ) model is
used
EOQ Model
When To Order
Inventory Level
Optimal Average
Order Inventor
Quantit y ( Q */ 2 )
y
( Q *)

Reorder
Point
( ROP )

Time
Lead Time