Order Quantities

Inventory Management Questions

• 1. How much should be ordered at one
time?

• 2. When should an order be placed?

• SKU – Stock keeping unit

 Lot Decision Rules
• Lot-for-Lot- the exact amount needed

• Fixed-order quantity – specific number of

units

• Min-Max –when level reaches a range and

is replenished to a fixed quantity
 Economic Order Quantity (EOQ)
• Assumptions
– Demand is constant and known
– Item is purchased in lot or batches
– Order prep costs and inventory carrying costs
constant and known
– Replacement occurs all at once
• These assumptions are usually true for
finished goods with indep and uniform
demand.
 Economic Order Quantity (EOQ)
• Amount ordered that yields lowest total
cost
• Average lot size inventory =
Order quantity / 2 =
200 / 2 = 100 units
• Number of orders per year =
annual demand / order quantity=
100 X 52 / 200 = 26 times a year
 Economic Order Quantity (EOQ)
• Figure 10.1
U
n
i 200

t
= Lot size
s

100

1 2 3 4
Time (Weeks)
 Relevant Costs
• Annual cost of placing orders.

• Annual cost of carrying inventory.

• If order quantity increases lowering cost of

placing orders then average inventory and
carrying costs increase.
• Correct order quantity is where both costs
are minimized.
 Notation
• A = annual usage
• S = ordering cost in dollars per order
• i = annual carrying cost rate as a decimal %
• c = Unit cost in dollars
• Q = order quantity in units
Annual ordering cost = number of orders x costs per order =
A/Q X S

Annual carrying cost = Avg Inv X cost of carrying one unit for
one year = Avg Inv X unit cost X carrying = Q/2 X c X I

Total annual costs – Annual ordering costs + annual carrying

costs = A/Q X S + Q/2 X c X i
 Example
• The annual demand is 10,000 units, the ordering costs $30 per
order, the carrying costs 20%, and the unit cost $15. The order
quantity is 600 units. Calculate:
– a. Annual ordering cost
– b. Annual carrying cost
– c. Total annual cost

A = 10,000 units a. annual ordering cost = A / Q X S

S = $30 10,000 / 600 X $30 = $500
i = 0.20
c = $15 b. annual carrying cost = Q/2 X c X i
Q = 600 units 600 / 2 X $15 X 0.2 = $900

c. Total annual cost = $1400

 Order Ordering Carrying
Quantity costs costs Total cost

A 1000 units (Q) (AS/Q) (Qci/2)  

S $20.00  
c $5.00   50 $400 $25.00 $425.00
i 20%  
100 $200 $50.00 $250.00

150 $133 $75.00 $208.33

200 $100 $100.00 $200.00

250 $80 $125.00 $205.00

300 $67 $150.00 $216.67

350 $57 $175.00 $232.14

400 $50 $200.00 $250.00

 Problem
• 10.1