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    Economic Order Quantity

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    Fandy Bestario Harlan
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    Economic Order Quantity

    Uploaded by

    Fandy Bestario Harlan
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    economic order quantity

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    economic order quantity

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    108 views31 pages

    Economic Order Quantity

    Uploaded by

    Fandy Bestario Harlan
    economic order quantity

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 31

    Economic Order Quantity

    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

    EOQ, or Economic Order Quantity, is


    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

    How much inventory


    should we order each
    month?

    The EOQ tool can be used to model the


    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

    Keeping inventory on hand


    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

    Primarily the labor costs associated


    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

    Total Cost = Purchase Cost + Order Cost + Holding Cost


    How EOQ Works
    The Total Cost Formula

    This represents the


    unchanging fixed costs

    P = Purchase cost per unit


    R = Forecasted monthly usage
    How EOQ Works
    The Total Cost Formula

    This represents the


    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

    This represents the


    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

    The result of differentiation

    The Economic Order Quantity


    How EOQ Works
    The EOQ Formula

    Review and Summary of the EOQ Formula

    P = Purchase cost per unit


    R = Forecasted monthly usage
    C = Cost per order event (not per unit)
    F = Holding cost factor
    How EOQ Works
    The EOQ Formula

    Review and Summary of the EOQ Formula

    Here is the a graphic representation of the EOQ equation


    Real Life Example:
    Real Life Example:
    Real Life Example:

    First, Recall the


    EOQ Equation:

    P = Purchase cost per unit


    R = Forecasted monthly usage
    C = Cost per order event (not per unit)
    F = Holding cost factor
    Real Life Example:

    Next let’s identify the


    correct variables…
    Real Life Example:

    Next let’s identify the


    correct variables…
    Forecasted
    Amount
    Real Life Example:

    Next let’s identify the


    correct variables…

    Ordering
    Costs
    Real Life Example:

    Next let’s identify the


    correct variables…

    Cost per
    Unit
    Real Life Example:

    Next let’s identify the


    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)

    EOQ = 510 cases


    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.

    EOQ is useful in determining optimal order


    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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