EOQ
ECONOMIC ORDER QUANTITY (EOQ) MODEL
The economic order quantity (EOQ) is the order quantity that minimizes total holding and ordering costs for the year. Even if all the assumptions don’t hold exactly, the EOQ gives us a good indication of whether or not current order quantities are reasonable.
What is the EOQ Model?
Cost Minimizing “Q”
Assumptions:
Relatively uniform & known demand rate
Fixed item cost
Fixed ordering and holding cost
Constant lead time
(Of course, these assumptions don’t always hold, but the model is pretty robust in practice.)
What Would Holding and Ordering Costs Look Like for the Years?
A = Demand for the year
Cp = Cost to place a single order
Ch = Cost to hold one unit inventory for a year
Total Relevant* Cost (TRC)
Yearly Holding Cost + Yearly Ordering Cost
* “Relevant” because they are affected by the order quantity Q
Economic Order Quantity (EOQ)
EOQ Formula
Same Problem
Pam runs a mail-order business for gym equipment. Annual demand for the TricoFlexers is 16,000. The annual holding cost per unit is $2.50 and the cost to place an order is $50. What is the economic order quantity?
Example:
The I-75 Carpet Discount Store in North Georgia stocks carpet in its warehouse and sells it through an adjoining showroom. The store keeps several brands and styles of carpet in stock; however, its biggest seller is Super Shag carpet. The store wants to determine the optimal order size and total inventory cost for this brand of carpet given an estimated annual demand of 10,000 yards of carpet, an annual carrying cost of $0.75 per yard, and an ordering cost of $150. The store would also like to know the number of orders that will be made annually and the time between orders (i.e., the order cycle) given that the store is open every day except Sunday, Thanksgiving Day, and Christmas Day (which is not on a Sunday).
SOLUTION:
Cc = $0.75 per yard
Co = $150
D = 10,000 yards
The optimal order size is
The total annual inventory cost is determined by
The economic order quantity (EOQ) is the order quantity that minimizes total holding and ordering costs for the year. Even if all the assumptions don’t hold exactly, the EOQ gives us a good indication of whether or not current order quantities are reasonable.
What is the EOQ Model?
Cost Minimizing “Q”
Assumptions:
Relatively uniform & known demand rate
Fixed item cost
Fixed ordering and holding cost
Constant lead time
(Of course, these assumptions don’t always hold, but the model is pretty robust in practice.)
What Would Holding and Ordering Costs Look Like for the Years?
A = Demand for the year
Cp = Cost to place a single order
Ch = Cost to hold one unit inventory for a year
Total Relevant* Cost (TRC)
Yearly Holding Cost + Yearly Ordering Cost
* “Relevant” because they are affected by the order quantity Q
Economic Order Quantity (EOQ)
EOQ Formula
Same Problem
Pam runs a mail-order business for gym equipment. Annual demand for the TricoFlexers is 16,000. The annual holding cost per unit is $2.50 and the cost to place an order is $50. What is the economic order quantity?
Example:
The I-75 Carpet Discount Store in North Georgia stocks carpet in its warehouse and sells it through an adjoining showroom. The store keeps several brands and styles of carpet in stock; however, its biggest seller is Super Shag carpet. The store wants to determine the optimal order size and total inventory cost for this brand of carpet given an estimated annual demand of 10,000 yards of carpet, an annual carrying cost of $0.75 per yard, and an ordering cost of $150. The store would also like to know the number of orders that will be made annually and the time between orders (i.e., the order cycle) given that the store is open every day except Sunday, Thanksgiving Day, and Christmas Day (which is not on a Sunday).
SOLUTION:
Cc = $0.75 per yard
Co = $150
D = 10,000 yards
The optimal order size is
The total annual inventory cost is determined by