02-04-2011, 12:33 PM
Presented By:
Neeraj Gautam
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“Economic Order Quantity”
Introduction
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.
What is EOQ ?
Economic order quantity is the level of inventory that minimizes the total inventory holding costs and ordering costs.
Since a higher quantity is not best … and a lower quantity is not best … there must be some “Economic order quantity (EOQ)” which minimizes the total variable costs of inventory.
Assumptions
1. Production is instantaneous.
2. Delivery is immediate.
3. Demand is deterministic.
4. Demand is constant over time.
5. Ordering cost is known and constant.
6. Cost of items remains constant over time.
7. Lead time is zero.
8. Shortages are not permitted.
How large should your orders be?
Inventory Models With Deterministic Demand
There are two models
1 No shortage permitted
2 Shortage permitted
EOQ provides information about
how much to order
when to order
Since a higher quantity is not best … and a lower quantity is not best … there must be some “Economic order quantity (EOQ)” which minimizes the total variable costs of inventory.
Classical EOQ model ( Demand Rate Uniform, Replenishment rate Infinite)
Example: 1
A item has a demand of 9000 units/year. The cost of procurement is Rs 100 & holding cost per unit is Rs 2.40 per year. No shortage are allowed. Determine : 1 ) The economic lot size
2) The number of order per year
Solution:- Given
Demand rate “D” = 9000units/year, Ordering cost “S” = Rs100/procurement
Ordering cost “S” = Rs100/procurement
Holding cost “H” = Rs2.40/unit/year
1) Economic lot size
= sqrt {(2*9000*100)/2.40}
= 866 units
2) The no. of order per year
= sqrt {(H*D)/(2*S)}
= sqrt {(2.40*9000)/(2*100)}
= sqrt (108)
= 10.4 order / year
EOQ Model
Advantages of EOQ
How much amount of goods to order
When to order
minimizing inventory costs
keeps you away from over purchasing to get 'deals' from vendors
Disadvantages
High demand
On seasonality to your consumption
EOQ should only be applied to higher volume items