eoq Essays - Manufacturing, Operations Research,

Economic Order Quantity A lot of companies worries about two things when deciding how to manage their inventory. First, is how much theyshould order? Second, how often should they order. The Economic Order Quantity, EOQ, determines the appropriate amount and frequency to order and hold inventory. Is the amount of inventory to be ordered at one time for purposes of minimizing annual inventory cost. The EOQ formula is: where: Q= the EOQ order quantity. This is the variable we want to optimize. All the other variables are fixed quantities. D= the annual demand of product in quantity per unit time. Also forecasted monthly usage. S= the product order cost. Cost per order event (not per unit) C=Unit cost. H= Holding cost per unit as a fraction of product cost. An example: The demand for Klabitz?s is 50 per week. The order cost is $30 (regardless of the size of the order), and the holding cost is $6 per Klabitz per week. Plugging in these figures into equation 1; the EOQ formula we get: The greater the Q, the order cost would decrease due to less orders placed. On the other hand, if Q increases, the holding cost would increase due to higher inventory levels. The graph is: From the graphic we can see that while the holding cost increases with quantity ordered, the ordering costs decreases. At the same time it can also be seen that purchase order cost is constant as it is not a function of the quantity but of cost alone. The point where the lines cut and where the line starts going down is the EOQ. From the graph Total cost TC = Purchase cost + Carrying cost + Ordering cost Purchase cost = D.C where D = annual demand in units, C = Cost per unit Ordering cost = [D/Q] * S where D = annual demand in units; Q = EOQ and S = order cost or set-up cost So the important thing here is that the total cost, is the minimal cost that you can have when the inventory tends to be cero, with the purpose of finding the minimal cost. EOQ whole model bases in founding the point, where the costs of ordering a product and the cost to maintain the product in the inventory are equal.