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# 3...economic order quantity

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### 3...economic order quantity

1. 1. ECONOMIC ORDER QUANTITY (EOQ) PRESENTED BY SAYANA.K.A IIIrd SEM MSc IF SCHOOL OF INDUSTRIAL FISHERIES CUSAT
2. 2. INTRODUCTIONECONOMIC ORDER QUANTITY IS THE NUMBER OF UNITS THAT A COMPANY SHOULD ADD TO INVENTORY WITH EACH ORDER TO MINIMISE THE TOTAL COSTS OF INVENTORY.EXAMPLE FOR INVENTORY COSTS ARE HOLDING COSTSORDER COSTSSHORTAGE COSTS
3. 3. DEFENITION AND EXPLANATIONSIZE OF THE ORDER WHICH GIVES MAXIMUM ECONOMY IN PURCHASING ANY MATERIAL AND ULTIMATELY CONTRIBUTES TOWARDS MAINTAINING THE MATERIALS AT THE OPTIMUM LEVEL AND AT THE MINIMUM COST.THE AMOUNT OF INVENTORY TO BE ORDERED AT ONE TIME FOR PURPOSES OF MINIMIZING ANNUAL INVENTORY COST.
4. 4. THE QUANTITY TOORDER AT A GIVEN TIME MUST BE DETERMINED BY BALANCING TWO FACTORS(1) THE COST OF POSSESSING ORCARRYING MATERIALS AND (2) THE COST OFACQUIRING OR ORDERING MATERIALS
5. 5. USE OF EOQ AS A PART OF A CONTINUOUS REVIEW OF INVENTORY SYSTEM MODEL FOR CALCULATING THE APPROPRIATE REORDER POINT AND THE OPTIMAL REORDER QUANTITY TOOL FOR DETERMINING QUANTITY OF INVENTORY
6. 6. FORMULA OF EOQEOQ=•A      =  DEMAND FOR THE YEAR•CP   =  COST TO PLACE A SINGLE ORDER•CH   =  COST TO HOLD ONE UNIT INVENTORY FOR A  YEAR
7. 7. UNDER LYING ASSUMPTIONS• THE ORDERING COST IS CONSTANT.• THE RATE OF DEMAND IS CONSTANT• THE PURCHASE PRICE OF THE ITEM IS CONSTANT I.E. NO DISCOUNT IS AVAILABLE• THE REPLENISHMENT IS MADE INSTANTANEOUSLY, THE WHOLE BATCH IS DELIVERED AT ONCE.
8. 8. GRAPHICAL SOLUTION
9. 9. THE TOTAL COST FUNCTIONTOTAL COST = PURCHASE COST + ORDERING COST + HOLDING COSTPURCHASE COST : VARIABLE COST OF GOODS= PURCHASE UNIT PRICE × ANNUAL DEMAND QUANTITY. THIS IS P×DORDERING COST: COST OF PLACING ORDERS: EACH ORDER HAS A FIXED COST S, AND WE NEED TO ORDER D/Q TIMES PER YEAR. =S × D/QHOLDING COST: THE AVERAGE QUANTITY IN STOCK (BETWEEN FULLY REPLENISHED AND EMPTY) IS Q/2; =H × Q/2.
10. 10. EOQ MODEL
11. 11. THE DIAGRAM BELOW ILLUSTRATES HOW THESE TWO COMPONENTS (ANNUAL HOLDING COST AND ANNUAL ORDER COST) CHANGE AS Q,THE QUANTITY ORDERED, CHANGES. AS Q INCREASES HOLDING COSTINCREASES BUT ORDER COST DECREASES. HENCE THE TOTAL ANNUAL COST CURVE IS AS SHOWN BELOW - SOMEWHERE ON THAT CURVE LIES A VALUE OF Q THAT CORRESPONDS TO THE MINIMUM TOTAL COST.
12. 12. HOW TO CALCULATE EOQ1. UNDERSTAND AND REVIEW THE FORMULA [2 * (ANNUAL USAGE IN UNITS * ORDER COST) / ANNUAL CARRYING COST PER UNIT]^(1/2).2. DEFINE THE VARIABLES.3. CALCULATE THE NUMERATOR4. DIVIDE THE NUMERATOR BY ANNUAL CARRYING COST PER UNIT5. TAKE THE SQUARE ROOT
13. 13. APPLICATIONTO PART OF THE PURCHASES OF ALMOST EVERY ORGANISATIONELIMINATE BURDEN OF CALCULATION AND ALSO ENABLES THE USE MORE COMPLEX FORMULASUSEFUL FOR MATERIALS THAT HAVE I. REASONABLY STEADY AND PREDICTABLE USAGE II. RELATIVELY LOW COST III. SHORT LEAD TIME