The document discusses the economic order quantity (EOQ) model, which determines the optimal order quantity that minimizes total inventory costs. It defines EOQ as the order size that balances holding costs from carrying inventory with ordering costs. The document provides the EOQ formula and explains its underlying assumptions, as well as how to calculate EOQ and examples of its applications for organizations.

1. ECONOMIC ORDER QUANTITY
(EOQ)
PRESENTED BY
SAYANA.K.A
IIIrd SEM MSc IF
SCHOOL OF INDUSTRIAL FISHERIES
CUSAT

2. INTRODUCTION
ECONOMIC 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. 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. THE QUANTITY TO
ORDER AT A GIVEN TIME
MUST BE DETERMINED
BY BALANCING TWO
FACTORS
(1) THE COST OF POSSESSING OR
CARRYING MATERIALS AND
(2) THE COST OF
ACQUIRING OR ORDERING MATERIALS

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. FORMULA OF EOQ
EOQ=
•A = DEMAND FOR THE YEAR
•CP = COST TO PLACE A SINGLE ORDER
•CH = COST TO HOLD ONE UNIT INVENTORY FOR
A YEAR

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. GRAPHICAL SOLUTION

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. EOQ MODEL

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 COST
INCREASES 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. HOW TO CALCULATE
EOQ
1. 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 NUMERATOR
4. DIVIDE THE NUMERATOR BY ANNUAL
CARRYING COST PER UNIT
5. TAKE THE SQUARE ROOT

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