This document discusses the economic order quantity (EOQ) model, which helps determine the optimal order quantity that minimizes total inventory costs. It describes the different types of inventory costs, including carrying costs, ordering costs, and shortage costs. The EOQ model balances these costs - large orders reduce ordering costs but increase carrying costs, while small orders are the opposite. The document provides the formula for calculating the EOQ and defines the symbols used. It also shows graphs depicting how total costs vary with order quantity and how the EOQ is the quantity that minimizes total costs.

1. Economic Ordered
Quantity (EOQ)
By
Prof. R. V. Kolhe
Assistant Professor
Department of Civil Engineering
Sanjivani College of Engineering, Kopargaon

2. Inventory Costs
 Carrying cost
◦ cost of holding an item in inventory
 Ordering cost
◦ cost of replenishing inventory
 Shortage cost
◦ temporary or permanent loss of sales
when demand cannot be met
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3. ECONOMIC ORDER QUANTITY
 EOQ----
 One of the major decision to be taken
◦ Involves:
 Investment in the inventory
 Large orders – reduce administrative
costs but – increase investment in stock
 Small frequent orders – reduce
investment but – increases administrative
costs
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4. INVENTORY COSTS
 Holding costs- (INVENTORY CARRYING COST)
it consists of
 Purchase cost
 storage cost,
 capital cost and
 obsolescence/ shrinkage cost.
 Purchase cost Actual cost of purchase
 Storage cost includes rent, depreciation,
insurance, tax, security, personnel, etc;
 capital cost includes loss of interest,
opportunity cost interest paid;
 Shrinkage cost includes pilferage and breakage.
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5.  Setup or ordering costs –
(Procurement Cost)
 These are fixed costs associated with the
production of a lot internally and placing an
order externally with a vendor.
 These are independent of the no. of
units ordered.
 Setup costs includes time for setup of
jigs/fixture etc.
 Ordering cost includes telephone
charges, delivery fee, time required
for purchase order, expediting cost.
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6. EOQ Assumptions
 Known & constant demand
 Known & constant lead time
 Instantaneous receipt of material
 No quantity discounts
 Only order (setup) cost & holding cost
 No stockouts
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7. EOQ Model Graphical
Order Quantity
Annual Cost
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8. Order Quantity
Annual Cost
Holding Cost
EOQ Model
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9. Order Quantity
Annual Cost
Holding Cost
Order (Setup) Cost
EOQ Model
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10. Order Quantity
Annual Cost
Holding Cost
Total Cost Curve
Order (Setup) Cost
EOQ Model
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11. Order Quantity
Annual Cost
Holding Cost
Total Cost Curve
Order (Setup) Cost
Optimal
Order Quantity (Q*)
EOQ Model
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12. Symbols
 Annual Consumption of the item = S
 Price per unit = Cu
 Procurement cost / order = Cp / C0
 Inventory carrying cost as
% of average inventory
investment = i
 Order quantity = q
 Economic Order Quantity = q0
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13. Optimising Costs
 Annual procurement cost :
 No. of orders x procurement cost per order
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X procurement cost/per order

14.  Annual Inventory :
 Average inventory investment X inventory
carrying cost
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X Inventory carrying
cost

15.  TOTAL ANNUAL COST =
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+

16. Optimisation of the model
 For the cost to be minimum –
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Q = Cu*q = 2s * cu * cp
i√
Q = Cost of EOQ

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2 * (Annual Consumption {units}) * (procurement cost/order)
Price / unit * inventory carrying cost
EOQ =

18. AN ALTERNATIVE FORMULA
 Let
 A = Total items consumed per year
 P = procurement cost per year
 C= annual inventory carrying cost
 Q= Economic order quantity
 Then
 procurement cost per year
= Number of orders * cost per order
= AP/Q
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19.  Inventory carrying cost
◦ = Average value of inventory in a year
* inventory carrying cost /year
= ½ QC
Total cost = AP/Q + QC/2
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20. Q2 = 2AP/C
Q = EOQ = 2AP/C
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21. Thank You
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