This document discusses economic order quantity (EOQ) models for inventory management. It defines EOQ as the order quantity that minimizes total annual inventory costs, including ordering costs and carrying costs. It presents the mathematical formula for calculating EOQ as the square root of 2 times annual demand times ordering cost divided by carrying cost per unit. The document also describes the 'Q' model, where a fixed quantity is ordered when inventory reaches a reorder point, and the 'P' model, where inventory is reviewed and ordered periodically. It notes the merits of each model in reducing costs and the demerits like inflexibility or irregular supplier interactions.

1. IDEAL INSTITUTE OF ENGINEERING
NAME- SUBHADIP MAJUMDER
ROLL NO- 27901321017
DEPARTMENT- CIVIL ENGINEERING
SEMESTER- 6th
YEAR- 3rd
SUBJECT- ENGINEERING ECONOMICS, ESTIMATE & COSTING
SUBJECT CODE- CE(PC)602
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-:TOPIC:-
ECONOMIC ORDER QUANTITY

2. Inventory
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Definition
“The term inventory include materials- raw, in
progress, finished packaging, spares, and
other stock in order to meet an un expected
demand or distribution in the future.”

3. Inventory cost
Ordering costs;
Carrying cost;
Capital cost;
Store space cost;
Inventory service cost; &
Inventory risk cost;
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4. Inventory management & control
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Inventory management involves the:
“Development and administration of policies
systems and procedures, which will minimize
total cost related to inventory decisions and
related functions such as production
scheduling, purchasing and traffic”.

5. What is EOQ ?
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Economic order quantity is one of the
techniques of inventory control which minimizes
total holding and ordering costs for the year.
The economic order quantity is the technique
which solves the problem of the materials
manager.

6. Definition of EOQ
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“ EOQ is essentially an accounting formula that
determines at which the combination of order,
costs and inventory carrying cost are the least.
The result is the most cost effective quality to
order. In purchasing this is known as order
quantity, in manufacturing it is known as the
production lot size.”
- Dave Piasecki

7. EOQ Models
‘Q’ Models; &
‘P’ Models.
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8. Assumption of the EOQ Models
Demand is known and is deterministic, i.e. constant;
The lead time, i.e. the time between placement of the order and
the receipt of the order is known and constant;
The receipt of inventory is instantaneous. In other words the
inventory from an order arrives in one batch at one point in time;
Quantity discount are not possible, in other words it dose not
make any difference how much we order, the price of the product
will still be the same; and
That only costs pertinent to inventory model are the cost of
placing an order and cost of holding or storing inventory over
time.
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9. ‘Q’ Model of EOQ
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 In ‘Q’ model, a fixed quantity of material is
ordered when ever the stock on hand reaches
the recorder point the fixed quantity of
material ordered each time is nothing but the
economic order quantity (EOQ). when the
new consignment arrives the total stock shall
be within the maximum and the minimum
limits.

10. Graphic presentation of ‘Q’ Model
E
O
Q
RE-ORDER
LEVEL
BUFFER
STOCK
MAXIMUM
LEVEL
MINIMUM
LEVEL
E G
I
N
V
E
N
T
O
R
Y
TIME PERIOD
K
A B C D
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11. Mathematical method of EOQ
The objective is to determine the quantity to order
which minimize the total annual inventory
management cost;
Minimize Total cost per period = inventory holding
cost per period + order cost per period;
Where order cost = the number of order placed in the
period ‘x’ order cost; and
Carrying cost = average inventory level ‘x’ the
carrying costs of 1 unit of stock for one period.
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12. Mathematical formula of ‘Q’ Model
Where as ,
Q denotes order quantity;
A denotes demand per time period (e.g.-annual demand);
S denotes carrying / holding cost of 1 unit of stock for one
period; and
P denotes order cost.
EOQ = Square Root of 2AP/S
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13. 12/08/09 15
Example:
Q. Calculate the economic order quantity if annual demand for the
product is 5,000 unit. The ordering cost is Rs 30 per order and
holding cost is Rs 6/- per unit per annual.
Sol:-
Now,
Given R=5000 unit
Cp= Rs. 30
Ch=Rs. 6
EOQ = J ( 2RCp/ CH)
= J(2*5000*30/6)
= J 5000
= 224 or 22.5 units.
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14. Merits of ‘Q’ system
Each material can be in the most economical
quantity;
Purchasing an inventory control personnel
automatically devote attention to the items
that are needed only when required; and
Positive control can be easily exerted to
maintain total inventory investment at the
desired level, simply by manipulating the
plant maximum and minimum values.
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15. Demerits of ‘Q’ system
The orders are raised at irregular intervals which may not
be convenient to the suppliers;
In case the lead time is very high supply of inventory may
interpret;
EOQ may give you an order quantity which is much below
the supplier minimum, and there is always a chance that
the ordering level for an item has been reached but not
noticed in which case a stock out may occur; and
The items cannot be group and ordered at a time since the
recorder points occur irregularly.
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16. ‘P’ model of EOQ
In this model the stock position of each item
of material is regularly is reviewed;
Under this model inventory is ordered based
on fixed period.
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L
I
T
UNITS OF
STOCK
Replenishment
level
R1 15
days
Y1
Y2 Y3
R3
R1
G
S3
R2
S2
S1
S2
R2 R3 S3
Graphical Presentation of ‘P’ Model
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18. Merits of P model
The ordering and inventory cost are low;
The supplier will also offer attractive discount
on sales are granted; and
The system works well for material which
exhibit an irregular or seasonal use and
whose purchase must be planned in advance
on the basis of sales estimates.
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19. Demerits of ‘P’ model
It compels a periodic review of all item; this in itself
make the system somewhat inefficient. because of
difference in uses rate supply may not have to be
order until succeeding review;
Equally important the system demand the
establishment of rather inflexibility order quantities. in
The interest of the administrative efficiency; and
The periodic review system tends to peak the
purchasing work around the review dates.
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20. THANK YOU
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