introduction to EOQ,concepts, application, formula

1. Economic Order
Quantity

2. Definition of EOQ
How to use the EOQ model in a business
organization
How the EOQ model works
Real world example

3. The Definition of EOQ
EOQ, or Economic Order Quantity, is defined as
the optimal quantity of orders that minimizes tota
variable costs required to order and hold
inventory.

4. How to use EOQ in your organization
How much inventory should we
order each month?
The EOQ tool can be used to model the amount of
inventory that we should order each month.

5. How EOQ Works
& 
The Principles Behind EOQ: The Total Cost Curve

6. How EOQ Works
The Principles Behind EOQ: The Holding Costs
Keeping inventory on hand
Interest
Insurance
Taxes
Theft
Obsolescence
Storage Costs

7. How EOQ Works
The Principles Behind EOQ: The Holding Costs
Interest
Obsolescence
Storage

8. How EOQ Works
The Principles Behind EOQ: The Procurement Costs
Primarily the labor costs associated with processing
the order:
Ordering and requisition
A portion of the freight if the amounts vary
according to the size of the order
Receiving, inspecting, stocking
Invoice processing

9. How EOQ Works
The Total Cost Formula
Total Cost = Purchase Cost + Order Cost + Holding
Cost

10. How EOQ Works
The Total Cost Formula
This represents the unchanging
fixed costs
P = Purchase cost per unit
R = Forecasted monthly usage

11. How EOQ Works
The Total Cost Formula
This represents the variable
order costs
P = Purchase cost per unit
R = Forecasted monthly usage
C = Cost per order event (not per unit)
Q = The number of units ordered

12. How EOQ Works
The Total Cost Formula
This represents the variable
holding costs
P = Purchase cost per unit
R = Forecasted monthly usage
C = Cost per order event (not per unit)
Q = The number of units ordered
F = Holding cost factor

13. How EOQ Works
The EOQ Formula
Total Cost
Formula
Taking the derivative of both sides of the equation and setting equal to
zero to find the minimum value of the function, one obtains:

14. The result of differentiation
How EOQ Works
The EOQ Formula
The Economic Order Quantity

15. How EOQ Works
The EOQ Formula
Review and Summary of the EOQ Formula
P = Purchase cost per unit
R = Forecasted monthly usage
C = Cost per order event (not per unit)
F = Holding cost factor

16. How EOQ Works
The EOQ Formula
Review and Summary of the EOQ Formula
Here is the a graphic representation of the EOQ equation

17. Real Life Example:

18. Real Life Example:

19. Real Life Example:
First, Recall
the EOQ
Equation: P = Purchase cost per unit
R = Forecasted monthly usage
C = Cost per order event (not per unit)
F = Holding cost factor

20. Real Life Example:
Next let’s identify the
correct variables…

21. Real Life Example:
Forecasted
Amount

22. Real Life Example:
Ordering
Costs

23. Real Life Example:
Cost per Unit

24. Real Life Example:
Holding Cost
Factor

25. Real Life Example:
R = Annual demand
C = Fixed ordering
cost
P = Cost per case
F = Holding Cost
Factor