EOQ, EPQ, and QR Inventory Models Explained
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ScribdTranslationsEOQ, EPQ, and QR Inventory Models Explained
Translated by
ScribdTranslationsHigher Technological Institute
North Zacatecas.
5- A
Public Accountant
Production and the management
operations
Professor: Ma. Juana Mota García
Alumna:Kelly Adamari Rivas Mijares
D19010498
Theme:
4.5 Inventory models, EOQ, EPQ, QR
Miguel Auza, Zacatecas.
EOQ inventory model
The Wilson Model, also known as the EOQ System (Economic Order Quantity)
Quantity in English and EOQ (Economic Order Quantity) in Spanish, is a
stock management method widely used to reduce inventory costs in
a warehouse or storage room.
It is one of the simplest stock management models to apply, and for
It is so widely used. It focuses on calculating the right amount for each order.
product or raw material of the company to minimize costs
inventory.
The method arises with the clear objective of systematizing the goods that
periodically it is kept in the warehouse and to define the quantity and the date on which
Orders must be placed with suppliers. Although this system is used
commonly to systematize the purchase of raw materials, it is applicable to the
optimization of the purchase of any product necessary for the company at all times
that it is possible to determine the purchase costs in terms of order and
storage.
The method is simple and is based on a formula that allows to determine in which
moment and what quantity the company's orders need to be placed,
considering the demand and the company's minimum safety stock.
To develop the model and calculation correctly, total must be taken into account.
knowledge of the company's logistics processes and the different stages of
the supply chain and decision making.
Basic assumptions
In order to develop the EOQ method, the following conditions must be met
or basic assumptions in the company, if not the calculations cannot be carried out
precise form
• It is assumed that the demand that the company has is known, and
it is independent and without significant fluctuations throughout the year, therefore,
constant.
• The unit cost of each product or purchase must also meet these
conditions, being known and fixed throughout the year. Not valid therefore
for seasonal products.
• Storage costs are also known and depend on the level
of stocks.
• Potential discounts for bulk purchase or orders are not considered.
• The supplier's supply and load times are also taken into account.
constants and are known.
• Se toma el supuesto de que no hay roturas de stock y de que en cualquier
At the moment, any quantity of product can be requested from the supplier.
Formula
To calculate the formula of the model, we must determine the following
terms:
• Optimal quantity for each order
• Cost incurred for each order
• D: Annual demand for product or raw material
• Storage cost per unit
Considering these terms, we arrive at the simplified formula that provides the definition.
the optimal quantity for each order of the company (Q):
Formula
Advantages
• Simplicity and ease of execution compared to other types of
similar models.
• The EOQ or CEP method helps to optimize storage costs.
and purchase.
• It prevents situations from occurring in the warehouse or storage.
overstock.
• Defining the correct amount of product to purchase helps to avoid stockouts.
in stock.
• The EOQ (Economic Order Quantity) model has widely varying results.
demonstrated in situations that meet the indicated assumptions.
Disadvantages
• The assumptions make the model impractical or unrealistic for many.
companies by their characteristics. The assumption of constant demand makes
that the EOQ model may not be useful for companies with seasonal demands,
punctual or irregular, or can lead to errors in the face of a drastic change in
the habits of the customer.
• The fact that volume purchase discounts are not considered,
leaves out of the equation a very relevant variable, which can become
offset the storage costs.
• The assumption of immediacy in the replenishment of inventory is not entirely
realistic, and without considering that variable, break-up situations may occur
of stock that must be taken into account when developing the
model.
EPQ inventory model
Economic Production Lot
Quantity or by its acronym EPQ) is a Mathematical Model for inventory control
which extends the Economic Order Quantity model to a finite rate of
production. Its principle is to find the production batch of a single product
for which the costs of issuing the production order and the costs of maintaining it
In inventory, they are equalized. The model was initially formulated by E. W. Taft in
1918.
Normally, a purchase order is followed by a production order from the
article requested, so a certain period of time is needed to complete
that production order. During this time the item is being produced and
defendant. For this case to make sense, the production rate must be
greater than the demand rate, since if it were not so there would be no inventory in
no moment.
Assumptions
• The demand is known, constant, and independent. In general, one works
with annual time units but the model can be applied to others
units of time.
• The products are produced and sold simultaneously.
• The waiting time, loading time, or replenishment time of
The provider is constant and deterministic.
• The inventory level is progressively restocked over a period.
of time.
• The quantity to request is constant.
• Total costs are the sum of the costs of holding inventory and the
order costs are constant over time.
• There are no volume order discounts.
Formula
The production rate, P, is defined as the number of units produced in a
time period generally one year. When the inventory runs out, point A, it
The production of the purchase order for lot Q is starting. A time is required for...
Q/P production. During this time, inventory accumulates at a rate of P-
D, so when the production of the batch of size Q ends, it will reach the
maximum inventory level I, what is it:
From this point, the inventory level decreases as a consequence of a
uniform and constant demand, when the stocks run out the cycle starts
again.
Annual emission cost:
The average inventory:
So the annual cost of maintaining inventories is:
The total annual cost:
It can be obtained in the same way as for the case of the simple model, the value
of the optimal lot that minimizes costs:
As expected, for instantaneous provisioning, P = ∞, it is obtained the
economic order quantity formula.
QR inventory model
This model has a continuous inventory review policy in which it is requested
an amount Q when the inventory reaches the reorder point r, a condition
What must be satisfied is the fact that the delivery time is different from zero.
and a reorder point (r) and a fixed lot size Q model (Q, R) are calculated,
consider an essential stochastic model for the continuous review system, in
which establishes a service policy and an optimization approach that is the
stochastic version of the deterministic EOQ, the two decision variables of this
model are Q and R.
The QR strategy provides sufficient capacity to turn the information
from the demand, a guiding element for decision-making until the end
possible moment in time, seeking:
• Ensure that the offer is maximized.
• That there is a reduction to a minimum of cycle times and costs.
inventory, taking advantage of the competitive sales granted by technology
of the information. In particular, the strategy emphasizes flexibility and
speed of the product in order to meet the changing demands of a
competitive, volatile, and dynamic market.
The strategy is based on sharing information among business partners about
of the supply and demand of products, using technologies from the
information. Its operation consists of constantly updating the estimates
from demand and consumption in real time, to then place new orders at
lower cost.
Assumptions
• The demand is known and constant.
• The supplier's lead time is constant and known.
• The supply is received all at once.
• There are no volume order discounts.
• Total costs are constant.
Formula
Formula for the optimal order quantity in units:
2 AD
Q=
vr
Where:
• Order quantity in units
• Fixed cost of placing an order
• D: Annual product demand
• V: Inventory handling cost as a percentage of product value
• R: Unit cost of the product
Advantages
• It offers the possibility of keeping amounts organized at a low cost.
• It is easy to apply, as it has the assumptions of constant variables.
• It facilitates the calculation of order units at the time of placing it.
Disadvantages
• Variables do not always manage to be constant, so it may present
inconveniences.
• Volume discounts are ignored.
Bibliography
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economic order quantity eoq or wilson in warehouse stock management
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