Understanding the Basic EOQ Model
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ScribdTranslationsUnderstanding the Basic EOQ Model
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ScribdTranslationsBasic EOQ model
Assumptions of EOQ
For the development of the model, we start with the following assumptions:
The demand is constant and known. It can be given in days, weeks,
months or years. In reality, it can be any unit of time as long as
when the other data is processed in the same way.
The time between placing the order and its receipt (lead time) is
known and constant.
There are no quantity discounts.
There are no restrictions on the batch size.
The ordering cost and the holding cost are the only variable costs.
The ordering cost is constant.
Variables of the basic EOQ
This is the representative graph of the model, the sawtooth graph. Fix
so then just when the inventory level reaches 0, it immediately
replenish reaching Q units. The rate of usage or consumption of the inventory is as follows,
due to the constant demand. Thus, over time...
If we continue to delve into the EOQ model, we will find aspects to continue.
explaining the model, but I think that's enough of an introduction, so before
give examples of EOQ, let us see the variables that will participate in its calculation:
Q = Quantity of units per purchase order
Q*= Optimal quantity of units per order, also known
as EOQ.
TC= Costo total
D= Demanda de unidades
C = Cost per unit
S = Ordering cost
H = Cost of holding inventory (usually taken as a percentage
from the inventory unit, therefore, you will encounter H=iC, where i
it is the percentage of the cost of maintaining and C as we said before, the cost per
unit.
The formulas that I will explain below are to be worked on an annual basis,
but its application is the same for other periods of time, as long as the
time units are worked the same.
Basic EOQ model formula
Variables:
Formulas:
Solved example of EOQ
Veinteluces is a company that provides lighting solutions for streets and
homes. The company does not have a specific inventory control, so it seeks
reduce your inventory cost by determining the optimal order quantity of
standard bulbs.
The demand (D) is 1200 units per year.
The cost of ordering (S) is 20 per order.
The annual holding cost (H) per unit is 0.3 per unit.
Working days per year: 240 days.
How to calculate the economic order quantity? How many times do we go
to ask? At what moment should we ask? How much is it going to cost us to order and
maintain that inventory?
Step 1: We need to calculate the optimal order quantity. It will be enough to replace
the demand values, reorder and maintain on the EOQ formula.
Step 2: With the calculated EOQ, we can now obtain the number of times that
we should order in the year, dividing the demand by Q*.
Step 3: One piece of information we need is the working days per year. If we divide
this data about the number of times we should place an order, we will obtain
the lead time or the time between one order and another.
Step 4: To calculate the reorder point, we must first calculate the demand
average. This is nothing more than dividing the annual demand by the number of days of
work. We will multiply the result by the lead time.
Step 5: We calculate the ordering costs, holding costs, and the total cost by replacing
the data based on the formula.
The step-by-step described has this aspect and includes the EOQ formula.
So, note that in this solved exercise the optimal order quantity (Q*) is
400 units per order, and that three orders will be placed in the year
(N), whose time between one and the other will be 80 days (L). The company knows that it must
place a purchase order as soon as the inventory reaches a level of 400
units (R).