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Economic Order Quantity (EOQ) Explained

The Economic Order Quantity (EOQ) model is a mathematical optimization tool used to determine the optimal order size and timing to minimize total inventory costs. It has advantages such as calculating order quantity, annual costs, and reorder points, but assumes constant demand and does not account for stockouts or discounts. Examples illustrate how to apply the EOQ formula to determine optimal order quantities and reorder points for specific scenarios.

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23 views17 pages

Economic Order Quantity (EOQ) Explained

The Economic Order Quantity (EOQ) model is a mathematical optimization tool used to determine the optimal order size and timing to minimize total inventory costs. It has advantages such as calculating order quantity, annual costs, and reorder points, but assumes constant demand and does not account for stockouts or discounts. Examples illustrate how to apply the EOQ formula to determine optimal order quantities and reorder points for specific scenarios.

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© All Rights Reserved
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OEQ MODEL

The Economic Order Quantity


(EOQ) is a fixed quantity model
which seeks to determine through the
quantitative equality of costs of
sort and the costs of
maintenance at the lowest total cost
possible (this is an exercise of
mathematical optimization
ADVANTAGES
The EOQ method as a mathematical model is capable of determining:
• The moment when an order should be placed or a run should be started
production.
• The number of units (Order size) to be ordered 'Q'.
• The Annual Cost per Order (which will be equal to the annual holding cost).
• The annual cost of maintenance (which will be equal to the annual ordering cost).
• The total annual cost (TRC, Total Relevant Cost, which will be the summation of
the two previous costs).
• The number of orders or runs that need to be placed or started
respectively to the year (N).
• The time between each order or production run (T).
• The consumption period in days.
DISADVANTAGES
• One single item.
• Constant, exact, and known demand.
• Items are produced or purchased in batches.
• Each order is received in a single shipment.
• Out of stock situations (stock break) are not allowed.
• The fixed cost of issuing an order or of preparation is
constant and deterministic.
• The lead time (loading time) of the supplier is
constant and deterministic.
• There are no volume order discounts.
in this case there is a special model that
presented later.
EOQ model graph
FORMULAS
Example 1
A company faces an annual demand of 1,000
units of its main product. The cost of issuing a
the order is $10 and it has been estimated that the cost of
unit storage of the product for one year is
of $2.5. Assume that the Lead Time (Waiting Time)
From the time an order is issued until it is received, it is 7.
days. Determine the optimal order quantity using
EOQ that minimizes total costs. What is the point of
reorder (ROP)?
The optimal order size (Q*) that minimizes total costs is 90 units.
Additionally, each time the inventory reaches 20 units, a new order for 90 is issued.
units.
Example 2
Veinteluces is a company that offers solutions for
lighting for streets and homes. The company does not have a
specific inventory control, so it seeks to reduce
its inventory cost determining the optimal quantity
standard bulb order.
Example 2
The demand (D) is 1200 units per year.
The cost of ordering (S) is 20 per order.
The annual cost of holding (H) per unit is 0.3 per unit.
Working days per year: 240 days.
How to calculate the economic order quantity? The number
How often do we go to ask? When should we?
ask? How much is it going to cost us to arrange and maintain that
inventory?
Step 1:

We must calculate the optimal order quantity. It will be enough to


replace the values of demand, order and maintain on
the EOQ formula.
Step 2:

With the calculated EOQ, we can now obtain the quantity of


times that we must order in the year, dividing the demand
between Q*.
Step 3:

One data point we must have is the workdays per year. If


we divide this data on the number of times we must
to 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


average demand. This is simply dividing the demand
annual report on the number of working days. The result it
we will multiply by the lead time..
Step 5:

We calculate the ordering costs, carrying costs, and the total cost
replacing the data based on the formula.
Solution:
Solution:

cantidad óptima de pedido (Q*) : 400 und por orden


Number of times an order will be placed (N): 3 times a year

Tiempo entre pedido (L): 80 días


An order must be placed when the inventory
arrived at (R): 400 units
Thank you...

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