itft-- eoq
DESCRIPTION
introduction to EOQ,concepts, application, formulaTRANSCRIPT
Economic Order Quantity
Definition of EOQ
How to use the EOQ model in a business organization
How the EOQ model works
Real world example
The Definition of EOQ
EOQ, or Economic Order Quantity, is defined as the optimal quantity of orders that minimizes total variable costs required to order and hold inventory.
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.
How EOQ Works
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The Principles Behind EOQ: The Total Cost Curve
How EOQ Works
The Principles Behind EOQ: The Holding Costs
Keeping inventory on hand
Interest
Insurance
Taxes
Theft
Obsolescence
Storage Costs
How EOQ Works
The Principles Behind EOQ: The Holding Costs
Interest
Obsolescence
Storage
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
How EOQ Works
The Total Cost Formula
Total Cost = Purchase Cost + Order Cost + Holding Cost
How EOQ Works
The Total Cost Formula
This represents the unchanging fixed costs
P = Purchase cost per unit R = Forecasted monthly usage
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
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
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:
The result of differentiation
How EOQ Works
The EOQ Formula
The Economic Order Quantity
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
How EOQ Works
The EOQ Formula
Review and Summary of the EOQ Formula
Here is the a graphic representation of the EOQ equation
Real Life Example:
Real Life Example:
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
Real Life Example:
Next let’s identify the correct variables…
Real Life Example:
Forecasted Amount
Real Life Example:
Ordering Costs
Real Life Example:
Cost per Unit
Real Life Example:
Holding Cost Factor
Real Life Example:
R = Annual demand
C = Fixed ordering cost
P = Cost per case
F = Holding Cost Factor