itft-- eoq

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Economic Order Quantity

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introduction to EOQ,concepts, application, formula

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Page 1: ITFT-- EOQ

Economic Order Quantity

Page 2: ITFT-- EOQ

Definition of EOQ

How to use the EOQ model in a business organization

How the EOQ model works

Real world example

Page 3: ITFT-- EOQ

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.

Page 4: ITFT-- EOQ

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.

Page 5: ITFT-- EOQ

How EOQ Works

&

The Principles Behind EOQ: The Total Cost Curve

Page 6: ITFT-- EOQ

How EOQ Works

The Principles Behind EOQ: The Holding Costs

Keeping inventory on hand

Interest

Insurance

Taxes

Theft

Obsolescence

Storage Costs

Page 7: ITFT-- EOQ

How EOQ Works

The Principles Behind EOQ: The Holding Costs

Interest

Obsolescence

Storage

Page 8: ITFT-- EOQ

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

Page 9: ITFT-- EOQ

How EOQ Works

The Total Cost Formula

Total Cost = Purchase Cost + Order Cost + Holding Cost

Page 10: ITFT-- EOQ

How EOQ Works

The Total Cost Formula

This represents the unchanging fixed costs

P = Purchase cost per unit R = Forecasted monthly usage

Page 11: ITFT-- EOQ

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

Page 12: ITFT-- EOQ

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

Page 13: ITFT-- EOQ

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:

Page 14: ITFT-- EOQ

The result of differentiation

How EOQ Works

The EOQ Formula

The Economic Order Quantity

Page 15: ITFT-- EOQ

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

Page 16: ITFT-- EOQ

How EOQ Works

The EOQ Formula

Review and Summary of the EOQ Formula

Here is the a graphic representation of the EOQ equation

Page 17: ITFT-- EOQ

Real Life Example:

Page 18: ITFT-- EOQ

Real Life Example:

Page 19: ITFT-- EOQ

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

Page 20: ITFT-- EOQ

Real Life Example:

Next let’s identify the correct variables…

Page 21: ITFT-- EOQ

Real Life Example:

Forecasted Amount

Page 22: ITFT-- EOQ

Real Life Example:

Ordering Costs

Page 23: ITFT-- EOQ

Real Life Example:

Cost per Unit

Page 24: ITFT-- EOQ

Real Life Example:

Holding Cost Factor

Page 25: ITFT-- EOQ

Real Life Example:

R = Annual demand

C = Fixed ordering cost

P = Cost per case

F = Holding Cost Factor