Economic Order Quantity Models

ECONOMIC ORDERING QUANTITY AND TYPES.

1. EOQ MODELS Presentation By: Shashank Shekhar

2. Economic Ordering Quantity EOQ  is the amount of inventory to be ordered at one time for purposes  of minimizing annual inventory cost. Formula for Economic Ordering Quantity : Ordering Cost : Cost of placing single order. Holding Cost: Cost to hold one unit inventory for a year

3. EOQ ASSUMPTIONS Known & constant demand Known & constant lead time Instantaneous receipt of material No quantity discounts Only order (setup) cost & holding cost No stockouts

4. Various EOQ Models Economic P roduction Quantity (EPQ) Quantity Discount Model Planned Shortage With Backorders

5. 1.Economic Production Quantity EPQ determines the quantity a company or retailer should order to minimize the total inventory costs by balancing the inventory  holding cost  and average fixed ordering cost. Assumptions : Demand for items from inventory is continuous and at a constant rate. T he production of items is continuous and at a constant rate. O rdering cost is fixed (independent of quantity produced ). The purchase price of the item is constant i.e. no discount is available. The replenishment is made incrementally.

6. Derivation of EPQ Formula Holding Cost Per Year = Q/2*(F(1-x)) Q/2 is average inventory & F(1-x) is the average holding cost.  F(1-x) is the average holding cost.  Ordering Cost per Year =D/Q*(K) K = ordering/setup cost D = demand rate F = holding cost Q = order quantity P=Production Rate x =D/P

7. How TO Get EPQ Formula ? Holding Cost = Ordering Cost So, We get:

8. 2. Quantity Discount Model   Quantity discounts are price reductions designed to induce large orders.  The buyer's goal in this case is to select the order quantity that will minimize total costs, where total cost is the sum of carrying cost, ordering cost,  and  purchase cost. Two approach are there: With the  I ncremental A pproach , we would pay $65 for the first 100 units and $60 for rest of the 150 units . But, with the  A ll U nits A pproach , we would pay $60 a piece for all the 250 units.

9. Understanding Quantity Discont QUANTITY PRICE 1 - 49 Rs.1,400 50 - 89 1,100 90+ 900 C o = Rs.2,500 C h = Rs.190 per unit D = 200 Q opt = = = 72.5 PCs 2 C o D C h 2(2500)(200) 190 TC = + + PD = Rs.233,784 C o D Q opt C h Q opt 2 For Q = 72.5 TC = + + PD = Rs.194,105 C o D Q C h Q 2 For Q = 90

10. 3.Planned Shortage WithBackorder

11. Continued.. Shortage: when customer demand cannot be met. Shortage may result into: Lost of goodwill. Reduction in future orders. Unfavorable Changes in the market share. Loss of customers. In some situation customer may not withdraw order and wait till next shipment arrives.

12. Planned B ackorder Formula