EOQ ModelEconomic Order Quantity.ppt

EOQ ModelEconomic Order Quantity Ken Homa EOQ Assumptions Known constant demand Known constant lead time Instantaneous receipt of material No quantity discounts Only order (setup) cost holding cost No stockouts Inventory Holding CostsReasonably Typical Profile Housing (building) cost 6% Material handling costs 3% Labor cost 3% Inventory investment costs 11% Pilferage, scrap, obsolescence 3% Total holding cost 26% EOQ Model EOQ Model Why Order Cost Decreases Cost is spread over more units Example: You need 1000 microwave ovens EOQ Model EOQ Model EOQ Model EOQ Formula Derivation Economic Order Quantity EOQ Model Equations EOQ Example You’re a buyer for SaveMart. SaveMart needs 1000 coffee makers per year. The cost of each coffee maker is $78. Ordering cost is $100 per order. Carrying cost is 40% of per unit cost. Lead time is 5 days. SaveMart is open 365 days/yr. What is the optimal order quantity ROP? SaveMart EOQ Economic Order Quantity What if … Interest rates go up ? Order processing is automated ? Warehouse costs drop ? Competitive product is introduced ? Product is cost-reduced ? Lead time gets longer ? Minimum order quantity imposed ? * % of  Category Inventory Value Order Quantity Annual Cost Order Quantity Annual Cost Holding Cost Purchase Order Description Qty. Microwave 1000 Purchase Order Description Qty. Microwave 1 Purchase Order Description Qty. Microwave 1 Purchase Order Description Qty. Microwave 1 Purchase Order Description Qty. Microwave 1 1 Order (Postage $ 0.35) 1000 Orders (Postage $350) Order quantity Order Quantity Annual Cost Holding Cost Order (Setup) Cost Order Quantity Annual Cost Holding Cost Total Cost Curve Order (Setup) Cost Order Quantity Annual Cost Holding Cost Total Cost Curve Order (Setup) Cost Optimal Order Quantity (Q*) D = Annual demand (units) C = Cost per unit ($) Q = Order quantity (units) S = Cost per order ($) I = Holding cost (%) H = Holding cost ($) = I x C Number of Orders = D / Q