Slide 1: EOQ model (continuation)-ENGR.

GEORGIA

- So, let's dive deeper into the EOQ (Economic Order Quantity) model.

1. EOQ Model: EOQ is a fundamental formula used in inventory management to determine the
optimal order quantity that minimizes total inventory costs. It balances the costs of ordering and
holding inventory to achieve the most cost-effective approach. (The Economic Order
Quantity (EOQ) model determines the optimal order quantity by considering
factors such as ordering costs (e.g., setup costs, transportation costs), holding costs
(e.g., storage costs, obsolescence), demand rate, and lead time variability, aiming
to minimize total inventory costs. (THE FORMULA WE USE FOR EOQ IS SHOWN) By
calculating the EOQ, businesses can optimize their inventory management practices,
ensuring that they neither overstock nor understock, thereby minimizing costs associated
with inventory management. It provides a balance between the costs of holding excess
inventory and the costs of frequently placing orders for smaller quantities.)

Slide 2: What is the importance of Optimizing Inventory?

- Efficient inventory management leads to cost savings, improved cash flow, and better customer service
by optimizing inventory levels, reducing carrying and ordering costs, freeing up capital, and ensuring
products are available to meet customer demand promptly.

Slide 3: Components of EOQ Model

- Alright, let's break down the EOQ model into its key components. First up, we've got :

 The annual ordering cost is the number of orders per year multiplied by the ordering cost per
order. The number of orders in one year is annual demand (D) divided by the order quantity
(Q), that is, D/Q. Therefore, annual ordering cost = (D/Q) * S. An increase in the value of Q will
decrease the annual ordering cost and vice versa. (ordering cost per order (S)
 Note: The statement means that when the order quantity (Q) increases, the annual ordering
cost decreases. Conversely, if the order quantity decreases, the annual ordering cost increases.
This relationship is due to the inverse correlation between the number of orders required and
the order quantity: as the order quantity increases, fewer orders are needed to meet demand,
reducing ordering costs, and vice versa.

 Annual Inventory Holding Cost- (The annual inventory holding cost encompasses expenses
such as warehouse rent, insurance premiums, and obsolescence costs, representing the total
expenditure associated with storing inventory over a one-year period.) The annual cost of
holding inventory is the average inventory multiplied by the inventory holding cost per unit per
year. The average inventory in a year is Q/2 as explained below.

-This formula provides a simplified way to estimate the annual inventory holding
cost based on the average inventory level and the cost associated with holding
each unit of inventory. However, it's essential to note that the actual holding cost
calculation may involve more detailed considerations and may vary depending on
the specific expenses incurred by a business.
- For a given annual demand of 1200 units and varying order quantities (Q), the example shows
that when Q equals 1200 units, all inventory is purchased at the beginning of the year, resulting
in an initial inventory level of 1200 units, and with no inventory remaining at the end of the
year, the average inventory level simplifies to half of the initial quantity, which is 600 units.
Figure 5.3 shows the inventory level variations for Q = 600.
  The annual item cost is calculated by multiplying the annual demand D by the item cost C, that
is, annual item cost = D * C. A change in the value of Q does not change the annual item cost. It
may, however, be pointed out that the annual item cost will change with a change in the value
of Q if quantity discounts are involved.

Slide 10: Understanding Costs

- Now, let's get into the nitty-gritty of costs. Imagine we're ordering 1,000 units of a product per year.
We've got an ordering cost of $50 per order, an inventory holding cost of $2 per unit per year, and an
item cost of $10 per unit. Crunching the numbers, we can calculate the total cost, considering both
ordering and holding costs.

Slide 11: Calculating Total Costs

- So, how do we calculate the total costs associated with inventory management? Well, we use a simple
formula that takes into account the annual demand, EOQ (Economic Order Quantity), ordering cost,
holding cost, and item cost. By plugging in these values, we can determine both the annual total cost
and the annual total variable cost.
Slide 12: EOQ (Economic Order Quantity) Formula

Slide 13: Example Calculation

- Let's put theory into practice with an example. Say Company X sells 10,000 units of a product
annually, with holding costs of $2 per unit per year and ordering costs of $50 per order. Using the
Economic Order Quantity (EOQ) formula, Company X calculated that the optimal order quantity for their
product, with an annual demand of 10,000 units, a holding cost of $2 per unit per year, and an ordering
cost of $50 per order, is 316 units per order, aiming to minimize total inventory costs.

EOQ = √[(2 x D x S) / H]

Slide 14: Benefits of EOQ Model

- Now, let's talk about the benefits of using the EOQ model. By finding that perfect balance between
ordering and holding costs, we're not only saving money but also ensuring our inventory levels are just
right. This translates into cost savings, efficient inventory management, and ultimately, happier
customers.

Slide 15: Implementing EOQ in Practice: Additional knowledge

Slide 16: The Economic Production Quantity (EPQ) model, also referred to as the Economic Lot Size
(ELS) model, is applicable in manufacturing scenarios where inventory levels rise at a finite rate, which
is influenced by both the production rate and the usage rate of the item being produced.

For instance, consider the example of making batches of cookies. The EPQ model would be relevant
here because the production of cookies involves a balance between the rate at which they are
produced and the rate at which they are consumed or sold.

If the batch size is too small, it would result in frequent setup times and changeovers, leading to
wasted time and resources. On the other hand, if the batch size is too large, it could lead to excess
inventory, requiring additional storage space and incurring storage costs.

Therefore, the EPQ model helps determine the optimal batch size for production, taking into account
factors such as production rate, usage rate, setup costs, and holding costs. By finding the right balance
between batch size and production and usage rates, the EPQ model helps minimize overall production
and inventory costs while ensuring efficient manufacturing processes.

Slide 17-18: ABC Classification (Use the example to explain the 3 category)
Slide 19: Quality discount model

- The Quantity Discount Model evaluates whether purchasing larger quantities of items to receive a
discount is economically advantageous. This model helps businesses decide if the savings obtained
from buying in bulk outweigh the costs associated with holding excess inventory.

For instance, consider a scenario where a snack shop is offered a discount for purchasing snacks in
bulk. The Quantity Discount Model would analyze whether the savings per unit gained from the
discount justifies the additional costs of holding a larger inventory.

If the discounted price per unit is significantly lower than the regular price, buying in bulk could be
beneficial. However, businesses must consider factors such as storage costs, the risk of product
expiration, and tying up capital in excess inventory.

By applying the Quantity Discount Model, businesses can determine the optimal order quantity that
maximizes cost savings while minimizing inventory holding costs. This ensures efficient inventory
management and helps businesses make informed decisions about bulk purchasing opportunities.

Slide 20: Lead time refers to the duration between placing an order for items and receiving those items.
It represents the time it takes for the ordered items to be processed, shipped, and delivered to the
customer or the buyer. (parcel is out for delivery)

For instance, when you order a package online, the lead time is the period between clicking the
"purchase" button and receiving the package at your doorstep. During this time, various processes
occur, including order processing, packaging, transportation, and delivery.

Slide 21: Order point policies

Slide 22: Perpetual Inventory Systems

- Perpetual Inventory Systems are automated inventory management systems that continuously track
inventory levels in real-time and automatically generate orders to replenish stock when necessary.
These systems provide a constant and up-to-date record of inventory levels, allowing businesses to
efficiently manage their stock without the need for manual counting or periodic inventory audits.

For example, imagine a smart fridge equipped with a perpetual inventory system. The smart fridge
monitors the quantity of groceries inside and tracks consumption patterns. When certain items are
running low, the fridge automatically generates an order to restock those items, either by sending a
notification to the owner or directly placing an order with a grocery delivery service.

Slide 23: safety stock

- Safety stock refers to additional inventory held by a company beyond its normal stocking levels to
serve as a buffer against unexpected fluctuations in demand or delays in the supply chain. It acts as a
precautionary measure to ensure that the company can meet customer demand even during
unforeseen circumstances.

For instance, consider the example of keeping extra batteries in case of a power outage. The safety
stock of batteries serves as a backup supply to ensure that there are enough batteries available to
power devices during emergencies, such as when the power goes out unexpectedly. By maintaining a
safety stock of batteries, individuals or businesses can mitigate the risk of running out of essential
supplies during unforeseen events.

Similarly, in a business context, safety stock may be used to protect against sudden increases in
customer demand or delays in supplier deliveries. By having a safety buffer of inventory on hand,
companies can avoid stockouts, maintain customer satisfaction, and minimize the impact of
disruptions in the supply chain.