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    EOQ and ABC Analysis: Economic Order Quantity

    Uploaded by

    Hitesh Kumar Sharma
    The document discusses economic order quantity (EOQ) and ABC analysis models for inventory management. It provides the EOQ formula, which calculates the optimal order quantity to minimize total inventory costs based on annual demand, order costs, and holding costs. It also gives an example of applying the EOQ model to calculate optimal order quantity and reorder point for a company ordering coffee makers. Additionally, it describes ABC analysis for categorizing inventory items into A, B, and C classes based on annual usage value to prioritize inventory management efforts.

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    EOQ and ABC Analysis: Economic Order Quantity

    Uploaded by

    Hitesh Kumar Sharma
    154 views21 pages
    The document discusses economic order quantity (EOQ) and ABC analysis models for inventory management. It provides the EOQ formula, which calculates the optimal order quantity to minimize total inventory costs based on annual demand, order costs, and holding costs. It also gives an example of applying the EOQ model to calculate optimal order quantity and reorder point for a company ordering coffee makers. Additionally, it describes ABC analysis for categorizing inventory items into A, B, and C classes based on annual usage value to prioritize inventory management efforts.

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    EOQ

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    The document discusses economic order quantity (EOQ) and ABC analysis models for inventory management. It provides the EOQ formula, which calculates the optimal order quantity to minimize total inventory costs based on annual demand, order costs, and holding costs. It also gives an example of applying the EOQ model to calculate optimal order quantity and reorder point for a company ordering coffee makers. Additionally, it describes ABC analysis for categorizing inventory items into A, B, and C classes based on annual usage value to prioritize inventory management efforts.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    154 views21 pages

    EOQ and ABC Analysis: Economic Order Quantity

    Uploaded by

    Hitesh Kumar Sharma
    The document discusses economic order quantity (EOQ) and ABC analysis models for inventory management. It provides the EOQ formula, which calculates the optimal order quantity to minimize total inventory costs based on annual demand, order costs, and holding costs. It also gives an example of applying the EOQ model to calculate optimal order quantity and reorder point for a company ordering coffee makers. Additionally, it describes ABC analysis for categorizing inventory items into A, B, and C classes based on annual usage value to prioritize inventory management efforts.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 21

    EOQ and ABC Analysis

    Economic Order Quantity

    Designed by:

    Hitesh Kumar Sharma


    Assistant Professor
    Anand Engineering College, Agra
    Sharda Group of Institution (SGI)
    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 Costs
    Reasonably Typical Profile

    % of
    Category Inventory Value
    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

    Annual Cost

    Order Quantity
    EOQ Model

    Annual Cost

    Holding Cost

    Order Quantity
    Why Order Cost Decreases
    • Cost is spread over more units

    Example: You need 1000 microwave ovens

    1 Order (Postage $ 0.35) 1000 Orders (Postage $350)

    Purchase Order PurchaseOrder


    Purchase Order
    PurchaseOrder
    Order
    Description
    Purchase Qty.
    Description Qty. Description Qty.
    Microwave 1000 Description
    Microwave
    Description Qty.1
    Qty.
    Microwave 11
    Microwave
    Microwave 1
    Order
    quantity
    EOQ Model

    Annual Cost

    Holding Cost
    Order (Setup) Cost

    Order Quantity
    EOQ Model

    Annual Cost

    Total Cost Curve

    Holding Cost
    Order (Setup) Cost

    Order Quantity
    EOQ Model

    Annual Cost

    Total Cost Curve

    Holding Cost
    Order (Setup) Cost

    Optimal Order Quantity


    Order Quantity (Q*)
    EOQ Formula Derivation
    D= Annual demand (units)
    C= Cost per unit ($) Total cost = (Q/2) x I x C + S x (D/Q)
    Q= Order quantity (units) inv carry cost order cost
    S= Cost per order ($)
    I = Holding cost (%) Take the 1st derivative:
    H= Holding cost ($) = I x C
    d(TC)/d(Q) = (I x C) / 2 - (D x S) / Q²

    Number of Orders = D / Q To optimize: set d(TC)/d(Q) = 0


    Ordering costs = S x (D / Q)
    DS/ Q² = IC / 2
    Average inventory
    units = Q / 2 Q²/DS = 2 / IC
    $ = (Q / 2) x C
    Q²= (DS x 2 )/ IC
    Cost to carry
    average inventory = (Q / 2) x I x C Q = sqrt (2DS / IC)
    = (Q /2) x H
    Economic Order Quantity

    2 D S
    EOQ 
    H
    D= Annual demand (units)
    S= Cost per order ($)
    C= Cost per unit ($)
    I = Holding cost (%)
    H= Holding cost ($) = I x C
    EOQ Model Equations
    2 D S
    Optimal Order Quantity  Q * 
    H
    D
    Expected Number Orders  N 
    Q*
    Working Days / Year
    Expected Time Between Orders  T 
    N
    D
    d D = Demand per year
    Working Days / Year S = Setup (order) cost per order
    H = Holding (carrying) cost
    ROP  d  L
    d = Demand per day
    L = Lead time in days
    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

    2 D  S
    EOQ 
    H
    D= 1000
    2  1000  $100
    S= $100 EOQ 
    C= $ 78 $31.20
    I= 40%
    H= CxI
    H= $31.20 EOQ = 80 coffeemakers
    SaveMart ROP
    ROP = demand over lead time
    = daily demand x lead time (days)
    =dxl

    D = annual demand = 1000


    Days / year = 365
    Daily demand = 1000 / 365 = 2.74
    Lead time = 5 days

    ROP = 2.74 x 5 = 13.7 => 14


    SaveMart
    Average (Cycle Stock) Inventory

    Avg. CS = OQ / 2
    = 80 / 2 = 40 coffeemakers
    = 40 x $78 = $3,120

    Inv. CC = $3,120 x 40% = $1,248

    Note: unrelated to reorder point


    Economic Order Quantity

    2 D S
    EOQ 
    H
    D= Annual demand (units)
    S= Cost per order ($)
    C= Cost per unit ($)
    I = Holding cost (%)
    H= Holding cost ($) = I x C
    2 D  S
    EOQ 
    H
    What if …
    1. Interest rates go up ?
    2. Order processing is automated ?
    3. Warehouse costs drop ?
    4. Competitive product is introduced ?
    5. Product is cost-reduced ?
    6. Lead time gets longer ?
    7. Minimum order quantity imposed ?
    ABC Analysis
    • ABC analysis is a business term used to define an inventory
    categorization technique often used in materials
    management.

    • It is also known as Selective Inventory Control.

    • ABC analysis provides a mechanism for identifying items that


    will have a significant impact on overall inventory cost, while
    also providing a mechanism for identifying different
    categories of stock that will require different management
    and controls.
    ABC Analysis
    • When carrying out an ABC analysis, inventory items are
    valued (item cost multiplied by quantity issued/consumed in
    period) with the results then ranked. The results are then
    grouped typically into three bands. These bands are called
    ABC codes.
    ABC Codes
    • "A class" inventory can be any thing which is used to reflect
    adhoc material management requirement.

    • "B class" inventory can be any thing which is used to reflect


    semi adhoc material management requirement.

    • "C class" inventory can be any thing which is used to reflect


    permanent material management requirement.

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