Economic Order Quantity for Inventory Management

Economic Order Quantity (EOQ) is a model of fixed amount which seeks to determine using the graphical intersection (quantitative equality) of the costs of ordering and maintenance costs of the lowest possible total cost which is an exercise in mathematical optimization. The EOQ method as a mathematical model is able to determine the following;

  • The moment in which to place an order or start a production run, and this is usually given in units in inventory which at the time of inventory (physical and transit) reaches a number of specific units R should order or production run.
  • The number of units (size order) that Q will be requested.
  • The annual cost per order which is equal to the annual cost to maintain.
  • The annual cost to maintain which is equal to the annual cost per order.
  • The total annual cost (TRC Total Cost Relevant, which will be the sum of the previous two costs).
  • The number of orders or runs that should be placed or start respectively in year.
  • The time between each order or production run (T)
  • The consumption period in days

The EOQ model is fixed on several assumptions which in turn identify its disadvantages as accurate model, and these assumptions are as follows;

  • A single item
  • Consistent, accurate and known demand
  • The items are produced or purchased in batches
  • Each order or order is received in a single shipment.
  • No non-existences (breakdown of stock) are allowed.
  • The fixed cost of issuing an order or enlistment is constant and deterministic.
  • The lead time when the supplier is constant and deterministic.
  • There are no discounts for volume order (in this case there is a special model which is presented below).

The variables considered in the EOQ model are as follows;

D = Annual demand, given in units per year

S = Cost of ordering or enlisting given in monetary units per unit

C = Cost item, given in monetary units per unit

I = Annual maintenance fee, given in percentage units

H = annual maintenance cost, given in monetary units per year

Q = batch size in units

R = Point new order or run, given in units

N = Number of orders or runs a year

T = time between each order

TRC = Total annual cost or relevant total cost

The equations are handled by the EOQ. Graphically it can be deduced that the point of order is the same point at which costs and maintain order are the same, so the formula of EOQ is cleared. In addition to the EOQ, you can calculate multiple data which is vital for further analysis and generate better programming. To hire professional inventory management services, visit this website.

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