ECONOMIC ORDER QUANTITY

EOQ
INTRODUCTION:
Effective inventory management requires an effective control over inventories. Inventory control refers to a system which ensures supply of required quantity and quality of inventories at the required time and at the same time prevent unnecessary investment in inventories. One of the technique of the inventory management is EOQ.

EOQ
Meaning:
Economic Order Quantity refers to the size of the order which gives maximum economy in purchasing any item of raw material or finished product. It is fixed mainly after taking into considerations the following costs: Ordering costs Carrying costs

EOQ
Ordering costs are the costs related to purchasing or ordering expenses. Ordering costs are totalled up for the year and then divided by the number of orders placed each year. Carrying costs are the costs incurred on holding the inventories. The longer the materials kept in stock, the costlier it becomes by 20 percent every year. The former cost may be referred as the cost of acquiring while

EOQ
Formula: Q = 2U*P S
Where Q= Economic order quantity U= Quantity(units) purchased in a year(month) P= Cost of placing an order S= Annual (monthly) cost of storage of one unit.

EOQ
Example:
A, a refrigerator manufacturer, purchases 1600 units of a certain component from B. His annual usage is 1600 units. The order placing cost is Rs. 100 and the cost of carrying one unit for a year is Rs. 8. calculate EOQ. Q= 2U*P S =2*1600*100 = 200 UNITS.

EOQ
Assumptions:
EOQ model is based on the following assumptions: The firm knows with certainty the annual usage or demand of the particular items of inventories. The rate at which the firm uses the inventories or makes sales is constant through out the year. The orders for replenishment of inventory are placed exactly when

EOQ- Behaviour of inventory costs

REORDER POINT
Point at which the firm may place an order for replenishment when the inventory level drops to zero. Reorder level is the level of inventory at which the firm should place an order to replenish the inventory. In order to determine the reorder level, information is required about things such as: (i) lead time and the (ii) usage rate. Reorder level= average usage* lead time For eg, if the lead time is 3 weeks and the average usage is 50 units per week, the reorder level will be Reorder level= lead time* average usage

REORDER POINT
The formula for determining the reorder level when safety stock is maintained will be as follows: Reorder level= lead time* average usage+ safety stock. safety stock is the stock which the firm maintains in order to meet any uncertainty.

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