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Economic Order Quantity
Economic Order Quantity
Economic Order Quantity
Inventory models/techniques
STOCK-LEVEL SUBSYSTEM
Introduction
• EOQ, or Economic Order Quantity, is
defined as the optimal quantity of orders
that minimizes total variable costs required
to order and hold inventory.
• The EOQ tool can be used to model the
amount of inventory that we should order
each month.
How EOQ Works
&
Assumptions
• Demand is known and consumption rate is
constant.
• Unit purchase rate is constant irrespective of
quantity purchased.
• Whole order quantity arrives at one time.
• Material is available in plenty.
• Basic costs like ordering cost and inventory
carrying cost are fairly accurate.
Methods and Models
• There are three methods of finding E.O.Q.
– Graphical method
– Algebraic method
– Tabular method
• It depends on:
Inventory required during lead time.
Minimum level of inventory held to prevent shortage
i.e. Reorder Point = Normal consumption during lead time + Safety
stock
21
Reorder Point (ROP)
ROP = d x L
Example
Arena company Buys pumps from a
manufacturer and sells to retailers
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Reorder Point with Probabilistic Demand
Demand 1500
Cc Rs 150 per order
Co Rs 300
Cp Rs 6000 per unit
Cs Rs 50
Optimum
Reorder Point with Probabilistic Demand
• Expected DDLT
(80x4)+(90x6)+(100x80)+(110x5)+(120x3)+(130x2)
100
= 100.3
Order point = DDLT+ Safety stock
Safety stock = O.P(maximum DDLT)-(Average EDDLT)
• Optimal Safety Stock
100 – 100.3 = –0.3 items