EOQ

( ECONOMIC ORDER QUANTITY)

hhhEOQ

A presentation by-
Simran Kodere.
Farhan Khan.
Nimish Kamble.
Mansi Chavan.
Asawari Lad.
What is Economic Order
Quantity ( EOQ) ?
• In inventory management,
economic order quantity is the
order quantity that minimizes the
total holding costs and ordering
costs.
• The EOQ is the technique which
solve the problem of the
materials manager.
Definition of EOQ :

“EOQ is essentially an accounting formula that determines at

which the combination of order cost and inventory carrying
cost are the least. The result is the most effective quantity to
order. In purchasing this is known as order quantity, in
manufacturing it is known as order lot size.”
Boost Your
Determination of EOQ :

• Assumptions of Economic Order Quantity (determination):

1. Demand is known and constant.
2. Lead time is known and constant.
3. Quantity discounts are not available.
4. Delivery is immediate.
5. Stock out can be avoided.
6. Ordering cost is known and constant.
 OBJECTIVE OF EOQ :

Total Cost Order Cost Carrying Cost

To reduce the total cost To reduce the order To reduce the carrying
cost cost.
GRAPHICAL REPRESENTATION
 SCOPE OF EOQ :
Reduce your storage and holding cost.

Satisfying the Customer’s needs.

Minimizing the cost of Inventory.

Minimizing the Annual purchase cost.

Minimizing the carrying & ordering cost

of materials.
Inventory Cost
Ordering Cost

Carrying Cost

Capital Cost

Inventory Service Cost

Inventory Risk Cost

01 ORDERING COST :
 Ordering costs, also known as setup
costs, are essentially costs incurred
every time you place an order from
your supplier.
02 CARRYING COST :
 Carrying costs represent costs incurred on holding
inventory in hand. These include opportunity cost of
money held-up in inventories, storage costs such as
warehouse rent, insurance, spoilage costs, etc.
 03 CAPITAL COST :
 Capital cost is the largest component of carrying
cost incurred by businesses. It includes the
interests added and the cost of money invested in
the inventory. Capital cost is always expressed as a
percentage of the total value of the inventory being
held.
04 INVENTORY SERVICE COST :
 Inventory Service cost include insurance paid on the
inventory and taxes to local government. Service cost
are basically incurred to protect inventory from issues
such as theft or workplace accidents, to ensure that
government regulations are met and to keep Inventory
well managed.
05 INVENTORY RISK COST :
 There is a risk associated with carrying inventory and a
cost associated with that risk. This includes the risk of
shrinkage, e.g. a loss of items while in storage that
doesn't relate to sales.
 EOQ FORMULA :
Multiply Determine Determine Determine
Demand by 2 Holding Cost Order Cost Demand in Units

A B
Calculate Square EOQ = Sq Root of
Multiply Result Divide Result By
Root of Result (2xDxS/H)
By Order Cost Holding Cost

EOQ FORMULA : Where,

Q =EOQ units
D=Demand in units (typically on an an
nual basis)
S= Order cost (per purchase order)
H= Holding costs (per unit ,year)​
MERITS OF
EOQ :
 Provides specific numbers

 Minimizes Storage and Holding Costs

 Makes restocking an easy process

 Specific to the Business

DEMERITS OF
EOQ :
 Constant  consumer demand

 Complicated math calculations

 Require detailed data

 Forecasting 
 CONCLUSION:

 The Economic Order Quantity formula is best

applied in situations where demand, ordering, and
holding costs remain constant over time.

 The Economic Order Quantity is a company's

optimal order quantity that minimizes its total costs
Modern
related to ordering, receiving, and holding inventory.

Portfolio
 The use of Economic Order Quantity will prove to be
beneficial if the company adheres to its limitations

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Bibliography
https://www.investopedia.com/terms/e/economicorderquantity.asp
https://www.shipbob.com/blog/economic-order-quantity/
https://www.letslearnfinance.com/advantages-disadvantages-economic-
order-quantity.
https://flylib.com/books/en/3.287.1.218/1/
Thank You