ECONOMIC ORDERING QUANTITY AND TYPES.

1. EOQ MODELS
Presentation By:
Shashank Shekhar

2. Economic Ordering Quantity
 EOQ is the amount of inventory to be ordered at
one time for purposes of minimizing annual
inventory cost.
Formula for Economic Ordering Quantity :
◦ Ordering Cost: Cost of placing single order.
◦ Holding Cost: Cost to hold one unit inventory for a year

3. EOQ ASSUMPTIONS
 Known & constant demand
 Known & constant lead time
 Instantaneous receipt of material
 No quantity discounts
 Only order (setup) cost & holding cost
 No stockouts

4. Various EOQ Models
 Economic Production Quantity (EPQ)
 Quantity Discount Model
 Planned Shortage With Backorders

5. 1.Economic Production
Quantity
 EPQ determines the quantity a company or retailer
should order to minimize the total inventory costs
by balancing the inventory holding cost and
average fixed ordering cost.
 Assumptions :
◦ Demand for items from inventory is continuous and at a constant
rate.
◦ The production of items is continuous and at a constant rate.
◦ Ordering cost is fixed (independent of quantity produced).
◦ The purchase price of the item is constant i.e. no discount is
available.
◦ The replenishment is made incrementally.

6. Derivation of EPQ Formula
 Holding Cost Per Year = Q/2*(F(1-x))
Q/2 is average inventory & F(1-x) is the average holding cost.
F(1-x) is the average holding cost.
 Ordering Cost per Year =D/Q*(K)
◦ K = ordering/setup cost
◦ D = demand rate
◦ F = holding cost
◦ Q = order quantity
◦ P=Production Rate
◦ x=D/P

7. How TO Get EPQ Formula ?
 Holding Cost = Ordering Cost
 So, We get:

8. 2. Quantity Discount Model
 Quantity discounts are price reductions designed to induce
large orders.
 The buyer's goal in this case is to select the order quantity
that will minimize total costs, where total cost is the sum of
carrying cost, ordering cost, and purchase cost.
 Two approach are there:
◦ With the Incremental Approach, we would pay $65 for the
first 100 units and $60 for rest of the 150 units.
◦ But, with the All Units Approach, we would pay $60 a
piece for all the 250 units.

9. Understanding Quantity
Discont
QUANTITY PRICE Co = Rs.2,500
1 - 49 Rs.1,400 Ch = Rs.190 per unit
50 - 89 1,100 D = 200
90+ 900
2CoD 2(2500)(200)
Qopt = = = 72.5 PCs
Ch 190
For Q = 72.5 Co D ChQopt
TC = + 2 + PD = Rs.233,784
Qopt
For Q = 90 CoD ChQ
TC = + 2 + PD = Rs.194,105
Q

10. 3.Planned Shortage
WithBackorder

11. Continued..
 Shortage: when customer demand cannot be met.
 Shortage may result into:
◦ Lost of goodwill.
◦ Reduction in future orders.
◦ Unfavorable Changes in the market share.
◦ Loss of customers.
 In some situation customer may not withdraw order
and wait till next shipment arrives.

12. Planned Backorder Formula