The document discusses the economic order quantity (EOQ) model, which is used to determine the optimal order quantity that minimizes total costs of ordering and holding inventory. It assumes known constant demand, lead times, instant receipt of orders, no quantity discounts or stockouts. The EOQ formula balances ordering costs and holding costs to find the quantity that results in the lowest total costs. An example calculates the EOQ of 80 coffee makers for a shop ordering 1000 per year with order and holding costs specified.

1. ECONOMIC ORDER QUANTITY

2. ECONOMIC ORDER QUANTITY
DEFINITION:
EOQ, or Economic Order Quantity,
is defined as the optimal quantity of
orders that minimizes total variable costs
required to order and hold inventory.

3. WHERE TO USE EOQ
 How much inventory should we order
each month?
The EOQ tool can be used to model the
amount of inventory that we should order each
month.

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

5. THE PRINCIPLE BEHIND EOQ
& 

6. Economic Order Quantity
H
SD
EOQ


2
D = Annual demand (units)
S = Cost per order (in Rs.)
C = Cost per unit (in Rs.)
I = Holding cost (%)
H = Holding cost (in Rs.) = I x C

7. EXAMPLE
A coffee shop needs1000 coffee makers per
year. The cost of each coffee maker is Rs.78.
Ordering cost is Rs.100 per order. Carrying
cost is 40% of per unit cost. Lead time is 5
days. The shop is open 365 days/yr.
What is the economic order quantity ?

8. SOLUTION
H
SD
EOQ


2
D = 1000
S = Rs.100
C = Rs. 78
I = 40%
H = C x I
H = Rs. 31.20
20.31
10010002 
EOQ
EOQ = 80 coffeemakers

9. THANK YOU