Introduction

 Determining the ordering or manufacturing

quantities of different items.
 Investments in inventories.
 It can be determined by having fixed price,
quantity discounts, manufactured items,
when stock replenishment is instantaneous
and when it is gradual,etc.
 There are two types of costs involved in the
procuring & storing of the Material.
 Procurement cost .
 Inventory carrying cost.
When both these costs are properly balanced the
total cost of procurement + Inventory carrying cost
is minimum. This is called as EOQ.
Ordering large lots reduces administrative work but
increases investments in stocks. Ordering small
lots frequently keeps the investments low but it
increases administrative work because ,
 Small lots require high order frequency.
 More Purchase requisitions are required.
 Lot wise comparative statements required to be
generated by Q.A.Department.
 Frequency of Material receipt increases.
 More No. Of Postings.
 More bills to be handled.
All such activities increase the work content.
Mathematically,

EOQ = 2 x S x CP
CU x i

Where, S Annual Requirement

CP Procurement Cost/Order
CU Price / Unit
i Inventory Carrying Cost.
 Effect of Order Quantity on Costs
Annual
Procurement
Cost
Annual Inventory
Carrying Cost

Cost Annual Procurement Cost

EOQ
Order Quantity
 EOQ when price is fixed
Assumptions :-
 The demand of the item occurs uniformly
over a period at the known rate.
 The replenishment of the stock is
instantaneous.
 The time elapses between the placing a
replenishment order & receiving the item into
stock, called Lead time, is zero.
 The price per unit is fixed & is independent of
the order size.
 The cost to place an order & process the
delivery is fixed & does not vary with the lot
size.
 The inventory carrying changes vary directly &
linearly with the size of the inventory & is
expressed as a percentage of average
inventory investment.
 The item can be procured in the quantities
desired , there being no restrictions of any kind.
 The procured item has fairly long shelf life.
 Determination of EOQ with
Constraints
 With Quantity Discounts.
 For Manufactured items
a) Instantaneous Replenishment
b) Non-Instantaneous Replenishment
EOQ of Manufactured Items when Stock
Replenishment is Instantaneous
 The item is consumed at the known demand rate
which is constant.
 Cost to setup a machine and order writing is fixed
and does not vary with size.
 Inventory carrying charges vary directly and linearly
with the size of inventory and are generally
expressed as a percentage of average inventory
investment.
 The production rate is infinite.
 The item can be manufactured free from restriction of
any kind.
 Inventory Build-up under
Instantaneous Replenishment Method

Lot
Size
(q)

Time
EOQ of Manufactured Items when Stock
Replenishment is Gradual
 The item is consumed at the known demand rate which
is constant.
 Cost to setup a machine and order writing is fixed and
does not vary with size.
 Inventory carrying charges vary directly and linearly with
the size of inventory and are generally expressed as a
percentage of average inventory investment.
 The inventory does not increase by the quantity on the
shop order but rather gradually at a rate (p-d), where ‘p’,
the production rate is infinite & ‘d’ is the demand rate.
 The item can be manufactured in the desired quantity
free from restrictions of any kind.
Mathematically,

EOQ = 2 x S x CP
(1-d ) x CU x i
p
 Inventory Build-up under
Non-Instantaneous Replenishment
Method

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