Economic Order

Quantity

Presented by :
Rajneesh Ranjan
Introduction
Economic order quantity is the level
of inventory that minimizes the total
inventory holding costs and ordering
costs. The framework used to
determine this order quantity is also
known as Wilson EOQ Model. The
model was developed by F. W. Harris in
But still R. H. Wilson is given credit for
his early in-depth analysis of the
model.
 The Definition of EOQ

EOQ, or Economic Order Quantity, is defined as

the optimal quantity of orders that minimizes total
variable costs required to order and hold inventory.
How to use EOQ in
organization
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.
 How EOQ Works
The Principles Behind EOQ

Interest

Obsolescence

Storage
 How EOQ Works
The Principles Behind EOQ: The Total Cost
Curve

& 
 How EOQ Works
The Principles Behind EOQ: The Holding Costs
Keeping inventory on hand
Interest
Insurance
Taxes
Theft
Obsolescence
Storage Costs
EOQ Model
Cost(Rs)

Carrying cost

Order Quantity Size

EOQ Model
Cost(Rs)

Carrying cost
Ordering cost

Order Quantity size

EOQ Model

Total cost curve

Cost(Rs)

Carrying cost
Ordering Cost

Order Quantity size

EOQ Model

Total Cost Curve

Cost (Rs)

Carrying cost
Ordering Cost
EOQ

Order Quantity
 How EOQ Works
The EOQ Formula

P = Purchase cost per unit

R = Forecasted monthly usage
C = Cost per order event (not per unit)
F = Holding cost factor
Example:
Q. Calculate the economic order quantity if annual demand for the product is 5,000
unit. The ordering cost is Rs 30 per order and holding cost is Rs 6/- per unit per
annual.

Sol:- Given R=5000 unit

C= Rs. 30
H=Rs. 6
Now, _____
EOQ = √(2CR/H)
_____
= √(2*5000*30/6)
______
= √ 50000
= 223.6
≈ 224
Total No of events per year(order per year) = 5000/224= 22.32≈ 23
 EOQ Assumptions
 Demand is assumed to be known with certainly.
 The size of each order is constant.
 The procurement cost is assumed to be linearly
related to the number of order.
 The time between placement of the order and the
receipt of the order is known and constant.
 The receipt of inventory is instantaneous
 the cost of the placing an order and the cost of
holding or storing inventory overtime.
 Advantages of EOQ
 EOQ is the order quantity that minimizes total
holding and ordering costs for the year.
 EOQ technique is highly useful in as much it
answers the question of how much to order.
 An inventory-related equation that determines the
optimum order quantity .
 EOQ may not apply to every inventory situation,
but most organizations will find it beneficial in at
least some aspect of their operation.
 Weakness of EOQ

formula
Erratic usages
 Faulty Basic Information
 Costly Calculations
 No formula is Substitute for commonsense
 EOQ ordering must be tempered with judgment
 Materials Requirement Planning (MRP)
 The cost assumptions are rational and are not found
in real life, unit cost of purchased varies in practice.
 The lead time is not constant, the demand is erratic.
References:
1) Khanna, Dr O.P. and Sarup, A. (2003), Industrial
Engineering and Management, Dhanpat Rai Publications
(P) Ltd, New Delhi
2) Badi, R.V. and Badi, V.N. (2005), Modern Production
Management, Vrinda Publication, New Delhi.
3) Chunawalla, S.A. and Patel, D.R. (2008), Production and
Operation Management, Himalaya Publication, Mumbai.
4) http://en.wikipedia.org, viewed on 04 Feb. 2010
5) http://managementhelp.org, viewed on 04 Feb. 2010
Thank you