Methods of determine the demand:

Independent Demand;

Demand is independent of any other item. Only reasonable way of forecasting future demand is to project historical trends.

Dependent Demand;

The demands for different items are often related.

Basic EOQ Model under Independent Demand:

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Assumptions: SZABIST.

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Costs involved in EOQ Model:

Unit Cost (UC); Reorder Cost (RC):

Requesting, Receiving and Comparing Quotations; Correspondences; Telephone costs; Receiving; Use of equipments; Expediting; Quality checks; Etc.

Holding Cost (HC); Shortage Cost (SC).

4/20/12 SZABIST. MBA Fall22 Other variables used in EOQ Models:

Basic EoQ Formulas:

Economic Order Quantity = Qo=Sqr.root(2 x RC x D / HC); Optimal Cycle Length =To=Qo/D; Optimal variable cost per unit time= VCo = HC x Qo; Optimal cost per unit time = TCo = (UC x D) + VCo

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Example #.1 under Basic EOQ Model:

ABC Trading Company buys 6,000 units of an item every year with a unit cost of Rs.30/-. It costs Rs.125/- to process and order and arrange delivery, while interest and storage cost amount to Rs.6/- a year for each unit held.

What is the best Ordering Policy?

Demand = D = 6,000 units a year; Units Cost = UC = Rs.30/- a unit; Reorder Cost =RC = Rs.125/- an order; Holding Cost = HC = Rs.6/- a unit a year.

Qo = Sqrt(2 x RC x D / HC) = 500 Units. To = Qo/D = 500/6000 = 0.083 years = 1 month.

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Example #2 under Basic EOQ Model:

Each unit of an item costs a company $40 with annual holding cost of 18% of unit cost for interest charges, 1% for insurance, 2% allowance for obsolescence, $2 for building overheads, $1.50 for damage and loss and $4 for misc. costs.

If the annual demand for the item is constant at 1000 units and each order costs $100 to place, calculate the:

Economic Order Quantity; Total cost of stocking the item; If the supplier will only deliver the batches of 250 units, how does it affect the costs.
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Example #3 under Basic EOQ Model:

Ms. Sarah works for a manufacturer that makes parts for marine engines. The parts are made in batches, and every time a new batch is started it costs $1640 for disruption and lost production and $280 in wages for the fitters. One item has an annual demand of 1,250 units with a selling price of $300, 60% of which is direct material and production costs. If the company is looking for a return of 20% a year on capital, what is the optimal batch size of the item and the associated costs? D = 1250 Units; UC = $300 x 60% = $180 per unit;
4/20/12 HC = SZABIST. MBA $180 x 20% = $36 Fall66

Example #4 under Basic EOQ Model:

Mr. Brown works in his bakery for 6 days a week for 49 weeks a year. Flour is delivered with a charge of $7.50 for each delivery. Mr. Brown uses an average of 10 sacks of flour a day, for which he pays $12 a sack. He has an overdraft at the bank which costs 12% a year, with spillage, storage, loss and insurance costing 6.75% a year. 1) What size of delivery should Mr. Brown use and what are the resulting costs? 2) How much should he order if the flour has a shelf life of 2 weeks? 3) How much should he order if the bank imposes a 4/20/12 77 maximum orderSZABIST. of $1500? value MBA Fall-