Economic Order Quantity ( EOQ )/
Economic Quantity Discount (EQD)
Economic Order Quantity ( EOQ ) serve to find the optimal value of Order Quantity that would give the lowest Total Inventory Cost . Typically , among other factors that need to be considered in deciding how much to order are
- Demand Rate
- Ordering/Setup costs
- Unit Costs
- Lead Time ( i.e Time of Delivery )
- Reorder point
- Quantity Discount given by suppliers and
- Amount of Desire Safety Stock required ( Assuming all Demand need to be satisfied ) .
Given the above factors, What is the Optimal Order Quantity ? Consider the following example .
Annual Demand Rate = 2000
Ordering/Set up Cost = 200 ( e.g Administrative Costs )
Holding Cost = 20% ( e.g Insurance , Rent , embezzlement and etc)
Lead Time = 5 days
Unit Costs = 0
Safety Stock = 30 required
Under such circumstances , how much should the company order that would minimize the Total Inventory Cost ?
Given the above circumstances , the Economic Order Quantity ( EOQ )computed based on the criteria is estimated :-
EOQ = 160
Orders per Period = 120
Annual Set Up and Holding Cost = 2440.95 Reorder Point = 34