Economic Order Quantity (EOQ) Lecture Notes
Introduction
- Speaker: Ian Johnson from DriveSuccess.com
- Topic: Calculating Economic Order Quantity (EOQ) using the Wilson EOQ formula.
- Historical context: The EOQ formula has been around since 1913.
- Importance: Understanding changes in business over the last 100 years is crucial.
Overview of EOQ Calculation
- Purpose: To determine the ideal quantity for purchasing raw materials or consumables.
- Key Components:
- Annual usage of materials
- Cost per unit
- Purchasing costs
- Holding costs of inventory
Variables in EOQ Calculation
- Annual Usage (A):
- Cost per Unit:
- Cost to Purchase (CP):
- Includes all costs associated with placing and receiving orders:
- Approval process
- Purchase requisition
- Shipping and inspection
- Holding Costs (HC):
- Costs associated with holding inventory without sales:
- Cost of obsolescence
- Theft (pilferage)
- Damage
- Insurance
- Freight costs
- Example standard holding cost for calculation: 3% of inventory value.
- Holding cost calculation example:
- Price per unit: $20
- Holding cost = $20 * 3% = $0.60*
EOQ Formula
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Formula:
In this example:
- EOQ = 141 units
- Annual orders = 21 (calculated by dividing annual usage by EOQ)
Advantages and Drawbacks of EOQ Formula
- Advantages:
- Straightforward calculation
- Helps in minimizing costs
- Drawbacks:
- Assumptions made by the formula:
- Constant lead time from vendors
- Constant purchase prices
- Constant ordering costs
- Constant demand for units purchased
- Not accounting for discounts or variable costs over time.
Conclusion
- EOQ is a useful tool but requires careful consideration of specific costs involved in purchasing and holding inventory.
- For more information, links provided for additional resources and safety stock calculations.
- Speaker: Ian Johnson, DriveSuccess.com
Note: Ensure to review variables and calculations for accuracy based on specific business conditions.