14. The Principles Behind EOQ:
The Procurement Costs
Primarily the labor costs associated with
processing the order:
Ordering and requisition
A portion of the freight if the amount
very according to the size of the order
Receiving, inspecting, stocking
Invoice processing
15. Total Cost = Purchase Cost + Order Cost + Holding Cost
The Total Cost Formula
16. The Total Cost Formula
This represents the
unchanging fixed costs
P = Purchase cost per unit
R = Forecasted monthly usage
17. The Total Cost Formula
This represents the variable
order costs
P = Purchase cost per unit
R = Forecasted monthly usage
C = Cost per order event (not per unit)
Q = The number of units ordered
18. The Total Cost Formula
This represents the variable
holding costsP = Purchase cost per unit
R = Forecasted monthly usage
C = Cost per order event (not per unit)
Q = The number of units ordered
F = Holding cost factor
19. The EOQ Formula
Taking the derivative of both sides of the equation and
setting equal to zero to find the minimum value of the
function, one obtains:
24. First, Recall the
EOQ Equation:
P = Purchase cost per unit
R = Forecasted monthly usage
C = Cost per order event (not per unit)
F = Holding cost factor
25. R = 5200
C = $10 per order
P = $2
F = 20% of value of
inventory per year
26. R = 5200
C = $10 per order
P = $2
F = 20% of value of inventory per year
(10)2 (5200)
(2 )(.20)
28. EOQ is a tool, not a simple solution.
EOQ is useful in determining optimal order
quantity
Understand the equation and what you are
trying to find
Find accurate inputs for the equation