EOQ Problem Flashcards
annual demand
D = units / year
N x Q
number of orders placed / year
N = orders / year
order qty
Q = units / order
D / N
annual inventory carrying (holding) cost
annual cost to store one unit of inventory for one year
h = $ / (unit x year)
ordering cost
the cost to place and receive an order
K = $ / order
(annual order cost) / (N)
independent of the number of items ordered
annual cost associated with Q
C(Q) = $ / year
[(avg. inventory) x h] + (N x K)
Q is a function of the annual cost of inventory
average inventory level
Q / 2 units
annual inventory carrying (holding) cost
not per unit
(Q / 2) x (h)
Average inventory x (holding cost per unit per year)
Number of orders placed per year
N = (D / Q)
annual ordering cost
N x K
If the sum of the ordering cost and holding cost is minimized…
EOQ = D / N or Q
If EOQ is used…
(Total Ordering cost) = (Total holding cost)
(N x K) = (Q/2) x h
Optimal Order Qty (Q*)
Q* = [SQR (2KD / h)]
