ECONOMIC ORDER QUANTITY (EOQ) Inventory models deal with idle resources like men, machines, money and materials. These models are concerned with two decisions: how much to order (purchase or produce) and when to order so as to minimize the total cost. For the first decision--how much to order, there are two basic costs are considered namely, inventory carrying costs and the ordering or acquisition costs. As the quantity ordered is increased, the inventory carrying cost increases while the ordering cost decreases. The order quantity means the quantity produced or procured during one production cycle. Economic order quantity is calculated by balancing the two costs. Economic Order Quantity (EOQ) is that size of order which minimizes total costs of carrying and cost of ordering. i... Minimum Total Cost occurs when Inventory Carrying Cost = Ordering Cost Economic order quantity can be determined by two methods: 1. Tabulation method. 2. Algebraic method. X7 MATERIALS MANAGEMENT 900.00 Total cost 800.00 700,00 600.00 500.00 Inventory cost ---Inventory cost --- Ordering cost Total cost 400.00 300.00 200.00 100.00 0.00 Ordering cost EOQ 2000 8000 10000 4000 6000 Quantity Fig. 4.6 Inventory cost curve 1. Determination of EOQ by Tabulation (Trial & Error) Method This method involves the following steps: 1. Select the number of possible lot sizes to purchase. 2. Determine average inventory carrying cost for the lot purchased. 3. Determine the total ordering cost for the orders placed. 4. Determine the total cost for each lot size chosen which is the summation of inventory carrying cost and ordering cost. 5. Select the ordering quantity, which minimizes the total cost. The data calculated in a tabular column can plotted showing the nature of total cost. inventory cost and ordering cost curve against the quantity ordered as in Fig. 4.6. ILLUSTRATION 3: The XYZ Ltd. carries a wide assortment of items for its customers. One of its popular items has annual demand of 8000 units. Ordering cost per order is found to be Rs. 12.5. The carrying cost of average inventory is 20% per year and the cost per unit is Re. 1.00. Determine the optimal economic quantity and make your recommendations