Part A Written Lecture on EOQ Model in SCM by Sang T. Choe, USI Economic Order Quantly (EOQ) is an inventory control model to increase efficiency in supply chain management for effective control of inventory by minimizing costs and avoiding stock-out that may, many times creates, consumer ill-will. Two kinds of costs are considered here: Ordering cost per order (O) and Carning cost per unit(C) all of which are based on an annual basis. Annual Ordering cost =(D/Q)00D/Q testifies how many times it should be ordered. Annual Carrying cost =(Q/2)CQ/2 testifies to what will be the average quantity it must carry. Where (D/Q)O=(Q/2)C EOQ= square root of 2DO/C where D is annual demand or sales a business can make for a particular product or brand, O is ordering cost per order for the item, and C is carrying cost per unit. Remember it is a square root. Let usy.pply my lecture to an example here. A firm expects the total demand for its product over the year to be 10,000 units, while the ordering cost: Let us apply my lecture to an example here. A firm expects the total demand for its product over the year to be 10,000 units, while the ordering cost per order is $100 and the carrying cost per unit is $2. What is EOQ for the product? EOQ= Square root of 210,000100/2= Square root of 1,000,000 EOQ for this situation will be 1,000 units. State here how many units the firm should order and explain why, 1000 units. It will give the lowest total logistical cost of carrying and ordering. To check, we see below. Carrying cost =1000/22=$1000 Ordering cost =10,000/1000=10 times ordering. 10100=$1000. Total cost =1000+1000=$2000 If we order any higher units, for example, 1100 units, Carrying cost =1100/22=$1,100 Ordering cost =10,000/1100=9.09 times. 9.09100=$909 Total cost =1,100+909=$2,009. (You cannot order 9.09 times, but this is to show the Justification of the EOQ model). You can see that the total cost is now higher than the volume of EOQ. Now go to the problem on the next page. Part B. Please work on the following two problems by showing the entire process in detail. Problem 1: Ace Appliance Store has experienced inventory imbalances for many appliances resulting in overstocking of some items while other items are out-of-stock. The following data relates to one inventory item. Annual sales in units X 30 Annual cost of carrying one unit of inventory $6 Cost of placing an order $10 1. Prepare a graph like Figure 1 and establish the EOQ. 2. Using the formula, calculate EOQ to confirm your graphic analysis
