1. ECONOMIC ORDER QUANTITY
(EOQ)
PRESENTED BY
SAYANA.K.A
IIIrd SEM MSc IF
SCHOOL OF INDUSTRIAL FISHERIES
CUSAT

2. INTRODUCTION
ECONOMIC ORDER QUANTITY IS THE NUMBER
OF UNITS THAT A COMPANY SHOULD ADD TO
INVENTORY WITH EACH ORDER TO MINIMISE
THE TOTAL COSTS OF INVENTORY.
EXAMPLE FOR INVENTORY COSTS ARE
 HOLDING COSTS
ORDER COSTS
SHORTAGE COSTS

3. DEFENITION AND
EXPLANATION
SIZE OF THE ORDER WHICH GIVES MAXIMUM
ECONOMY IN PURCHASING ANY MATERIAL
AND ULTIMATELY CONTRIBUTES TOWARDS
MAINTAINING THE MATERIALS AT THE
OPTIMUM LEVEL AND AT THE MINIMUM
COST.
THE AMOUNT OF INVENTORY TO BE
ORDERED AT ONE TIME FOR PURPOSES OF
MINIMIZING ANNUAL INVENTORY COST.

4. THE QUANTITY TO
ORDER AT A GIVEN TIME
MUST BE DETERMINED
BY BALANCING TWO
FACTORS
(1) THE COST OF POSSESSING OR
CARRYING MATERIALS AND
(2) THE COST OF
ACQUIRING OR ORDERING MATERIALS

5. USE OF EOQ
 AS A PART OF A CONTINUOUS REVIEW OF
INVENTORY SYSTEM
 MODEL FOR CALCULATING THE APPROPRIATE
REORDER POINT AND THE OPTIMAL REORDER
QUANTITY
 TOOL FOR DETERMINING QUANTITY OF
INVENTORY

6. FORMULA OF EOQ
EOQ=
•A = DEMAND FOR THE YEAR
•CP = COST TO PLACE A SINGLE ORDER
•CH = COST TO HOLD ONE UNIT INVENTORY FOR
A YEAR

7. UNDER LYING ASSUMPTIONS
• THE ORDERING COST IS CONSTANT.
• THE RATE OF DEMAND IS CONSTANT
• THE PURCHASE PRICE OF THE ITEM IS
CONSTANT I.E. NO DISCOUNT IS AVAILABLE
• THE REPLENISHMENT IS MADE
INSTANTANEOUSLY, THE WHOLE BATCH IS
DELIVERED AT ONCE.

8. GRAPHICAL SOLUTION

9. THE TOTAL COST
FUNCTION
TOTAL COST = PURCHASE COST + ORDERING
COST + HOLDING COST
PURCHASE COST : VARIABLE COST OF GOODS=
PURCHASE UNIT PRICE × ANNUAL DEMAND
QUANTITY. THIS IS P×D
ORDERING COST: COST OF PLACING ORDERS:
EACH ORDER HAS A FIXED COST S, AND WE NEED
TO ORDER D/Q TIMES PER YEAR. =S × D/Q
HOLDING COST: THE AVERAGE QUANTITY IN
STOCK (BETWEEN FULLY REPLENISHED AND
EMPTY) IS Q/2; =H × Q/2.

10. EOQ MODEL

11. THE DIAGRAM BELOW ILLUSTRATES HOW THESE TWO COMPONENTS
(ANNUAL HOLDING COST AND ANNUAL ORDER COST) CHANGE AS Q,
THE QUANTITY ORDERED, CHANGES. AS Q INCREASES HOLDING COST
INCREASES BUT ORDER COST DECREASES. HENCE THE TOTAL ANNUAL
COST CURVE IS AS SHOWN BELOW - SOMEWHERE ON THAT CURVE
LIES A VALUE OF Q THAT CORRESPONDS TO THE MINIMUM TOTAL
COST.

12. HOW TO CALCULATE
EOQ
1. UNDERSTAND AND REVIEW THE FORMULA
[2 * (ANNUAL USAGE IN UNITS * ORDER
COST) / ANNUAL CARRYING COST PER
UNIT]^(1/2).
2. DEFINE THE VARIABLES.
3. CALCULATE THE NUMERATOR
4. DIVIDE THE NUMERATOR BY ANNUAL
CARRYING COST PER UNIT
5. TAKE THE SQUARE ROOT

13. APPLICATION
TO PART OF THE PURCHASES OF ALMOST
EVERY ORGANISATION
ELIMINATE BURDEN OF CALCULATION AND
ALSO ENABLES THE USE MORE COMPLEX
FORMULAS
USEFUL FOR MATERIALS THAT HAVE
I. REASONABLY STEADY AND PREDICTABLE USAGE
II. RELATIVELY LOW COST
III. SHORT LEAD TIME