EOQ Model: Ken Homa
EOQ Model: Ken Homa
Ken Homa
EOQ Assumptions
% of
Category Inventory Value
Housing (building) cost 6%
Material handling costs 3%
Labor cost 3%
Inventory investment costs 11%
Pilferage, scrap, & obsolescence 3%
Total holding cost 26%
EOQ Model
Annual Cost
Order Quantity
EOQ Model
Annual Cost
Holding Cost
Order Quantity
Why Order Cost Decreases
Holding Cost
Order (Setup) Cost
Order Quantity
EOQ Model
Annual Cost
Holding Cost
Order (Setup) Cost
Order Quantity
EOQ Model
Annual Cost
Holding Cost
Order (Setup) Cost
2 D S
EOQ
H
D= Annual demand (units)
S= Cost per order ($)
C= Cost per unit ($)
I = Holding cost (%)
H= Holding cost ($) = I x C
EOQ Model Equations
2 D S
Optimal Order Quantity Q *
H
D
Expected Number Orders N
Q*
Working Days / Year
Expected Time Between Orders T
N
D
d D = Demand per year
Working Days / Year S = Setup (order) cost per order
H = Holding (carrying) cost
ROP d L
d = Demand per day
L = Lead time in days
EOQ
Example
Youre a buyer for SaveMart.
2 D S
EOQ
H
D= 1000
2 1000 $100
S= $100 EOQ
C= $ 78 $31.20
I= 40%
H= CxI
H= $31.20 EOQ = 80 coffeemakers
SaveMart ROP
ROP = demand over lead time
= daily demand x lead time (days)
=dxl
Avg. CS = OQ / 2
= 80 / 2 = 40 coffeemakers
= 40 x $78 = $3,120
2 D S
EOQ
H
D= Annual demand (units)
S= Cost per order ($)
C= Cost per unit ($)
I = Holding cost (%)
H= Holding cost ($) = I x C
2 D S
EOQ
H
What if
1. Interest rates go up ?
2. Order processing is automated ?
3. Warehouse costs drop ?
4. Competitive product is introduced ?
5. Product is cost-reduced ?
6. Lead time gets longer ?
7. Minimum order quantity imposed ?