Chapter 9: Inventory Management

Calculating E O Q (1 of 2)

• Develop a formula for annual holding cost (CH)
• Annual cycle inventory = Q/2
• Annual holding cost (CH)
• = (Q/2)* H
• (H = Inv. holding cost/unit/year)

• Annual Holding Cost (CH)

• Order Quantity (Q)

• Cost

• 2. Develop a formula for annual ordering cost (CO)
• The number of orders in a year = D/Q
• (D = Annual Demand)
• Annual ordering cost (CO)
• = (D/Q)* S
• (S = fixed ordering cost per order)

• Order Quantity (Q)

• Cost

• Annual Ordering Cost (CO)

Calculating E O Q (2 of 2)

• 3. Develop a formula for annual cycle-inventory cost (TC)
• Annual cycle-inventory cost (TC)=annual holding cost(CH)+annual ordering cost (CO)
• = (Q/2)* H + (D/Q)* S

• Annual Holding Cost (CH)

• Order Quantity (Q)

• Cost

• Annual Ordering Cost (CO)

• TC = CH + CO

• EOQ

• The total cost becomes minimum at CH = CO.
• Therefore,
• at EOQ, CH = CO
• (Q/2)H = (D/Q)S
• Solve this for Q,
• Then,
• Q =

EOQ Computation

• If we need 3,000 units per year at a unit price of $20, at a cost of $50 per order with a holding cost of 20% of the unit price,
• what is EOQ?
• Holding cost/unit/year = $20 * 0.2 = $4
• Annual demand = 3,000 units
• Fixed ordering cost per order = $50
• EOQ = (2*D*S)/H = (2*3,000*50)/4 = 273.86 ≈274