ECONOMIC ORDER QUANTITY
An Economic Order Quantity is the optimal number of order that minimizes total variable costs required to order and hold inventory, that is to say, that EOQ helps us to determine the appropriate amount and frequency when ordering and holding inventory. EOQ is used as part of a continuous review inventory system, in which the level of inventory is monitored at all times, and a fixed quantity is ordered each time the inventory level reaches a specific reorder point, as it shown in the left-hand graphic, where R is the minimum inventory. Moreover, EOQ is essentially an accounting formula that determines the point at which the combination of order costs and inventory carrying costs are the least. The result is the most cost effective quantity to order. Also, EOQ is generally recommended in operations where demand is relatively steady, items with demand variability such as seasonality can still use the model by going to shorter time periods for the EOQ calculation. This Model have som assumptions that are important to take into account: 1. Demand is known and is deterministic, ie. constant.
2. The lead time, ie. the time between the placement of the order and the receipt of the order is known and constant. 3. The receipt of inventory is instantaneous. In other words the inventory from an order arrives in one batch at one point in time. 4. Quantity discounts are not possible, in other words it does not make any difference how much we order, the price of the product will still be the same. (for the Basic EOQ-Model) 5. That the only costs pertinent to the inventory model are the cost of placing an order and the cost of holding or storing inventory over time The basic Economic Order Quantity (EOQ) formula is:
WhereA = Demand for the year
Cp = Cost to place a single order
Ch = Cost to hold one unit inventory for a year
Then, the before formula try to Minimize the Total cost...