1. The Economic Order Quantity
Chapter 7: Supplement B
The Economic Order Quantity

2. The Economic Order Quantity Model (EOQ)
EOQ model applier to items that are:
Replenished in batches or orders
Not produced and delivered instantaneously
Only two costs are considered:
Carrying costs
Ordering costs
Will decide
When to order
How many to order

3. Assumptions Constant rate of demand Shortages not allowed
Stock replenishment can be scheduled to arrive exactly when inventory drops to zero
Purchase price, ordering cost, and per unit holding cost are independent of quantity ordered
Items are ordered independently of each other

4. Notation Q Order quantity U Annual usage CO Order cost per order
CH Annual holding cost per unit

5. Water Distributor’s Inventory Pattern
Figure 7SB.1

6. Water Distributor’s Inventory Graph
Figure 7SB.2

7. Cost Equations

8. Graph of Annual Inventory Costs
Figure 7SB.3

9. Finding an Optimal Policy

10. EOQ Example Sells 1,000 bottles a month Lead time is six days
Cost of placing an order is $60
Cost of holding one bottle in inventory is $10

11. Cautions Regarding EOQ
Garbage in, garbage out (GIGO)
Exclude “sunk” costs
Very small EOQ values my not be valid