INVENTORY CONTROL

ECONOMIC  ORDER  QUANTITY

The  above is a standard diagram of INVENTORY CONTROL  and  EOQ  called  ECONOMIC  ORDER  QUANTITY  and such diagrams are discussed at various levels.

The concept of EOQ is one of the basis on which Inventory Control is studied and carried out in practical situations and the many kinds of Inventory models that have come up of-late do have their basis on concepts like this.

Inventory planning is influenced by two kinds of conflicting forces..the Carrying cost  and the Ordering cost.The carrying cost would be the rent you would pay for a store house and add to it labor costs and material handling costs......Ordering cost also called procurement cost is the cost of bringing an item into a ware-house and would involve transport cost and associated labor and any transis warehousing and communication costs.

If procurement costs are high then the EOQ will be high  and if Carrying costs are low  EOQ will be high..and EOQ is a trade-off in terms of volume ordered at any point in time which would keep the cumulative of these  costs low.

Consider the following steps that are used to derive an expression for EOQ;

Cc is carrying cost per item per year

Cp is procurement cost per order

A is total demand per year

Q is EOQ  Economic Order Quantity  (half of which is Average Inventory)

TOTAL INVENTORY COSTS =  TOTAL CARRYING COST  +  TOTAL PROCUREMENT COST

TOTAL CARRYING COST = AVERAGE INVENTORY  X  Cc

TOTAL PROCUREMENT COST  =  ORDERS PER YEAR  X  Cp

TOTAL INVENTORY COSTS = Q/2   X  Cc  +  A/Q   X Cp

AT  MINIMUM  Q   THE DIFFERENTIATION OF THE ABOVE EXPRESSION with respect to Q WILL BE EQUATED TO ZERO.

THEREBY WE GET  EOQ  =   SQRT  (2 A Cp / Cc)