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EQONOMIC ORDER QUANTITY (EOQ). COST OF INVENTORY. 1. PURCHASE COST. 2. CAPITAL COST. 3. ORDERING COST. 4. INVENTORY CARRING COST. 5. SHORTAGE COST. INVENTORY CONTROL TERMINOLOGY. 1. Demand : Number of items required per unit time.
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COST OF INVENTORY • 1. PURCHASE COST. • 2. CAPITAL COST. • 3. ORDERING COST. • 4. INVENTORY CARRING COST. • 5. SHORTAGE COST.
INVENTORY CONTROL TERMINOLOGY • 1. Demand : Number of items required per unit time. • 2. Order Cycle : The time period b/w two successive order. • 3. Lead Time : The time gap b/w placing a order & received the item. • 4. Safety stock : This is the buffer stock for overcome uncertainties. • 5. Re-order level : When the stock level reaches re-order level new order issued. • 6. Re-order quantity : This is the quantity of material to be ordered in ROL.
DETERMINATION OF EOQ • Let, D = Annual demand. • C0 = Order cost. • Ch = Inventory carrying cost. • Cp = Price per unit. • Q = Quantity order. • Q* = Economic order quantity. • N = Number of order placed per year. • Tc = Total cost per annum.
CONTINUED………….. • Annual ordering cost = No. of orders * ordering cost / order. = Annual demand / order quantity * ordering cost / order. = D / Q * C0 …………..(i) Annual inventory carrying cost = Avg. Inventory investment * inventory carrying cost. = (Max Inventory – Min Inventory ) / 2 * Inventory carrying cost . = Q / 2 * Ch..................(ii) Annual Total Cost = Annual ordering cost + Annual Inventory cost. = DCo / Q + QCh/2 ………….(iii) To determine EOQ differentiate Annual Total Cost eq (iii) we got, dTC / dQ = -d DCo / Q² So, Q² = 2DCo / Ch Q* = √ 2DCo / Ch ( Q* = economic order quantity). If inventory carrying cost is expressed as a % of annual avg. inventory investment then, Q* = √ 2DCo / Cp.I
SOME RELATED FORMULAS • 1. Optimal number of order placed (N*) = D / Q* • 2. Optimal time diff b/w two order (T*) = no. of working days / N* 3. Minimum total yearly inventory cost (Tcm) = √ 2 D . Co. Ch
SAMPLE PROBLEM • A co. has got a demand for particular part at 10,000 units per year. The cost per unit is Rs. 2 & it costs Rs. 36 to place an order and to process the delivery. The inventory carrying cost is estimated at 9% of average inventory investment. Determine • (i) Economic order quantity. • (ii) Optimum no. of orders placed per annum. • (iii) Minimum total cost of inventory per annum. Sol : (i) EOQ ( Q*)= √ 2DCo / Cp.I = √ 2 . 10,000 . 36 / 2 . 0.09 = 2000 units. (ii) Optimum no. of order = D / Q* = 10,000 / 2000 = 5 (iii) Total annual inventory cost = Ordering cost + Inventory carrying cost = 2 * Ordering cost ( at EOQ Ordering cost=carrying cost) = 2 . D / Q* . Co = 2 . 5 . 36 = 360 .