CHAPTER 8 ORDER QUANTITIES

       CHAPTER 8 ORDER QUANTITIES

STOCK-KEEPING UNITS (SKU)

~Control is exercised through individual items is a particular           inventory.

ECONOMIC-ORDER QUANTITY (EOQ)

Assumptions:

1)      Demand relatively constant and is known

2)      Items produced @ purchased in lots or batches and not continually

3)      Order preparations costs and inventory-carrying costs are constant & known

4)      Replacement occurs all at ones

FORMULA EOQ

~AVERAGE LOTS SIZE INVENTORY = ORDER QUANTITY (Q) / 2

~NUMBER OF ORDER PER YEAR (N) = ANNUAL DEMAND (A) / ORDER QUANTITY (Q)

~ANNUAL ORDERING COST (OC) = A/Q x S

~ANNUAL CARRYING COST (CC) = Q/2 x I x C

~TOTAL ANNUAL COST (TC) = OC + CC

~EOQ = ∫2AS/I x c

EXAMPLE 1:

An SKU Costing = $10

Q=500 Unit

A=5200 Unit

I=20%

S=$50

a)      Average inventory =Order quantity/2

                                                            =500/2

                           = 250 unit

b)      Number of order placed per year =Annual demand/order quantity

         = 5200/500

         = 10.4 times/year

c)       Annual inventory  carrying cost  = Q/2 x I x c

       = 500/2 x 0.2 x10

       = $ 500

d)      Annual ordering cost = A/Q X S

                 =5200/500 X 50

                 = $520

e)      Total cost = OC + CC

                  =500 + 520

                  = $1020

 EXAMPLE 2

Annual demand, A = 100,000 Unit

Costing, C =$10

Ordering cost, S = $200

Carrying cost, I =20%

a)      EOQ=/2AS  I x C

        =∫2 (10,000) (200)/0.2(10)

        =1414 UNIT

EOQ ($) = 1414 X 10

                = $14140

   PERIOD-ORDER QUANTITY (POQ)

                FORMULA:

                Period-order quantity = EOQ/ AVERAGE WEEKLY USAGE

                Example:

                EOQ= 2800 units

                Annual usage = 52,000 units

                Average weekly usage = 52,000/52

                                                           = 1000 per week

                POQ = 2800/1000

                         =2.8 weeks/3 weeks