Operations
Manager
EOQ Overview
Economic
order quantity (EOQ)
 The
purpose of the EOQ model is simple, to find that particular quantity
to order which minimizes the total variable costs of inventory.
Total variable costs are usually computed on an annual basis
and include two components, the costs of ordering and holding inventory.
Annual ordering cost is the number of orders placed times
the marginal or incremental cost incurred per order.
This incremental cost includes several components: the
costs of preparing the purchase order, paying the vendor's invoice,
and inspecting and handling the material when it arrives.
It is difficult to estimate these components precisely but a ball‑park
figure is good enough. The
EOQ is not especially sensitive to errors in inputs.
Why don't we include the purchase cost of the inventory
in this calculation? It
is not a variable cost. We
have to purchase the inventory in any event.
The problem is to minimize those costs that vary with the
quantity purchased at one time. |
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