Economic Order Quantity
Bachelors student ISP(Independent Study Project), Belinda Simpson , Faculty of Management, Department of Management Science, leads Our student's in the program: "Bachelors Of Science Business Management & Administration (Research) or B.Sc. BMA or BBMA (Research)". Our Students work on real-life situation but Enterprises Secrecy are respected in such that a product line and or enterprise name will never be revealed.
EOQ Theorem
EOQ = The most economical quantity to order each time an order is placed.
F = Seasonal Factor.
U = Unit of the items used over a period of three years, divided by three, to phase out stock shortages or abnormal sales.
A = Acquisition cost, fixed costs incurred in placing and receiving a single order.
P = Purchase price per unit of inventory.
C = Carrying costs (storage, insurance & spoilage) expressed as a percentage of inventory value.
Let's say that during the month of September the stock drop below the re-order level, thus now the Factor value for October will be used ! The factor are always one month ahead to avoid sudden stock shortage or to reduce the risk of over stock ! By using this Principe and given theorem make some exercises and you will see how this can help your Enterprise to EXTREMELY WELL CONTROL THERE STOCK(Hence more money in the bank, less work(with products), Personnel more available for customer service).
$$ \color{green}{EOQ} = \sqrt{2UA\over \lower2pt{\class{framed}{\,pc\,}}} + b + l $$
$$ \color{green}{EOQ} = \sqrt{2\times 144\times $10\over \lower2pt{\class{framed}{\,$1.00\times 20\%}}} + b + l $$
$$ \color{green}{EOQ} = \sqrt{2 880\over \lower2pt{\class{framed}{\,0.2\,}}} + b + l $$
$$ \color{green}{EOQ} = \sqrt{14 400} + b + l $$
$$ \color{green}{EOQ} = \color{#FF0000}{120 \color{green} + b + l \,units\,} $$
The Seasonal Factor and the + b + l not jet implemented (Will have to create some tabulation to explain this part soon).
Considering the acquisition and carrying cost, an order of 120 units is the most economical quantity for this item.
An order of 120 units Total cost is 22,00€: Total Cost = acquisition cost + carrying costs thus 22,00€ = 10,00€ + 12,00€
Smaller orders will drive up acquisition cost and larger orders will inflate carrying costs. The Hastings EOQ formula helps to balance these two costs.
See tabulation of data to prove correctness of formula.
EOQ Tabulation
A
B
C
D
E
F
G
1
ANNUAL
USAGE
ORDER
PER YR
ORDER
QUANTITY
ORDER
VALUE
ACQUISITION
COST
CARRYING
COST
TOTAL
COST
2
144
1
720
720
10,00
360,00
370,00
3
144
1
576
576
10,00
230,40
240,40
4
144
1
432
432
10,00
129,60
139,60
5
144
1
288
288
10,00
57,60
67,60
6
144
1
144
144
10,00
14,40
24,40
7
144
2
72
72
20,00
7,20
27,20
8
144
3
48
48
30,00
4,80
34,80
9
144
4
36
36
40,00
3,60
43,60
10
144
5
29
29
50,00
2,90
52,90
One order per year is the most economical in this case. EOQ formula gets to 120 units lets see if that is the lowest cost ... Get Carrying Cost 20% on (120/2) = 12,00€ plus Acquisition Cost of 10,00€ per order = 22,00€ per order. EOQ formula has thus proofed to be Very valuable and correct since its Fast and extremely precises
Carrying cost is calculated at 20% of the average value of stock on hand(see Carrying Cost Tabulation)
Carrying Cost Tabulation
UNITS
20% on value
COST
UNITS
20% on value
COST
UNITS
20% on value
Cost
720
20% on 576€
115,20€
576
20% on 432€
86,40€
432
20% on 288€
57,60€
20% on(144/2)
14,40€
20% on(144/2)
14,40€
20% on(144/2)
14,40€
576
20% on 432€
86,40€
432
20% on 288€
57,60€
288
20% on 144€
28,80€
20% on(144/2)
14,40€
20% on(144/2)
14,40€
20% on(144/2)
14,40€
432
20% on 288€
57,60€
288
20% on 144€
28,80€
144
20% on (144/2)
14,40€
20% on(144/2)
14,40€
20% on(144/2)
14,40€
288
20% on 144€
28,80€
144
20% on (144/2)
14,40€
20% on(144/2)
14,40€
144
20% on (144/2)
14,40€
Total Cost
360,00€
Total Cost
230,40€
Total Cost
129,60€
UNITS
20% on value
COST
UNITS
20% on value
Cost
UNITS
20% on value
Cost
288
20% on 144€
28,80€
144
20% on (144/2)
14,40€
72
20% on (72/2)
7,20€
20% on(144/2)
14,40€
48
20% on (48/2)
4,80€
144
20% on (144/2)
14,40€
36
20% on (36/2)
3,60€
Total Cost
57,60€
Total Cost
14,40€
29
20% on (29/2)
2,90€
Stock Movement Analysis for perioe 2006, 2007, 2008
Stock Sales for 2006, 2007, 2008 and Average of Units issued.
Stock Sales Average for 2006, 2007, 2008 and Average of Units issued.
Pie Chart shows that Ave. and Units are equal in quantity !You will see the importance of this fact soon !
Most Stock Controllers thinks like a "Pie Chart" thus bringing their flourishing companies to an early "Liquidation" and nobody understanding whats wrong !!!
One year later their stock space reduced to half thus freeing valuable space and less stock on-hand less spoilage better control and more free time to concentrate on customer service !!!
This Example Stock Item can be classed as a "C" category Item thus(Rather a service Stock Item than a money making Item) More examples will make this clear later. More the value goes up less the order quantity will be for this example. Think like a "Line Chart(Seasonal Factor)" and you can conduct a company from liquidation to a profit with no increase in sales and no price rising(you can maybe consider reducing prices) and you will see an even bigger profit at the end.
By using this kind of "Line Chart" thinking I have seen a company reducing his bank credit (interest rate at 18.6% per year) from 16 000 000 € to 4 000 000 € (just because of intelligent stock control). The computer was thinking and the stock controllers (obviously by using their brains) just needed to verify that (the programmer did not made a human error) there are no errors.
The company saved 2 232 000 € on (12 000 000 x 18.6%)interest rate, thus money in there pocket(from all sales made) and not to the bankers pocket via Interest rates ! So all profit of sales (overstocked between 3-6 years depending on stock Items) stayed in the company !!! And they were in Instance of Liquidation and the Liquidator said there is nothing to do ... This Formula brought them back into business end 1990. Never for Get Liquidators only serves their Greed and will never help a Company to recover or they put them self's out of Business. Fire your Purchase Manager & Stock Controller (If you discover this situation in your company because they give no dammed shit for your Enterprise).
