Economic Order Quantity ( EOQ)
Economic order quantity is the order quantity that understates total inventory holding costs and ordering costs. It is one of the oldest classic production scheduling models. The framework utilized to ascertain this order quantity is also referred as Wilson Formula. It is also called as Wilson Economic Order Quantity Model. It was formulated by Ford W. Harris in year 1913, but R. H. Wilson, a ad visor who employed it extensively, has been given credit for his comprehensive and complete detailed analysis.
Economic Order Quantity applies only when demand for a product is fixed over the year and each one fresh order is delivered in entire when inventory r each ones zero. There is a fixed cost for each one order placed, in spite of everything of the number of units ordered. There is also a cost for each one unit held in storage, on certain occasions showed as a percentage of the purchase cost of the item.
We want to ascertain the optimal number of units to order, so as to minimize the total cost linked with the purchase, delivery and storage of the product.
The requisite parameters to the solution are the total demand for the year, the purchase cost for every one item, the fixed cost to place the order and the cost of warehousing for every item per annum. Note that the number of times an order is placed will also have an effect upon the total cost, though this number can be ascertained from the other parameters.
Underlying hypothesis that is taken for granted:
ñ The cost of ordering is defined.
ñ The rate of demand is known and spread in equal amounts throughout the year.
ñ The lead time is determined and constant.
ñ The purchase price of the item is fixed ire. no discount is available
ñ The replacement is attained instantaneously, the whole batch make a delivery at once.
ñ Only one product is called for.
Economic Order Quantity is the quantity to order, hence that ordering cost and carrying cost finds its minimum. It is a very common misunderstanding is that the formula attempts to find when these are equal.
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