EOQ (Economic Order Quantity) Definition and Explanation: Economic order quantity (EOQ) is that size of the order

which gives maximum economy in purchasing any material and ultimately contributes towards maintaining the materials at the optimum level and at the minimum cost. In other words, the economic order quantity (EOQ) is the amount of inventory to be ordered at one time for purposes of minimizing annual inventory cost. The quantity to order at a given time must be determined by balancing two factors: (1) the cost of possessing or carrying materials and (2) the cost of acquiring or ordering materials. Purchasing larger quantities may decrease the unit cost of acquisition, but this saving may not be more than offset by the cost of carrying materials in stock for a longer period of time. The carrying cost of inventory may include:

Interest on investment of working capital Property tax and insurance Storage cost, handling cost Deterioration and shrinkage of stocks Obsolescence of stocks.

Formula of Economic Order Quantity (EOQ): The different formulas have been developed for the calculation of economic order quantity (EOQ). The following formula is usually used for the calculation of EOQ.

A = Demand for the year

Cp = Cost to place a single order Ch = Cost to hold one unit inventory for a year *=

Concept of Economic order Quantity (EOQ): One of the major inventory control problems to be resolved is how much inventory should be added when inventory is replenished. If the firm is buying raw materials, it has to decide lots in which it has to be purchased on each replenishment. These problems are called order e1quantity problems, and the task of the firm is to determine the optimum or Economic Order Quantity. Determining an optimum inventory level involves 2 types of costs: (a) Ordering Cost and, (b) Carrying Cost. The Economic Order Quantity is that inventory level which minimizes the total of ordering and carrying cost. a) Ordering Cost: The term ordering cost is used in case of raw material and includes the

entire cost of acquiring raw materials. They include cost incurred in the following activities: Requisitions, Purchase Ordering, Transporting, Receiving, inspecting and Storing. Ordering cost includes the number of orders; thus the more frequently inventory is required, the higher the firms ordering cost. On the other hand, if the firm maintains large inventory levels, there will be few orders placed and ordering cost will relatively small. Thus ordering cost decrease with increasing size of the inventory. b) Carrying Cost: Cost incurred on maintaining a given level of inventory are called

carrying costs. They include storage, insurance, taxes, deterioration and obsolescence, etc. Carrying cost vary with inventory size. The economic size of inventory would thus depend on trade off between carrying cost and ordering cost. Assumptions underlying the EOQ model: 1. The demand of the item occurs uniformly over the period at a know rate. 2. The replenishment of the stock is instantaneous. 3. The time that elapses between placing a replenishment order and receiving the item into stock, called lead time is zero. 4. The price per unit is fixed and is independent order size. 5. The cost of placing an order and processing of the delivery is fixed and does not vary with the lot size.

6. The inventory carrying charges vary, directly and linearly with the size of the inventory and are expressed as a percentage of average inventory investment. 7. The item can be produce in the quantities desired, there being no restriction of any kind. 8. The item has fairly long shelf life, there being no fear of deterioration or spoilage. Nowadays EOO technique is not much in use because an open order with delivery schedule can be placed on a supplier for all future periods. This keeps down the purchasing cost. With the availability of computer links (Networking techniques / E mail / E commerce, M commerce, C commerce, etc.) between the buyer and the supplier, there is no need to physically raise a purchase order. This helps in avoiding major purchasing cost. At the same time computer helps in ensuring Just in Time inventory. Limitations of EOQ: The assumptions listed above may not come true in real life situations, thus limiting the use of this model. 1. Price off materials may not remain same throughout the year. 2. Availability of materials is another constraint. Material can only be purchased at the time when it is available. 3. There can be delays in real situation in placing orders since many times the calculated EOQ is an inconvenient number and some time is wasted in taking decision for rounding off this number. In real situations, suppliers receive an irregular stream of orders since the use of EOQ usually leads to orders at random points. 4. If suppliers are allowing discounts after purchasing quantities above a particular level, the discount will also have to be taken into consideration for fixing the ordering quantity. Also purchasing costs are nowadays reduced to a great extent because of computer links between buyer and seller. So in practice purchasing cost and inventory carrying cost are not exactly opposite to each other. Often the inventory carrying cost and purchasing cost cannot be identified accurately and sometimes cannot be even identified properly. Example

Suppose annual requirement quantity (Q) = 10000 units Cost per order (CO) = $2 Cost per unit (CU)= $8

Carrying cost %age (%age of CU) = 0.02 Carrying cost Per unit = $0.16

Economic order quantity = Economic order quantity = 500 units

Number of order per year (based on EOQ) Number of order per year (based on EOQ) = Total cost Total cost Total cost If we check the total cost for any order quantity other than 500(=EOQ), we will see that the cost is higher. For instance, supposing 600 units per order, then Total cost Total cost Similarly, if we choose 300 for the order quantity then Total cost Total cost This illustrates that the Economic Order Quantity is always in the best interests of the entity.

Work Study Work study is simply the study of work. It is the analysis of work intosmaller parts followed byrearrangement of these parts togive the same effectiveness atlesser cost. It examines both themethod and duration of the workinvolved in a process. What is Work Study? Work Study is the systemeatic examination of the methods of carrying out activities such as to improve the effective use of resources and to set up standards of performance for the activities carried out. Components of Work

Study to be included

Another definition of Work Study could be: A generic term for those techniques, particularly method study and work measurement, which are used in the examination of human work in all its contexts, and which lead systematically to to the investigation of all the factors which affect the efficiency and economy of the situation being reviewed, in order to effect improvement'. This has to do with Productivity Improvement, but also improvement of Quality and Safety.