Chapter 10Order Quantities

IM417 Manufacturing Resources Analysis

Southeast Missouri State University
Compiled by Bart Weihl
Spring 2001

Order Quantities
Inventory Management
How much should be ordered at one
time?
When should an order be placed?
Stock-Keeping Unit (SKU)
http://www.inventoryops.com
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Order Quantities
Decision Rules
Lot-size Decision Rules
Lot-for-lot
Order what is needed - no more - no less

Fixed order quantity

Specifies the number to order each time
Easily understood, but does not minimize costs

Order n periods supply

Order enough to satisfy future demand for a given
period of time.

Order Quantities
Economic Order Quantity (EOQ)
The EOQ is based on assumptions:
Demand is relatively constant and known
The item is produced or purchased in lots or
batches
Order preparation costs and inventory carrying
costs are constant and known
Replacement occurs at once

Assumptions usually valid for finished goods

whose demand is independent and uniform.

Order Quantities
Units in Stock

A Model of Inventory
20
0

10
0

Q = Lot
Size

2
Time (weeks)

Example: Average
Inventory and Number of
Orders
Q: The annual demand for an SKU is 6,750 units, and it is ordered in
quantities of 450 units. Calculate the average inventory and the number of
orders placed per year.
A:

Average inventory = order quantity / 2

= 450 / 2
= 225 units
Number of orders per year = annual demand / order quantity
= 6,750 / 450
= 15

Order Quantities
EOQ Costs
Annual cost of placing orders
Annual cost of carrying orders
Total Cost
Cost in Dollars

Ordering Costs

Carrying
Cost

Lot Size

Order Quantities
EOQ Formula
Carrying costs = Ordering costs
Qic / 2 = AS / Q

Order Quantities
EOQ Formula
Q2 =

2AS
ic

or

2AS
ic

where Q = Economic Order Quantity

Example: EOQ
Q: An item has a annual demand of $10,000, carrying costs of 15% per
order, and ordering costs of $50. What is the EOQ in dollars?
A:

A = Annual usage in dollars = $10,000

S = ordering cost in dollars = $50
i = carrying cost rate as a decimal of a percent = 15% = 0.15

Therefore -

EOQ = 2AS / i
= (2 x 10000 x 50) / 0.15
= $2,582

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Order Quantities
Costs and Lot Size
EOQ will increase as annual demand and
ordering costs increase.
EOQ will decrease as carrying costs and unit
costs increase.
The cost of ordering is either the cost of placing
a purchase order or the cost of placing a
manufacturing order.
The cost of a manufacturing order includes production
control costs and setup costs.

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Order Quantities
Quantity Discounts
A discount given by a supplier on orders
over a certain size.
When deciding whether to accept a discount
the total cost must be considered including:
Purchase costs
Ordering costs
Carrying costs

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Order Quantities
EOQ When Costs Are Not Known
Many times the costs are not known or easy
to determine
The ordering and carrying costs are
generally the same for each item in a family
Use an approach to arrive at an average of
K to reduce the total cost of inventory
Where K = SQRT(Ad)/N

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Order Quantities
Period Order Quantity
When demand is not uniform the EOQ may not
produce the lowest total cost
The POQ uses the EOQ to calculate an
economic time between orders
Orders are placed to satisfy requirements for
the calculated time period
POQ = EOQ/Avg. weekly usage

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Order Quantities
Miscellaneous Considerations
Lumpy Demand
The EOQ assumes that demand is fairly uniform

Determining Costs
The EOQ model is relatively robust with respect to
cost estimates

Minimum Orders
Some suppliers require a minimum order quantity
Often C items where plenty is ordered not EOQ

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Example # 10.4, pg. 271. .

.
Q. A company wishes to establish an EOQ for an item for which the
annual demand is $800,000, the ordering cost is $32, and the cost of
carrying inventory is 20%. Calculate the following:
a. The EOQ in dollars.
A = $800,000

EOQ = 2AS/i

S = $32
i = 20%

= (2 x 800,000 x 32)/.2

EOQ = $16,000

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Example # 10.4, pg. 271. .

.
b. Number of orders per year
Number of Orders = A / Q = 800,000 / 16,000 = 50
c. Cost of ordering, cost of carrying inventory, and total cost.
Cost of Ordering = AS / Q = (800,000 X 32) / 16,000 = $1600
Cost of Carrying = QiC / 2 = (16,000 X 0.2) / 2 =

$1600

Total Cost = $3200

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Next Week. . .
Work the following:

10.1

10.2

10.3

10.10

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