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Sem 5 Prep
← OperationsThe economic order quantity

Formulas for this chapter

Economic order quantity

EOQ = sqrt( 2 D S / H )

Buying an independent-demand item under the six basic assumptions. Convert a percentage carrying charge into H first.

D
Annual demand in units
S
Ordering cost per order
H
Holding cost per unit per year

Total annual inventory cost

TC = (Q / 2) H + (D / Q) S At the EOQ: TC = sqrt( 2 D S H ) and the two halves are equal

Costing any order quantity, optimal or not. Use the equal-halves property to check an EOQ.

Q
Order quantity being costed
(Q/2)H
Annual holding cost
(D/Q)S
Annual ordering cost

Orders per year and cycle length

N = D / Q Cycle length = Q / D (in years) = Q / D x working days (in days) = working days / N

Immediately after computing EOQ. The exam almost always asks for at least one of these.

N
Optimum number of orders a year; may be fractional
working days
The year length the question gives, not 365

Reorder level under certainty

ROP = d x LT, where d = D / working days

When lead time and demand are both certain. The stock at ROP covers exactly one lead time.

d
Demand per day
LT
Lead time in days
Step 3 of 19
The real wordsTheory

The assumptions

Six, and the exam asks for them by name. Every later model relaxes one of these.

  1. Only one product is involved
  2. Annual demand requirements are known
  3. Demand is even throughout the year
  4. Lead time does not vary
  5. Each order is received in a single delivery
  6. There are no quantity discounts

Assumption 5 goes in the EPQ model. Assumption 6 goes in the discount model. Assumptions 3 and 4 go in the safety-stock chapter.

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