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