Monday 24 December 2018

Economic Order Quantity (EOQ) for Inventory control

Supplies is a resource that must be kept by the Organization in the anticipation towards the fulfillment of the request, the resource in question it can be either Material (materials), machine, Money or manpower. Two major decisions related to the inventory control is how much resources should be ordered (purchased or manufactured) and when it's time to place an order (purchase or production) to reduce costs the supplies.

Economic Order QuantityThere are two costs that should be considered at the time of the decision to "amount to be booked", i.e. storage charges (carrying cost holding cost) and the cost of booking (cost ordering/acquisition cost). If the amount of the booked quantity increases, then the storage costs will rise while the cost of the booking will be decreased.

Therefore, it is necessary a calculation that serves to balance both of these costs. One of the most frequent method used in determining the amount of the order quantity in the inventory management is a method of Economic Order Quantity (EOQ) or in the language of Indonesia referred to the amount of the booking.

The Formula of Economic Order Quantity (EOQ)

The formula of calculation of Economic Order Quantity EOQ or are as follows:
(quoted from the book basics of production and Operations Management)


D = use or demand is estimate at per time period
S = Booking Fee (orders Preparation and storage engine) per order
H = cost of storage per unit per year

EOQ model can be apply if the assumptions the following assumptions are met:

  1. Demand for the product is constant, uniform and known (deterministic).

  2. The price per unit of product is constant.

  3. The cost of Storage per unit per year (H) is constant.

  4. Reservation fee per order (S) is constant.

  5. The time between the order and the goods receive (Lead Time, L) is constant.

  6. No shortage of goods or "Back Orders."

Examples of Cases the Calculation of the Economic Order Quantity (EOQ):

A company engage in manufacturing Smartphones require raw materials in the form of an adapter as much as 60,000 units per year. Booking fees to get the Adapter is $. 200, -per order. While the holding cost is $. 0.5/unit. Working days per year is as much as 298 days. Lead Time or waiting time for delivery of the Adapter is for 10 days.

The case of the example, we can calculate:

  1. EOQ or Economic Amount.

  2. Costs that must be incur by the company to get the item.

  3. The best frequency for placing an order within 1 year.

  4. The duration of the EOQ will be consume by the company.

  5. The point of rebooting or Reorder Point.

  6. The company Supplies a chart on the Adapter.


S = $. 200,-per order
D = 60,000 units per year
H = $. 0.5,-per unit/year
L = 10 days
L = 14 days


How to calculate the Costs that must be incur by the company to get the item.

TC = (HxQ/2) + (S. D/Q)

TC = (0.5 x 6,928/2) + (200 x 60.000/6.928)

The TC = IDR 1,732 + $ 1,732

TC = $ 3,464

How to calculate the best Frequency for placing an order within 1 year.

The frequency of Bookings per year = D/Q

Frequency of Bookings per year = 60,000/6.928

The frequency of Bookings per year = 8.66 or round up to about 9 times

How to calculate EOQ endless duration.

The duration of the deplete EOQ = 298/9

The duration of the deplete EOQ = 33 days.

How to calculate the Reorder Point or the point of booking again

The Reorder Point = L x D/working days a year

A Reorder Point = 10 x 60,000/298

Reorder Point = 2,013

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