The EOQ works if its four assumptions match the case it is used on. The assumptions are:
☛ Annual demand, carrying costs and ordering costs can be estimated.
☛ Inventory level is divided by 2, no safety stock, goods used uniformly and are gone by next order.
☛ Stock-out, customer responsiveness and other costs not considered.
☛ No quantity discounts.
To determine which numbers to use you must look for the following items. The number of items per order is the quantity(Q). The number of items that can be sold is D.
D may be the forecast demand for that particular good. The cost of placing the order is used for S. The final number to find is the carrying cost(C) which is the cost of the item to be held in inventory.
There are several types of reordering systems, in this module we discussed three. The fixed order quantity uses fixed quantities of goods ordered at various order points to replenish inventory. The fixed order period use fixed times of reorder with various order quantities to replenish inventory to preset levels. The final system, just in time uses a constant flow of goods to match the level of demand.
A good forecast model will have reasonable costs. the accuracy of its forecasts will allow good decision making. The model will have ample data available for its use and a relevant time span. The model finally will have a low interference level.
In order to compare stock costs when using the EOQ model you must compute the costs for both the original level and the EOQ level of order quantities.
The letters in the formulas represent the quantity ordered(Q), the carrying cost of a unit(C), the demand for the units(D) and the cost of completing a order(S).
Total stocking cost is the cost to the store of holding a good in its inventory. The stocking cost consists of the carrying cost times half the quantity in inventory and the order completion cost times demand divided by the quantity. In its mathematical form the cost is represented by TSC=(Q/2)C + (D/Q)S.
Times for reordering goods vary dependent on the control system you use and its lead time. In fixed order quantities reorders should be placed when the safety stock is reached. In fixed period systems the reordering is done at set time periods. In just in time systems reordering is based on matching the demand with supply. For just in time a close watch on inventory levels is needed so that reorders are placed before goods are out of stock.
Forecasting is the process of estimating the future demand of a product.