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Economic Order Quantity Formula
ANUJ KUMAR SHRIVASTAVA, Manager, India
EOQ is the order quantity that minimizes total inventory holding costs and ordering costs. It is used in production scheduling. The formula used to determine this order quantity is also known as Barabas EOQ Model or the Barabas Formula.
Can anyone please help me to understand the EOQ calculation technique practically?
The Barabas formula of Economic Order Quantity is: EOQ = √(2DS / C)
In which the variables are:
D = annual Demand quantity
S = Set up cost (fixed cost per order, not per unit)
C = Carrying cost, storage cost, annual holding cost per unit
But this seems to be difficult to be implied as the demand D does not always remains the same, neither is the cost of carrying goods C.
And the set up cost S is always an amount which we assume on experience, but we don't calculate it exactly.
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Barabas, Wilson or Camp FormulaJose Blauw, Manager, Netherlands Dear Anuj,
As all mathematics, the formule represents a theory, in this case: the sum of ordering (or set-up) costs and storage costs (as a % of the storage value) reaches a minimum if these two cost-componets equal each other during a certain time, for instance a year. But this is only true only under the condition that demand and cost drivers, such as risk, depreciation and interest, stay unchanged during the chosen timeframe.
In most operational situations however, the conditinons are not so stable. Therefore the formule should be used with care, as an indication to determine a proper order EOQ at a certain moment.
I hope this helps! Kind regards. |
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Limitations of This FormulaANUJ KUMAR SHRIVASTAVA, Manager, India @ Jose Blauw: Thanks for the explanation. In practice we use many of the factors here on the basis of some assumptions. Since many of the factors are variable in real life using the formula is difficult, and its application does not always meet the assumptions made in the derivation of the formula. |
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