The EOQ is equal to the size of the re-stocking order, which minimizes the total value of inventory. The basis for the order is to reach the point of renewal of the level of inventory.
It is calculated to minimize the combined value of inventory,including acquisition costs (which may include high volume discounts), inventory storage costs, order placement costs, etc.
Economic order volume is a fairly old concept, reflecting the "static" point of view, where the demand in the future is not only known, but also unchanged.
Economic order volume is a fairly old concept, reflecting the "static" point of view, where the demand in the future is not only known, but also unchanged.
Avoid deficiency and excess supplies needed to meet production needs. Some things that are considered important according to efficiency in his inventory. "the average time required to order, the average consumption in the meantime, the cost to keep when there is excess inventory, and losses are possible when the inventory is reduced. "
Introduction to EOQ
The Economic Order Quantity (EOQ) is one of the inventory management model, a model of EOQ is used to determine the quantity of inventory orders can minimize storage costs and the cost of booking inventory. Economic Order Quantity (EOQ) is the sum of the quantity of items that can be obtained with minimal cost, or often said to be the optimal amount to purchase.
In the normal activities of the Economic Order Quantity Model has some of the characteristics are:
- The number of ordered goods on any booking is always constant.
- Consumer demand, booking fees, transportation costs and the time between booking of the goods until the goods are deliver can be known with certainty, and are constant.
- Price per unit of the goods is constant and does not affect the amount of goods to be order later. Assuming the purchase price being not relevant for calculating the EOQ. Since it was feared that in later prices of goods will join considered in ordering goods.
- At time of booking of the goods, is not going to run out of goods or back orders that lead to the calculation of be not right. Therefore, management should keep the number of reservations so that doesn't happen to run out of stuff.
- The time of the determination of the amount of stuff we should not consider. The cost of quality of goods.
- Costs storage per unit per year constant.
Economic Order Quantity determines the number of orders the supplies that keeps booking fees and storage fees.
Formula EOQ:
EOQ = TC = D x C + S + x x H
TC = the Total cost of the booking and storage costs
D = total (in units) that are required for a certain period,
e.g. one year.
S = order Cost each time a message.
C = purchase price paid per unit.
I = the cost of storage and maintenance of at warehouse expressed in percentage of the average value in dollars of supplies.
H = cost per unit of Storage of goods per year (USD/unit/year)
= Amount (number of times) the order time period (amount/orders/year)
= Average inventory
With the terms above, then the seat inventory is a means of preventing the occurrence of shortages of supplies. The most optimal seat inventory is the amount that produces the lowest costs in a given period.
The Point Re Ordering (Reorder Point/ROP)
Reorder Point is the time or the point at which the order should be held again such that the arrival or receipt of the ordered goods it was appropriate at the time where the above inventory safety stock is equal to zero. In determining/setting of Reorder Point We must pay attention to the following factors:
- The use of the goods during the period of getting goods (procurement lead time).
- The magnitude of the safety stock.
Reorder Point can be defined in various ways, among others:
(1) Set the number of usage during the lead time and coupled with a certain percentage. For example, determined that safety stock amounting to 50% of usage during the lead time and established that lead timely is 6 days, while the needs of everyday goods is 3 units/day.
ROP = (6 x 3) + 50% (6 x 3)
= 18 + 9
= 27 units,
(2) By setting the use during lead time and coupled with the use of a particular period as a safety stock, for example the need for 4 days.
ROP = (6 x 3) + (4 x 3)
= 18 + 12
= 30 units
From this last example can be said that the "reorder point" is in the amount of 30 units, this means that the order should be made at the time the amount of supplies living 30 units.
Determination of Reservation Inventory Merchandise with methods of Economic Order Quantity (EOQ)
In this section will be discussed regarding the calculation of the inventory of merchandise with the method of Economic Order Quantity (EOQ) that can minimize the cost of supplies later for Pepsi Cola. Determination of the Booking Supplies merchandise with methods of EOQ against Pepsi Cola.
Calculation of Economic Order Quantity (EOQ) Pepsi Cola is;
The amount of use of Pepsi Cola for 1 year = 1100 BIB
BIB is a Bag In the Box (1 BIB = 23.55 kg)
booking fees every time a message = IDR 4,625,-
purchase price per unit paid = IDR 70,650,-
storage costs each year (70,650 x 25%) = $ 17,662.5,-
unknown;
D = 1100 BIB
S = IDR 4,625,-
C = us $70,650,-
H = $ 17,662.5,-(70,650 x 25%)
answer; EOQ =
EOQ =
= = BIB
Booking Pepsi Cola in 1 year: = 45.8 = times
The Total cost of the booking and storage costs of Pepsi Cola the most economical needs in 1 year is:
TC = D x C + S + x x H
= TC24 (1100 x 70,650) + x 4,625 + x 17,662.5
= $ 77,715,000 + $ 211,979 until $ 211,950 +
= $
This means, how to order the most economical is the booking Pepsi Cola 24 BIB whenever a message, that means that the need for Pepsi Cola as much as 1100 BIB for 1 year will be filled with 46 times the number of orders with order 24 BIB. On the number of orders this is the achievement of booking fees and storage costs are minimal.
From the results of the above calculation of the authors will try to analyze the results of the calculation, whether the total cost of the inventory is the most low-cost, if the number of messages each time supplies Pepsi Cola is booked below or above the EOQ (24 BIB).
If the TC Calculations on booking, Pepsi Cola = 20 BIB
TC20 = (1100 x 70,650) + x 4,625 + x 17,662.5
= $ 77,715,000 + Rp Rp + 254,375 176,625.
= $
if, the calculation of the TC on booking Pepsi Cola = 27 BIB
TC27 = (1100 x 70,650) + x 4,625 + x 17,662.5
= $ 77,715,000 + $ 188,426 until $ 238,444 +
= $
Case Study
From the data above, it is seen that the calculation orders inventory items by using the method of Economic Order Quantity (EOQ) will minimize spending on storage costs and the cost of the booking. Total costs incurred to get the goods can also be used as efficiently as possible and avoid the occurrence of supplies are piling up and anticipate a shortage of supplies.
Pepsi Cola from the example above, the total cost on the order of 20 BIB $ 78,146,000, -lower IDR 7,071 (IDR 78,146,000 IDR 78,138,929) of the total cost on orders 27 BIB $ 78,141,870, -also lower IDR 2,941,-(USD 78,141,870.-$ 78,138,929). This means that the amount of an order for as many as 24 BIB, and with 46 times order in 1 year with a total cost of booking and storage costs of inventories amounting to $ 78,138,929,-will minimize the cost – the cost of supplies, where the ordered goods in accordance with the operational needs of the company.
Determination Of A Point Of Booking (Reorder Point) Merchandise Inventory
Judging from the example problem on PT Fast-food Indonesia Medan branch, note also that Pepsi Cola any inventory request usage assume 3 BIB and time is 5 days, then a point he repeated reservations can be determined as follows:
d = BIB 3
L = 5 days
Reorder Point can be defined in various ways, among others:
Set the number of usage during the lead time and coupled with a certain percentage. For example, determined that safety stock amounting to 60% of usage during the lead time that timely lead is 5 days, while the needs of everyday goods is 3 BIB/day.
ROP = (5 x 3) + 60% (5 x 3)
= 15 + 9
= 24 BIB
By setting the use during lead time and coupled with the use of a particular period as safety stock, e.g. the need for 4 days,
ROP = (5 x 3) + (4 x 3)
= 15 + 12
= 27 BIB
From this last example can be said to be that "reorder point" is the number 27 on his BIB, this means that an order should be made at the time the amount of supplies living 27 BIB. To the point of booking or Reorder Point as the discussion above i.e. at a time when Pepsi Cola lived 27 BIB means it is freight inventory order will be made back when the inventory level of Pepsi Cola remaining 27 BIB.
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