1. PURCHASE COST.

2. CAPITAL COST.

3. ORDERING COST.

4. INVENTORY CARRING COST.

5. SHORTAGE COST.

1. Demand : Number of items required per unit time.

2. Order Cycle : The time period b/w two successive order.

3. Lead Time : The time gap b/w placing a order & received the item.

4. Safety stock : This is the buffer stock for overcome uncertainties.

5. Re-order level : When the stock level reaches re-order level new order issued.

6. Re-order quantity : This is the quantity of material to be ordered in ROL.

Let, D = Annual demand. C0 = Order cost. Ch = Inventory carrying cost. Cp = Price per unit. Q = Quantity order. Q* = Economic order quantity. N = Number of order placed per year. Tc = Total cost per annum.

Annual ordering cost = No. of orders * ordering cost / order. = Annual demand / order quantity * ordering cost / order. = D / Q * C0 …………..(i)

Annual inventory carrying cost = Avg. Inventory investment * inventory

carrying cost. = (Max Inventory – Min Inventory ) / 2 * Inventory carrying

cost . = Q / 2 * Ch..................(ii)

Annual Total Cost = Annual ordering cost + Annual Inventory cost. = DCo / Q + QCh /2 ………….(iii)To determine EOQ differentiate Annual Total Cost eq (iii) we got, dTC / dQ = -d DCo / Q² So, Q² = 2DCo / Ch Q* = √ 2DCo / Ch ( Q* = economic order

quantity).If inventory carrying cost is expressed as a % of annual avg.

inventory investment then, Q* = √ 2DCo / Cp.I

1. Optimal number of order placed (N*) = D / Q*

2. Optimal time diff b/w two order (T*) = no. of working days / N* 3. Minimum total yearly inventory cost (Tcm) = √ 2 D . Co. Ch

A co. has got a demand for particular part at 10,000 units per year. The cost per unit is Rs. 2 & it costs Rs. 36 to place an order and to process the delivery. The inventory carrying cost is estimated at 9% of average inventory investment. Determine

(i) Economic order quantity. (ii) Optimum no. of orders placed per annum. (iii) Minimum total cost of inventory per annum.

Sol : (i) EOQ ( Q*)= √ 2DCo / Cp.I = √ 2 . 10,000 . 36 / 2 . 0.09 = 2000 units. (ii) Optimum no. of order = D / Q* = 10,000 / 2000 = 5

(iii) Total annual inventory cost = Ordering cost + Inventory carrying cost

= 2 * Ordering cost ( at EOQ Ordering cost=carrying cost)

= 2 . D / Q* . Co = 2 . 5 . 36 = 360 .