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Holding Costs is known as
carrying costs
Ordering Costs
These costs are associated with the process of ordering, receiving, and inspecting new inventory items. Also known as procurement costs or setup costs
Holding Cost
Refers to the expenses associated with storing and maintaining inventory within a business
Examples of Holding costs
Storage space rental/Ownership, Utilities, Insurance Costs, Depreciation, Storage Costs, Security, Material Handling costs (Equipment lease)
Ordering Costs examples
Purchase Order Processing, Supplier Communication, Transportation Costs, Inspection, Quality Control
Basic Economic Order Quantity (EOQ) ensures that
The right amount of inventory is ordered per batch, so a company does not have to make orders too frequently and there is not an excess of inventory sitting on hand
EOQ model minimizes…
Total holding and ordering costs for the year
What model is used to determine when and how much to order?
Basic Economic Order Quantity Model (EOQ Model)
EOQ Important Assumptions (1-3)
Demand is known, constant, and independent of decision from other items
Lead Time is known and constant
Receipt of inventory is instantaneous and complete
EOQ Important Assumptions (4-6)
Quantity discounts are not possible
Only variable costs are setup/ordering and holding or carrying cost
Stockouts/shortages can be completely avoided because we want order at the right time
Lead Time
Time from ordering to receiving an order
The total orders per year is 1200 units, and if the quantity is divided by 100 units per order, how many times would the number of orders be?
12
The total orders per year is 600 units, and if the quantity is divided by 100 units per order, how many times would the number of orders be?
2
By increasing order quantity you decrease
The number of orders (brings down the order cost per year)
What is Q* or EOQ (EXAM)
The order quantity that minimizes total annual cost / inventory cost?
By minimizing the sum of setup and holding costs,
total costs are minimize
Optimal Order size Q* will
Minimize total cost
A reduction in either cost reduces
Total Costs
Optimal order quantity occurs when
Holding cost and setup cost are equal
Annual Total Inventory Cost =
Annual Holding Cost + Annual Ordering Cost = Q/2 * H + D/Q * S
Calculate Q*
Square root of 2 D (S) / H It also looks like Square Root 2DS / H
Annual Setup Cost =
Number of orders placed per year Setup/Order cost per order = ANnual Demand / Number of Units in each order Setup/order cost per unit = D/QStar * S
Annual Holding Cost =
Average Inventory Level Holding Cost per unit per year = (ORder Quantity/2)(Holding cost per unit per year = (QStar/2 Times) Times (H)
EOQ is found when
Annual setup costs equals annual holding costs
Q star =
Optimal number of pieces per order
ROP (Reorder Point) tells
When to order so you wont run out of stock
N is
D / Q Star (How that one example got 5)
What is the time frame btw 2 consecutive orders is
Expected time between orders formula
Total annual cost
Setup Cost + Holding Cost
Safety Stock
The number of products you sell per day * The number of days of stock you want to hold
Safety stock is an
extra quantity of a product which is stored in the warehouse to prevent an out-of-stock situation
Note 
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