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Lab # 5

The document introduces the basics of using Excel to solve Economic Order Quantity (EOQ) problems. It provides background on the EOQ model, which determines the optimal order quantity to minimize inventory costs. The objectives are to use Excel to solve basic EOQ problems and obtain results. Limitations of the EOQ model are discussed, such as its assumptions of constant demand and costs. The conclusion states that EOQ helps companies minimize inventory costs and improve cash flow by calculating the optimal order quantity.

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Areeb Nasir Mughal
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28 views

Lab # 5

The document introduces the basics of using Excel to solve Economic Order Quantity (EOQ) problems. It provides background on the EOQ model, which determines the optimal order quantity to minimize inventory costs. The objectives are to use Excel to solve basic EOQ problems and obtain results. Limitations of the EOQ model are discussed, such as its assumptions of constant demand and costs. The conclusion states that EOQ helps companies minimize inventory costs and improve cash flow by calculating the optimal order quantity.

Uploaded by

Areeb Nasir Mughal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Lab 05

Title
Introduction to the basics of EOQ using Excel QM.

Objectives
The objective of this lab is to solve the EOQ basic problems using the excel and get the results.

Apparatus
MS Excel QM

Background
The Economic Order Quantity (EOQ) model is one of the most widely used inventory
management models for determining the optimal order quantity that a company should order
to minimize their inventory costs. It was developed by Ford W. Harris in 1913 and is often
credited as the first inventory management model. The EOQ model is based on the assumption
that ordering costs (such as purchasing, handling, and paperwork) are fixed, and that the cost
of carrying inventory is proportional to the average inventory level. It also assumes that the
demand for the item is constant over time. By determining the optimal order quantity that
minimizes the total cost of ordering and inventory carrying, the EOQ model can provide a
company with cost savings by reducing their overall inventory costs.

The Economic Order Quantity (EOQ) formula is used to determine the optimal amount of
inventory that a company should order at any given time in order to minimize the total cost of
inventory management.

The formula is as follows: EOQ =√(2AO/C)

Where

AO = Annual Ordering Cost

C = Cost of Holding One Unit of Inventory in Stock for One Year


Goal of EOQ

The goal of Economic Order Quantity (EOQ) is to minimize the total cost of ordering and
holding inventory. It is a model used to determine the optimal order quantity that will minimize
the total inventory costs of a company. The EOQ model considers the fixed cost of placing an
order, the variable cost of holding inventory, and the demand rate of the item. This allows
companies to determine the most cost-effective order size to maintain the desired level of
inventory.

Limitations of EOQ

• The EOQ model is based on several assumptions that may not always be applicable in
the real world, such as infinite demand, no quantity discounts, constant ordering and
holding costs, and a fixed lead time.
• The EOQ model does not consider the effect of shortages or the cost of capital when
making decisions.
• The EOQ model also assumes that the demand for an item is constant, which may not
always be the case.
• The EOQ model is also limited in its ability to consider uncertain demand and lead
times, which can significantly impact inventory levels.
• The EOQ model is a static model, which means it can only be used to optimize a single
order quantity based on the current conditions. It does not consider the possibility of
future changes in demand or other factors.
• The EOQ model does not consider the effect of stockouts or lost sales due to shortages.

Conclusion
In conclusion, EOQ is a major tool for inventory control and is used to minimize inventory
costs. By calculating the optimal order quantity, companies can reduce the amount of inventory
they need to carry, resulting in cost savings and improved cash flow. This can also help them
to better manage their inventory and reduce the risk of stockouts. Ultimately, EOQ helps
companies to minimize their inventory costs and improve their bottom line.

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