Economic Order Quantity.docx

Economic Order Quantity.docx

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EconomicOrderQuantity

ContentsPage

1.Introduction:

2

2.EconomicOrderQuantity:

3

2.1MeaningofEconomicOrderQuantity:

3

2.2EconomicOrderQuantityFormula:

5

2.3EconomicOrderQuantityGoal:

6

2.4EconomicOrderQuantityBenefits:

7

2.5EconomicOrderQuantityAdvantages:

8

2.6EconomicOrderQuantityChallenges:

8

3.ChallengesofAcceptableCustomerServices:

9

4.Trade-offs:

13

4.1Example1:

13

4.2Example2:

13

4.3Example3:

14

5.LeadTime:

15

6.TransportNetworks:

18

7.Conclusion:

20

8.ReferenceList:

21

1.Introduction:

Inthelogisticsmanagement,inventorymanagement,customerservice,leadtimemanagement,interchangeoperation,anddeliveryperformancebecomemoreandmoreimportant.Whenallofabovepointsdowell,itcanincreasecompetitiveadvantages,usethelowestcostandshortesttimetoachievethebestlogisticsperformance.

Toimproveinventorymanagement,manyorganisationsprefertousere-orderpointcalculationtogethowmanyitemsshouldbeorderedeachtime.

Theorganisationsalsolookforsomemethodstoimprovecustomerserviceandleadtime.Goodcustomerservicecansatisfycustomersandkeepthemback.Shortleadtimecansavelotsofcostandtimeinordertomakelogisticseffectiveandefficient.

Trade-offanalyseandtransportnetworksarealsousefulforanorganisationtobalancetwofactorsduringlogistics,andtoimprovetheinterchangeoperationtobemoresuccessful.

2.EconomicOrderQuantity:

2.1MeaningofEconomicOrderQuantity:

EconomicOrderQuantity（EOQ）isagoodmethodforinventorymanagement,andisanorderquantitymodelthatisusedtodeterminethequantityofeachorderfromthecompanysothattominimisethetotalcostofinventorymanagement.TheobjectivesofEOQaretominimiseandbalancetheholdingcostandorderingcost.（Rushtonetal,2000）

AsChopraandMeindl（2010）pointsoutholdingcostincludesdifferenttypesofcosts,suchaswarehouserent,localtaxes,insurance,laborcost,heating.Holdingcostwillincreasewhentheinventoryincreasesduetotheorderquantityincreases.Holdingcostwilldecreasewhentheinventorydecreasesduetotheorderquantitydecreases.Lessinventoryinthewarehousecanreducetheholdingcost.Theholdingcostisshownasastraightlinefrompointzero,asFigureA:

FigureA:

Holdingcost

（Resource:

Homa,2010）

Orderingcostisthecostofeachtimetoorderinventory.Whentheorderquantityincreases,thetimesoforderwillbelesssothattheorderingcostwillbereduced.Forexample,CompanyAneedstopurchase10,000televisions,anditcosts£10foreachorder.Whenitorders10,000quantityatonce,itneedspay£10asorderingcost.Whenitorders10timesthat1,000quantityperorder,itneedstopay£100asorderingcost.Theorderingcostisshownasarectangularhyperbola,asFigureB:

（ChopraandMeindl,2010）

FigureB:

Orderingcost

（Resource:

Homa,2010）

Totalcostisholdingcostaddsorderingcostaddspurchasecost.Itisshownasacurve,andthepointofintersectionofholdingcostlineandorderingcostlineisthelowestcost--EOQ,asFigureC:

（ChopraandMeindl,2010）

FigureC:

EOQModel

（Resource:

Homa,2010）

2.2EconomicOrderQuantityFormula:

AccordingtoManganetal,（2008）,

EOQFormula:

D=Annualdemand（units）

Q=Orderquantity（units）

S=Safetyinventory（units）

C=Costperorder（£）

P=Costperunit（£）

H=Holdingcostperunit（£）

Holdingcost=holdingcostperunit*（safetyinventory+averageinventory）

=H*（S+Q/2）

Orderingcost=（Annualdemand/Orderquantity）*Costperorder

=（D/Q）*C

Purchasecost=Costperunit*Annualdemand

=P*D

Totalannualcost=Holdingcost+Orderingcost+Purchasecost

EOQ=

=

2.3EconomicOrderQuantityGoal:

EOQ'sgoalistomaketheEOQpointintheFigureCmovetotheleftsidethatislowEOQ.LowEOQmeanssmallorderquantitythatcanreduceholdingcostbecauseoflessinsuranceofgoodsandlesswarehouserent.ItalsomeansmorefrequentdeliveriesthatthemanufacturerneedstoordergoodsJIT（Just-in-time）thatistotalktosuppliertodeliverygoodswhenthegoodsisinthere-orderpoint.AnotherwaytoreduceEOQisSMED（SingleMinuteExchangeofDie）thatisatechnicalmethod,toshortenthetransporttimeofmovingproductssothatreducetimewaste.TheagilityofreducingEOQhasshowninFigureD:

（Slacketal,2007）

FigureD:

（Resource:

Slacketal,2007,p.381）

2.4EconomicOrderQuantityBenefits:

Brown（1977）hasshownanexample,seeFigureE,highEOQ（orderquantity=600units）movestolowEOQ（orderquantity=200units）.Theorderfrequencybecomesmore,butinventorythatneededtostorebecomesless.Thebenefitsare:

●Toreducethecostofwarehouserunning.

●Toreducetheinsuranceofinventory.

●Toreducepotentialobsolescence.

●Tohavemoneytoinvestotheropportunities.

●TocompleteJITandSMED.

●Todecreasethedamageoftheinventory.

FigureE:

（Resource:

Brown,1977,p.178）

（Resource:

Brown,1977,p.178）

2.5EconomicOrderQuantityAdvantages:

●Itiseasyformanufacturertoimplementorunderstand.

●Ithelpsmanufacturertosetupasuitableorderquantity.

●Itcansavecostsandtime.

●IthaslotsofbenefitoflowEOQ,asabove.（Waters,2003）

2.6EconomicOrderQuantityChallenges:

Intherealsituation,themanufacturershouldconsider:

●Theannualdemandmaybechanged.

●Thestockmaybedelaybecauseofmanyfactors,suchasheavysnow.

●Themanufacturermaykeepsafetystocktoavoidstock-out.Safetystockalsowillincreasetheholdingcost.

●Theyhavemorethanonesupplier.

●Toordermoregoodsoncecangetmorediscount.LowEOQwillincreasethepurchasingcostsbecausesmallorderquantityneedsbeorderedmoretimes.

●TheymayuseKanbansystemstocontrolandorderinventoryfromsuppliersandmakesureinventoryisorderedwithJIT.TheyhaveVMI（VendorManagedInventory）thattheirsupplierwilldeliverygoodstothem.Itcanreducetheorderingcostsandadministrativecosts.（Waters,2003）

3.ChallengesofAcceptableCustomerServices:

AsHarrison.andvanHoek（2008）pointoutcustomerservicesmanagementisimportantbecausegoodcustomerservicecanincreasethesalesorpurchasingbetweensuppliersandcustomers.Moreandmorecompaniesseekto"puttingcustomerfirst",trytounderstandandachievecustomers'expectations.

TouseasupermarkethomedeliveryasanexampletoanalyseGapmodel（FigureF）,andtrytochangetheweaknessesofcustomerservicestoopportunities.

Gap1meansdifferencebetweencustomers'expectedservicesandsuppliersmanagementperceptionofconsumerexpectation.ThereasonforGap1isbecausesuppliersdonotunderstandwhattheircustomersreallywantandexpect.InordertoreduceGap1,thesuppliersshoulddomoreresearchaboutcustomerswantsandneeds,andcommunicatewellwithcustomerstogettheiropinions.（Lesem,2009）

Forexample,customerswantthesupermarkethomedeliveryservicecanachieve"6rights"thatincludingrightcondition,righttime,rightprice,rightquantity,rightplace,andrightitem.Whenthesupermarketcanunderstand"6right",itcanminimiseGap1.

Gap2meansdifferencebetweensuppliersmanagementperceptionofconsumerexpectationandtranslationofperceptionsintoservicequalityspecifications.Itisbecausethesupplierssetupthewrongqualitystandardofthecustomerservices.InordertoreduceGap2,supplierscanmakeobjectivesofservicesqualitystandard,makethestandardcanbeachieved.（Lesem,2009）

Intheexample,thesupermarketcansetupobjectives:

●Rightcondition:

Musttokeepthegoodszerodefect,andinagoodconditionduringdelivery,suchas,icecreammustbestoredinfridgetokeepfreezing.

●Righttime:

Musttomakesurethegoodsaredeliveredduringthedeliveryslotsthatcustomershavebooked,usuallytheslotis2hours.

●Rightprice:

Onepriceforallstock,suchas£10perunitinthismonth,itshouldbealso£10perunitinnextmonth.

●Rightquantity:

Thenumberofthegoodssupermarketdeliversmustbethequantitycustomersorder,suchascustomerorders100,itshoulddeliver100.

●Rightplace:

ThesupermarketmustdelivergoodstorightplacethatcustomersrequirewithGlobalPositioningSystem（GPS）.Ifnobodyathome,thedeliverystaffshouldputthegoodsinansafetyplace,suchascustomer'sneighbourhome,andleaveacardtotellcustomerwherethegoodsis.

●Rightitem:

Thesupermarketmustdelivergoodsthatcustomersorder.Ifthereisnostockinwarehouse,itshoulddeliverthesimilarproducttocustomersthattheycanselectthesimilarproductorcancelit.

Gap3meansdifferencebetweenservicedeliveryfromsuppliersandservicequalityspecifications.Itmaycausedbythestaffhaslessskillsandknowledgetoprovideservice,thestaffisambiguousofhisorherrole,ortheserviceperformancelackofcontrol.（Lesem,2009）

Thesupermarketshouldhire]employeeswhoaregoodatcomputerskillanddealingwithcustomers'ordersfromon-lineshopping.

Gap4meansdifferencebetweenexternalcommunicationstocustomersandservicedelivery.Itisoccurredwhenservicesthatthesuppliersactualprovidecannotmeettheirpromises.Thesuppliersshouldmakesurethecommunicationwithcustomersisdoneadequateandcorrect,andtoavoidtomakepromisesthatcannotbeachieved.（Lesem,2009）

Thesupermarketcanprovideon-linechatore-mailcommunicationwithcustomerssothattohelpthemtosolveproblemorgetfeedback.

Gap5meansdifferencebetweencustomers'expectationsandtheyactuallygetfromsuppliers.（Lesem,2009）

Whenthesupermarketknowstheexpectationsfromcustomers,itneedstotryits