Model Answer
0 min readIntroduction
Economic Order Quantity (EOQ) is a crucial inventory management technique used to determine the optimal order size that minimizes the total inventory costs. These costs include ordering costs and holding costs. Developed by Ford W. Harris in 1913, EOQ aims to balance these competing costs to achieve the most efficient inventory level. In the context of WeWe paint, determining the optimal order size is vital for managing storage costs, preventing stockouts, and ensuring smooth production or sales operations. This analysis will calculate the EOQ for WeWe paint, providing a data-driven recommendation for order quantity.
Understanding the EOQ Model
The EOQ model is based on several assumptions, including constant demand, fixed ordering costs, fixed holding costs, and no lead time. While these assumptions may not perfectly reflect real-world scenarios, the EOQ provides a valuable starting point for inventory optimization.
The EOQ Formula
The EOQ formula is as follows:
EOQ = √(2DS / H)
Where:
- D = Annual demand in units
- S = Ordering cost per order
- H = Holding cost per unit per year
Applying the EOQ to WeWe Paint – Data Requirements
To calculate the EOQ for WeWe paint, we need the following data. Since the question does *not* provide this data, we will *assume* reasonable values for illustrative purposes. A real-world application would require accurate data collection.
- Annual Demand (D): Let's assume WeWe paint has an annual demand of 10,000 litres.
- Ordering Cost (S): Assume the cost per order (including administrative costs, shipping, etc.) is ₹500.
- Holding Cost (H): Assume the holding cost per litre per year (including storage, insurance, obsolescence, etc.) is ₹5.
Calculating the Optimal Order Size
Now, we can plug these values into the EOQ formula:
EOQ = √(2 * 10,000 * 500 / 5)
EOQ = √(2,000,000)
EOQ = 1414.21 litres
Therefore, the optimal order size for WeWe paint is approximately 1414 litres.
Sensitivity Analysis and Considerations
The EOQ is sensitive to changes in demand, ordering costs, and holding costs. A small change in any of these variables can significantly impact the optimal order size. For example:
- Demand Fluctuations: If demand is not constant, safety stock should be added to the EOQ to buffer against stockouts.
- Quantity Discounts: If suppliers offer discounts for larger orders, the EOQ model may need to be modified to consider these discounts.
- Lead Time: The EOQ model doesn't explicitly account for lead time. Reorder points need to be calculated based on lead time and demand during lead time.
Real-World Application and Modifications
In practice, the EOQ model is often used in conjunction with other inventory management techniques, such as Material Requirements Planning (MRP) and Just-in-Time (JIT) inventory systems. Furthermore, businesses may use software solutions to automate inventory calculations and optimize order sizes based on real-time data.
Conclusion
In conclusion, based on the assumed data, the optimal order size for WeWe paint is approximately 1414 litres. This calculation minimizes the total inventory costs by balancing ordering and holding expenses. However, it’s crucial to remember that the EOQ model is a simplification of reality. Regularly reviewing and adjusting the order size based on actual demand, cost fluctuations, and other relevant factors is essential for effective inventory management and maintaining a competitive edge.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.