The Eoq Inventory Formula Case Analysis

1246 Words5 Pages
12.5 LOT SIZING IN MRP PROCESS
Lot sizing (or batching) in material requirements planning (MRP) is the process of modifying the net requirement quantities before they are translated into planned orders in an MRP system. If net requirements were translated directly into planned orders, it would result in manufacturing component schedules and purchasing schedules that did not take any account of the cost of machine setups or the cost of ordering. In other words, making the requirements as they occur on a period‐by‐period basis, otherwise known as the lot‐for‐lot policy, may certainly reduce overall stockholding costs, depending on the size of planning period chosen, but may increase costs incurred through excessive setup and ordering activities for small batches. To take account of the total costs of managing the materials, i.e., holding costs and ordering or setup costs, batch‐sizing rules or ordering policies may need to be applied to the net requirements to produce planned orders
…show more content…
In this article, “The EOQ Inventory Formula,” written by James A. Cargal clearly explains the fundamental theory of the Economic Order Quantity. Cargal published this article from Troy State University Montgomery. The article is straight forward and easy to understand. Cargal does a great job explaining each variable and how it’s used accordingly. The formula is written as illustrated in equation 1 and described as the following, Q=√(█((2*D*S)/(H*C )@ )) where, (EQ: 1)
Q= the EOQ order quantity. This is the variable we want to optimize. All the other variables are fixed quantities.
D= the annual demand of product in quantity per unit time. This can also be known as a

More about The Eoq Inventory Formula Case Analysis

Open Document