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EOQ & EPQ Calculators

author: Steve Myles date: January 2016 autosize: true transition: none

Background

  • Economic Order Quantity (EOQ)
  • a classic model in production scheduling
  • results in the optimal order quantity that should be purchased with each order to minimize the total cost
  • total cost = the cost of holding excess inventory plus the cost of placing orders
  • Economic Production Quantity (EPQ)
  • an extension of the EOQ model that assumes that the company will produce its own inventory
  • There is a new online EOQ & EPQ Calculator (GitHub repo)
  • based on user inputs, this tool calculates the EOQ and EPQ as well as related costs
  • Extensions to both models exist that allow for inclusion of shortage (stockout) and back-ordering costs, as well as minimum order quantities (MOQ)
  • these extensions are outside the scope of this tool

Formulas

  • EOQ and EPQ are both functions of annualized demand $R$, cost per order $C$ (not dependent on the quantity ordered), unit cost $P$ (price for EOQ, production cost for EPQ), and holding cost $H$ (defined as a percentage $F$ of unit cost, so $H = PF$)

  • Additionally, EPQ is a function of production rate (units produced per day) $p$ and demand rate (daily demand) $r$

  • Derivations: EOQ | EPQ

  • EOQ: $$Q^* = \sqrt{\frac{2CR}{H}} = \sqrt{\frac{2CR}{PF}}$$

  • EPQ: $$Q^* = \sqrt{\frac{2CRp}{H(p - r)}}$$

Economic Order Quantity Example

eoq <- function(demand, order_cost, holding_cost_percent, unit_cost) { 
    sqrt(2 * order_cost * demand / 
        ## avoid division by 0 by setting 0% holding cost to 0.001     
        (ifelse(holding_cost_percent == 0, 0.001, holding_cost_percent) * unit_cost)) }
demand <- 1000; order_cost <- 10; holding_cost_percent <- 0.1; unit_cost <- 5
eoqty <- eoq(demand, order_cost, holding_cost_percent, unit_cost)
eoqty
[1] 200
  • For the above scenario, the EOQ is 200
  • If this reflected the need to order a partial unit, one would need to round up to meet demand

Economic Production Quantity Example

demand_rate <- function(demand) {demand / 250}
epq <- function(demand, order_cost, holding_cost_percent, unit_cost, production_rate) {
    sqrt(2 * order_cost * demand * production_rate /
            ((ifelse(holding_cost_percent == 0, 0.001, holding_cost_percent) 
              * unit_cost) * (production_rate - demand_rate(demand)))) }
production_rate <- 5 ## the other parameters are the same as those in the EOQ example
epqty <- epq(demand, order_cost, holding_cost_percent, unit_cost, production_rate)
epqty
[1] 447.2136
  • For the above scenario, the EPQ is 447.2
  • Each production run should be 448 in this case (assuming partial units cannot be produced)