First Published: Friday, March 6, 2009
In the big company, inventory management uses EOQ to calculate the most economic quantity of order. EOQ also can use in the daily activity to calculate of consumer good storage in home. There are three main components to calculate EOQ such as re-ordering cost, demand, and holding cost.
In the daily life, everyone must keep something in home to store vegetables, meats, fruits, milk, book, bath equipments, and other consumer goods. To store everything, people usually don’t consider about the optimal time, size, and quantity when they buy something to stock in home. For example, how much mother should buy milk for her children in the market.
The first component is re-ordering cost (RC). The definition of re-order cost is total expenses involved in repeating supply such as order preparation, communications, transportation, inspection, administration, and other costs. For example, the distance from house to market is 20 km. Assume that the car’s consuming is 10 km per litre and gasoline price is $1 per litre. Therefore, the re-ordering cost is 2 x 20 / 10 x $1 = $4 (the calculation is for 2 ways, go to the market and go home).
The second component is demand (D). Demand in EOQ is define as the estimate of consume or how much the product will be sold in a year. For example, the children can consume 8 cans of milk in a month. Hence the demand is 8 x 12 = 96 bottles annually.
The second component is holding cost or storage cost (HC). It can be defined as expenses involved in keeping and maintain a stock. It is including rent of space, equipment, materials, labour, insurance, security, interest, and other direct expenses. For example, a $200 locker can store 10 cans of milk. It estimates that have a reliability age 10 years. Therefore, we can calculate the holding cost as $50/10/10 = $2 per can annually.
The calculation of EOQ for this example is EOQ = (2xRCxD/HC)0.5 = Ö(2 x 4 x 96) /2 = 19.6 ~ 20 cans. It means that each order or buy is 20 cans of milk. Moreover, the calculation of total annual inventory cost is VC = (RCxD/EOQ) + HC*EOQ/2 = (4×96/19.6) + (2×19.6/2) = 19.6 + 19.6 = $39.2. In addition, the time between order is 360/5 = 72 days (around 2.4 months).
By this calculation, each family is able to calculate the most optimal storage of daily consumer goods. In this example if the mother buys 15 cans every purchase (below EOQ), the total annual inventory cost will be VC = (RCxD/Q) + HC*Q/2 = (4×96/15) + (2×15/2) = 25.6 + 15 = $40.6. It will be the same if the mother buys 25 cans every purchase (above EOQ), the total annual inventory cost will be VC = (RCxD/Q) + HC*Q/2 = (4×96/25) + (2×25/2) = 15.36 + 25 = $40.36.
For conclusion, each family can save money with EOQ calculation in daily life.