Logistics and Supply Chain Management, 4th Edition

CREATING THE RESPON S I V E SU P P LY CHAIN

109

The EOQ can be easily determined by the formula:

2AS

EOQ =

––––

i

where,

A = annual usage

S = ordering cost/set-up cost

i = inventory carrying cost

So, for example, if we use 1,000 units of product X a year, each costing £40, and

each order/set-up costs £100 and the carrying cost of inventory is 25 per cent then:

2 × 1000 × 100

EOQ =

–––––––––––––––––

= 141

40 × 0.25

The problem is that this reorder quantity means that we will be carrying more

inventory than is actually required per day over the complete order cycle (except

on the last day). For example, if the EOQ were 100 ...