In an ideal environment, forecasting demand would be easy and straightforward. Simply look at past demand pattern to predict future consumption. Under these conditions, the EOQ model can be used to calculate when to order the item and how much to order. The basic EOQ equation is as follows:
EOQ = root 2PD/CV
Where, P = cost of placing one order in dollars
D = annual demand for product
C = annual inventory carrying costs expressed as a percentage of the product’s cost or value
V = average costs or value of one unit of inventory
This means that any time an order is placed, it should be for 600 units. Determining when to order is based on lead time-the elapsed time between placing the order and receiving the order. The amount of inventory used during lead time is the recorder point. When inventory reaches its level, an order should be placed. If it takes one day to place the order, three days to process and prepare the order, and four days to deliver it, then the total lead time is eight days. If daily demand is 20 units (7,200 divided by 360 days), multiply 20 times 8 = 160. The recorder point is 160 units. In this example, when the inventory reaches 160 units, a new order for 600 units is placed.
EOQ = root 2PD/CV
Where, P = cost of placing one order in dollars
D = annual demand for product
C = annual inventory carrying costs expressed as a percentage of the product’s cost or value
V = average costs or value of one unit of inventory
This means that any time an order is placed, it should be for 600 units. Determining when to order is based on lead time-the elapsed time between placing the order and receiving the order. The amount of inventory used during lead time is the recorder point. When inventory reaches its level, an order should be placed. If it takes one day to place the order, three days to process and prepare the order, and four days to deliver it, then the total lead time is eight days. If daily demand is 20 units (7,200 divided by 360 days), multiply 20 times 8 = 160. The recorder point is 160 units. In this example, when the inventory reaches 160 units, a new order for 600 units is placed.