1. Typical assumptions made
    1. Annual demand (D), carrying cost (C) and Ordering cost (S) can be estimated
    2. Average inventory level is the fixed order quantity (Q) divided by 2 which implies

i.    No safety stock

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ii.    Orders are received all at once

iii.    Demand occurs at a uniform rate
iv.    No inventory when an order arrives

 

Assumptions

    1. Stock out, customer responsiveness, and other costs are inconsequential
    2. Acquisition cost is fixed, i.e., no quantity discounts
  1. Annual carrying cost = Average inventory level X carrying cost = (Q/1)C
  2. Annual ordering cost = Average number of orders per year X ordering cost = (D/Q)S
  3. Total annual stocking cost (TSC) = annual carrying cost + annual ordering cost = (Q/2)C + (D/Q)S
  4. The order quantity where the TSC is at a minimum (EOQ) can be found using calculus (take the first derivative, set it equal to zero and solve for Q)

EOQ=√2DS/C

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