Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

11.4.2b The Economic Order Quantity (EOQ) Formula

Intended learning outcomes: Explain the economic order quantity (EOQ) formula. Describe the cost curves as a function of batch size.

Continuation from previous subsection (11.4.2)

The economic order quantity X0 is the lot size with the minimum of total costs, and it results from deriving the target function and setting it to zero, as shown in Figure

EOQ (economic order quantity) formula is another name for the X0 formula.

Fig.       EOQ formula: determining the optimum batch size.

Figure shows the cost curves that correspond to the values for C1, C2, C3, and CT as a function of batch sizes.

Fig.       Cost curves as a function of batch size.

These cost curves are typical of the EOQ formula. The minimum point for total costs lies exactly at the intersection of the curves for setup and ordering costs and carrying cost.

Continuation in next subsection (11.4.2c).

Exercise: Get used to the EOQ calculation by chosing different values for the parameters.

Course section 11.4: Subsections and their intended learning outcomes