In defending the life cycle of a company, inventory is one component that really need to be considered and planned with very mature. Delays in delivery of raw materials or items needed can complicate the performance of the company. Necessary materials should also be stored on a seasonal basis for avoiding price increases. Companies are racing to prepare inventories of goods they use a lot of things and methods. One method used by the company in minimizing risk in the process of inventory is the method of EOQ (Economic Order Quantity). Economic Order Quantity is a method used to optimize the purchase of raw materials which can reduce inventory costs so that the efficiency of material inventory in the company can run well. The use of EOQ method can assist a company in determining the number of units ordered in order to achieve a booking fee and inventory costs to a minimum. Some advantages which may be granted by the EOQ are to eliminate the risk if materials ordered are not good so it must be restored, eliminating the risk of price increases on a seasonal basis or inflation, store raw materials produced on a seasonal basis so that the company will have no trouble if the material was not available on the market, and others.
Economic Order Quantity first developed by F. W. Harris in 1915 to develop the economic order quantity formula. It is one of the oldest models of classical production scheduling. The framework used to determine the order quantity is also known as Wilson EOQ Model or the Wilson Formula.
Definition According to Prof. Dr. Bambang Rianto Economic Order Quantity is the quantity of goods that can be obtained with minimal cost, or often said to be the optimal number of purchases.
Definition According to Drs. Agus Ahyadi Economic Order Quantity is the number of purchases of raw materials that can provide minimal inventory costs. Of the two definitions above, it can be concluded that the EOQ is a method used to optimize the purchase of raw materials which can reduce inventory costs so that the efficiency of material inventory in the company can run well.
The purpose of the EOQ model is to minimize the total cost of inventory. Important cost is the cost of the reservation, the cost of placing the order, and the cost of carrying or holding units of inventory in stock. All other costs such as, for example, the purchase cost of inventory itself, which is constant and therefore not relevant to the model. The booking fee is also known as the cost of purchase or cost of set up, this is the amount of fixed costs that occur each time an item was ordered. These costs are not related to the quantity ordered but especially with physical activity required to process the order. The carrying cost is also called storage costs, carrying costs are the costs associated with inventories having on hand. It mainly consists of costs associated with inventory investment and storage costs. For the purposes of calculating the EOQ, if the cost does not change based on the amount of inventory on hand does not have to be included in the carrying cost. In the EOQ formula, the cost of bringing represented as the average annual cost per unit of inventory on hand. The following are the main components of carrying cost.
- Interest
If you need to borrow money to pay for your supplies, the interest rate will be part of the carrying value. If you do not borrow on inventory but have a loan on other capital goods, you can use the mortgage interest rate for inventory reduction will free up money that could be used to repay the loan. If by some miracle you are debt free you will need to determine how much you could make if the money was invested.
- Insurance
Because insurance costs are directly related to the total inventory value, you would include this as part of the carrying cost.
- Tax,
If you are required to pay tax on the value of your inventory they will also be included.
Variables
· P = purchase unit price, unit
production cost
· Q = order quantity
· Q* = optimal order quantity
· D = annual demand quantity
· K = fixed cost per order, setup
cost (not per unit, typically
cost of ordering and shipping and handling. This is not the cost of goods)
· h= annual holding cost per unit,
also known as carrying cost or storage cost (capital cost, warehouse space,
refrigeration, insurance, etc. usually not related to the unit production cost)
The Total Cost
function and derivation of EOQ formula
Classic EOQ model: trade-off between ordering cost
(blue) and holding cost (red). Total cost (green) admits aglobal optimum. Purchase cost is not a relevant cost for determining the optimal order quantity.
The single-item EOQ formula finds the minimum point of the following cost
function:
Total Cost = purchase cost or production cost +
ordering cost + holding cost
Where:
·
Purchase cost: This is the variable cost of goods:
purchase unit price × annual demand quantity. This is P × D
·
Ordering cost: This is the cost of placing orders:
each order has a fixed cost K, and we need to order D/Q times per year. This is
K × D/Q
·
Holding cost: the average quantity in stock (between
fully replenished and empty) is Q/2, so this cost is h × Q/2
To determine the minimum point of the total cost
curve, calculate the derivative of the total cost with respect to Q (assume all
other variables are constant) and set it equal to 0:
Solving for Q gives Q* (the optimal order quantity):
Therefore:
ECONOMIC ORDER QUANTITY
The optimal value Q* may also be found by recognising that[3]Q* is independent of P; it is a function of only K, D, h.
where the non-negative quadratic
term disappears for
Example:
PT Feminine is a company that manufactures a lady bag. The company requires a material component as many as 12,000 units a year. The booking fee component was Rp. 50,000 for each booking, regardless of the number of items ordered. Storage costs (per / unit / year) of 10% of the inventory value. Price component USD. 3,000 per unit.
Based on that data, the company's managers can determine the most economical order quantity (EOQ) that can provide the lowest total cost of inventory. EOQ calculations to obtain in this case can be seen in Table:
D = 12000 unit
K = Rp. 50.000
h = 10%
C = Rp 3.000
H = Cx h = 300
EOQ = 2 X 12000 X 50000 = 2000 unit
300
The most economical frequency bookings are:
F* = D = 12000 = 6 times/year
EOQ 2000
If one year is equal to 365 days the time period between each order is:
T* = working days per year = 365 = 61 days
F* 6
REORDER POINT
In order for the purchase of materials that have been defined in the EOQ not interfere
smooth operation of the production, it will take a re-ordering of materials
raw. Factors that influence the reorder point is:
1. Lead Time. Lead time is the time taken between the raw materials ordered
up to the company. Lead time will affect the amount of raw materials
used during the lead time, the longer the lead time it will be more
Great material needed during the lead time.
2. The rate of raw material consumption average of unity given time.
3. Inventory Safety (Safety Stock), the amount of the minimum supply of materials
must be owned by the company to maintain the possibility of delays in the arrival of
raw materials, so there is no stagnation. Of the three factors above,
reorder point can be searched by the following formula:
Reorder Point = (LD x AU) + SS
LD = Lead Time
AU = Average Usage Average Usage =
SS = Safety Stock
example:
PT. Deivy assign a lead time of raw material for 4 weeks, the average consumption of 250 kg per week, safety stock is valued at the average usage for 2 weeks. From this data, then reorder pointnya are as follows:
Reorder Point = (4 x 250) + (2 x 250)
= 1500
SAFETY STOCK
To estimate the amount of safety stock, can be used relatively more thorough way is by the method as follows:
1.Metode Usage Difference Maximum and average.
This method is done by calculating the difference between the maximum usage
average usage within a specified period (eg weekly), then
The difference is multiplied by lead time.
Safety Stock = (Maximum Usage - Usage Average) Lead Time
Suppose PT. General estimates the maximum use of materials per week
650 kg, while the average consumption of 500 kg and the long lead time 2
weeks, then the data safety stock of:
Safety Stock = (650-500) 2
= 300 Kg
2. Statistical Methods. To determine the amount of safety stock with this method,
then can use computer programs squares (least square). For
describes the use of this method, the following examples are given, namely
to assess the safety stock in 2001 based on 2000 data.
A---------B-----------C-----------D-------------E
1-------2.600-------2.500-------100----------10.000
2-------2.300-------2.350-------(-50)---------2.500
3-------2.200-------2.350-------(-150)-------22.500
4-------2.400-------2.450-------(-50----------2.500
5-------2.750-------2.700-------50------------2.500
6-------2.500-------2.600-------(-100)-------10.000
7-------2.250-------2.300-------(-50)---------2.500
8-------2.400-------2.600-------(-200)-------40.000
9-------2.550-------2.400-------150----------22.500
10------2.250-------2.200-------50------------2.500
11------2.300-------2.340-------40------------1.600
12------1.500-------1.690-------(-190)-------36.100
Amount--26.000-----28.480-------(-480)------155.200
1-------2.600-------2.500-------100----------10.000
2-------2.300-------2.350-------(-50)---------2.500
3-------2.200-------2.350-------(-150)-------22.500
4-------2.400-------2.450-------(-50----------2.500
5-------2.750-------2.700-------50------------2.500
6-------2.500-------2.600-------(-100)-------10.000
7-------2.250-------2.300-------(-50)---------2.500
8-------2.400-------2.600-------(-200)-------40.000
9-------2.550-------2.400-------150----------22.500
10------2.250-------2.200-------50------------2.500
11------2.300-------2.340-------40------------1.600
12------1.500-------1.690-------(-190)-------36.100
Amount--26.000-----28.480-------(-480)------155.200
Eplanation:
A; Month
B; Estimated Usage
C; Actual Usage
D; Deviation
E; Quadratic Deviation
Steps calculate Safety Stock:
1. Calculate the average deviation = - 480: 12 = 140
2. Calculate the difference between total deviation squared squared with a total deviation
divided by n
(-480) 2
= -------- = 136 000 155 200
n
3. The results of the second step divided by n-1 and the results diakar squares.
136 000
= √ -------------------- = 111.19
12-1
4. To calculate the amount of safety stock is influenced by two factors:
a. The magnitude of a significant degree of standard deviation in a normal curve is used,
eg 97% = 2 or 99.5% = 3
b. The length of the time period used as a basis for calculation. Suppose degrees
Significant use of 99.5%, and long-term time basis during 4
month, then the safety stock:
= (3 x 111.19 x √4) - (-40 x 4) = 827.14
JUST IN TIME
JIT is an approach to minimize the total cost of storage and preparation which is very different from the traditional approach. The traditional approach acknowledges the cost of preparing and then determines the quantity of the order which is the best balance of the two categories of costs. On the other hand, the JIT does not recognize the cost of preparation, but instead JIT try to suppress these costs to zero. If the setup costs are not to be significant, then the remaining cost to be minimized is the cost of storage, which is done by reducing inventory up to quite low levels. That is the approach that is pushing for zero inventory in the JIT system.
Most of the production stoppage occurs for one of three reasons: the engine failure, material damage, and the unavailability of raw materials, so has the inventory is one of the traditional solution to all these problems. Those who support the JIT approach found many supplies that will not solve the problem, but only a disguise or cover up the problem. JIT can solve these three problems above with an emphasis on total maintenance and total quality control and establish a good relationship with suppliers.
6.ANALISIS ECONOMIC ORDER QUANTITY (EOQ)
A standard deviation calculation raw
D = D = å FD2
-----
n
d = standard deviation
f = Frequency of events
d = deviation from average incidence
n = Total observations provided
According to the table above example, the calculation of standard deviation obtained as follows:
181
d = å --------
28
= Ö 6:46
= 2.54
As a practical safety stock rounded to 3.
If the buffer stock set three, the security against less inventory will be 68.27%, while if used standard deviation 2, then the amount to be 6 then the seat will be 95.45%.
The same mechanism can we do to deviations from the replenishment cycle. By adding both safety stock is sourced from recycling irregularities and deviations requests recharging, the safety stock can be established.
Large Inventory Must Built
In building supplies are closely related to several factors as follows:
a. Cost and risk of storage
The greater the amount of drug that is stored, the greater the risk of missing the drug, the greater the risk of expired due to the slow adoption, as well as basically the same drug store to save money. Private storage environment that does not generate money or unproductive would be a waste of existing resources.
b. The booking fee.
For reservations drugs are available various administrations to monitor inventory, administration building to make a reservation or request, hire people to do the administration and provide forms for those needs.
c. Maintenance cost.
Warehouse facilities and infrastructure necessary maintenance and is in need of funds.
The greater the supply means the risk and the amount of storage facilities to be built and in need of maintenance to be larger, but on the other hand the cost of ordering and distribution costs become smaller.
This means that the need for optimization of this equation in order to achieve a balance between building inventory and distribution costs and reservations.
Mathematically the calculation formula defined in the Order Amount economic or formula known as Economic Order Quantity (EOQ).
2 Co S
EOQ = √ -----------
cm U
Co = Cost per Order (all messages)
Cm = Cost of Maintenance of the inventory in a year
S = Number of requests a year
U = Cost per unit
example:
The volume of requests a month in 2400 units
Price per unit Rp. 5, -
The maintenance fee of 20% means that the cost of providing such goods
is because the money had actually absorbed by the product should be subject to
interest, in this case the Bank's interest.
The booking fee is Rp. 20, -
Substituting these figures into the formula EOQ was then
obtained the following results:
EOQ = √ 2 x 20 x 2400
-------------
0:20 x 5:00
EOQ = √ 96,000
EOQ = 310
To make it easier we round it off to 300.
This means that the inventory should be built is 300 and this means that the average inventory will be 150 in one cycle of charging.
