Lab # 2

Introduction to ABC inventory approach and Economic Order Quantity (EOQ)

Objectives:
o To classify the inventory item using ABC inventory approach
o To determine EOQ for items in group A

Theory:
ABC Inventory Approach:
ABC Inventory Classification Approach is a ranking system for identifying and
grouping items in terms of how useful they are for achieving business goals. The system requires
grouping things into three categories:

A - extremely important.

B - moderately important.

C - relatively unimportant.

EOQ Model:
In inventory management, economic order quantity (EOQ) is the order quantity that
minimizes the total holding costs and ordering costs. It is one of the oldest classical production
scheduling models.

EOQ = 2DC0/Ch

Lab Task:

To classify below 15 items using ABC Analysis.

 Item # Annual Demand Unit Price Setup Cost Holding Cost Total Cost=
D*Unit Price
R01 100 12 30 20% 1200
R02 20 50 20 20% 1000
R03 70 15 50 20% 1050
R04 60 50 35 20% 3000
R05 100 40 40 20% 4000
R06 240 75 50 20% 18000
R07 270 4 20 20% 1080
R08 420 1.5 10 20% 630
R09 270 2 50 20% 540
R10 520 25 40 20% 13000
R11 470 5 70 20% 2350
R12 100 7.5 25 20% 750
R13 270 3.5 45 20% 945
R14 1220 1 35 20% 1220
R15 320 15 60 20% 4800

Classification using ABC analysis (POM QM):

To Determine EOQ for items in Group A:

Items in Group A are:

Item no 6

Item no 10

Item no 15

EOQ (No Reorder Point):

Item no 6 --- 0.65

Item no 10 --- 1.42

Item no 15--- 0.88

EOQ (Reorder Point):

To find Reorder point for Group A, Some extra things are needed, i.e
Lead Time = 5

Safety Stock = 6

Then By using POM QM for windows we find out that EOQ for Group A items are as follow:

Item no 6 --- 9.25

Item no 10 --- 13.1

Item no 15--- 10.3