Economic Order Quantity deeper understanding. - YouTube

While trying to figure out that what quantity should we order to the supplier every time,

we went through a lot of real and book examples and situations.

Real situations were very friends and easily understandable.

But the book situations were very rigid.

And moreover we felt like every point said just one thing that what difference will it

make if I order small or medium or large quantities at the same time as the purchase cost of all

of them have been same.

Then I realized that even though the purchase cost of all of these are same there is something

called as total ordering cost and total carrying cost.

The total of these two was called as associated cost.

Because these costs are associated with purchasing of the raw material.

And I realized, even though everything seems to be constant they were variables.

Why?

Because I'll tell you why.

The smaller quantity I ordered, the number of times I had to order was too much.

How will I find out my ordering cost?Very simple.

What was my whole year's requirement?

5000.

So what am I doing?

Whenever I have to compute the number of orders, whenever I have to compute the number of orders,

then in terms of formula, can I say that we are doing this: My annual requirement of raw

materials divided by my quantity, that how much quantity am I ordering, correct?

Just like how we did it here.

What is my annual requirement?

5000 divided by my quantity.

How much quantity am I ordering?

100.

So how much will be my number of orders?

50.

Similarly, 5000 divided by 500.

How many orders will I make?

10.

Similarly, 5000 divided by 1000.

How many orders will I make?

5.

So I found out how to calculate the number of orders, then I realized that ordering cost

per order is constant, known and fixed and given to me in the question every single time.

So all I had to do is find my total ordering cost, which is very simple.

If I know the number of orders is 50, 10 or 5 and I know that I always have to multiply

them by 16 I can easily compute my total ordering cost, which is 50 into 16, 800 and 10 into

16, 160 and 5 into 16, 80.

Then I found out, ok the as the number of orders, as the number or orders increases,

if the orders are 5 then the ordering cost is less, if the orders are less, then the

ordering cost will increase.

And if there are 50 orders, then our ordering cost will increase a lot.

So as I realized that the number of orders play a very important role in my ordering

cost and my number of orders depend upon, my number of orders depends upon my order

size.

So as I increase the order size my ordering cost decreases, then I stood for one more

thing, that there should be also carrying cost, then we tried to understand the carrying

cost.

What is the carrying cost?

The cost of taking care of what is purchased.

Then I realized that if I'm bringing only 100 units with me then my production pattern

is going to be or my raw material consumption pattern is going to be something like this

100 units will be received and consumed.

100 units will be received and consumed.

100 units will be received and consumed.

100 units will be received and consumed.

So it is going to be something like this, so because my carrying cost was given to me

as per unit per annum basis.

I had to find out the average of it.

So whatever quantity I order, 100 quantity if I've ordered, the average is going to be

maximum 100, minimum 0, even if I order 1000 at a time, my average is going to be maximum

1000, minimum 0.

So what I can do is I can simply do this, that whatever quantity I'm ordering I can

just divide it by 2 and multiply it by C and this is how I can find out my total carrying

cost.

Surprisingly, I found out a relationship that the total ordering cost and the total carrying

cost, not the ordering cost not the carrying cost, the total of them - they have an inverse

relationship.

Now because of that when I studied that inverse relationship I found out that one thing.

If we order 100, then purchase price will be 50000, if I order in lots of 500, then

what is the purchase price?

50000 only.

Because whether I order in lots of 100s or 500s, during the whole year how much do I

have to order?

Only 5000 we have to order.

And what is the cost of every raw material?

It is only Rs. 10.

So I'm going to incur a cost of 50000, 50000 irrespective of any order size.

But I was quick to realize that if I order 100 then my total ordering cost and total

carrying cost will be less than that of 500.

And that is why, if I order in lots of 100, then I'll get my raw material, at what cost?

At the cost of 51000.

Otherwise if we order together 500 units, then I'll get a cost of 51500.

So I do definitely know that ordering in lots of 100 is better than ordering in lots of

500.

But is it the most optimal quantity?

Is there any other quantity of order which is more beneficial?

How do I find that?