Hi every body
I am doing a project of implementing Kanban in a company. For this I need to find out the Reorder point and Economic Order Quantity for the item/parts of my company (about18000 types).

According to me:-

EOQ=(2*D*S/H)^1/2
where,
D=Annual Demand
S=Order cost
H=Annual Holding cost
I have problem in finding the Holding cost. I assumed it to be 25% of the parts cost.so my formula becomes:-

EOQ=[2*D*S/(C*25/100)]^1/2
but this is giving very absurd figure,
for ex-if C=Rs 500,S=Rs 2000 and Annual Demand=3000
then EOQ=48000 which means I m ordering quantity for the next 16 years.

Also, If I take Holding cost of EOQ/2 parts (Since on an average I hold EOQ/2 quantity of the item/parts in a year)
so H=(EOQ/2)*C*25/100
now after some calculations
EOQ=(16*D*S/C)^1/3
this gives EOQ =92 for the above data.
where as its lead time is 132 days and its Reorder point is 1187
as per my knowledge EOQ should not come below the Reorder point.

kindly help me out of this..

regards
Arun

First off, do the calculation for kanban (Reference my previous post here (http://elsmar.com/Forums/showpost.php?p=128166&postcount=2)):

The formula for calculating the number of kanban cards in a system for a particular product is:

(Daily Demand x (Run Frequency + Lead Time + Safety Time)) / Container Capacity

Where:

Daily Demand = Customer Consumption expressed as # of units

Run Frequency = Frequency which you decide to set-up and produce that item. This is expressed as a unit of time. For a five day work week, running the product every day would equal (1), every third day would equal (3), etc.

Lead Time = Manufacturing lead time (processing time + Set-up time + queue time) + lead time for kanban retrieval expressed as a unit of time.

Safety Time = Allowance for variations in demand and supply, also expressed as a unit of time. Keep as low as possible.

Container Capacity = Number of units per container (# of units in a container is always the same number).

********************

Notice, that nowhere in the kanban formula is EOQ a factor. What EOQ does is try find the to optimum quantity that should be ordered which would minimuze the total variable costs (purchasing, shipping, carrying, etc.) APICS (The Association for Operations Management) covers EOQ in some of the certification modules.

Whereas EOQ is solely a cost model, kanban is time driven. The formula essentially gives you the reorder point as well. In this case, the quantity is determine by your container capacity, it is just a matter of how often which would be handled by the kanban board or heijunka box.

On a side note, be sure your carry costs are accurate. The typical range thrown out is usually in the 20-30% area, but when you really look at opportunity costs, it is probably more in the >30% range.

Your re-order point (Reorder Point = Lead Time Demand + Safety Stock) is also time based. It is the trigger based on inventory level (in order to maintain a defined level of service to the customer). These points are usually set as triggers within your MRP/ERP system.

The EOQ calculation is a good check and it can be used to help in the basis for your ordering system (which is a different topic), but the results are different in perspective.

Wayne

Dear Wayne
I totally agree with you in every sense. but what I am doing is that I want to keep the reorder point as u have explained (I suppose I did the same calculations). But I want to follow the order quantity as EOQ as far as I can, since it is the optimum quantity( may be the EOQ can be less than RP sometimes and I may have to manipulate the it in that case).
So I still want to find the EOQ, and hence It will be helpful if I get the exact formula. Can u please refer to my earlier post again for that and let me know the right formula.

Arun

Wayne really did an excellent job on this one.

You may be getting the correct answer with the EOQ. Notice, your holding costs is profoundly less than your ordering costs, so fundamentally you would order that much. Remember, EOQ is just an optimal balance between holding and ordering costs; nothing more comes into play.

I would challenge your holding costs. I can look it up in some books, but holding inventory is extremely expensive.

Too, the EOQ model is easy to calculate, and given the basic assumptions hold (which hardly never occurs) works pretty good. There are some more robust models that may work.

what I am doing is that I want to keep the reorder point as u have explained (I suppose I did the same calculations). But I want to follow the order quantity as EOQ as far as I can, since it is the optimum quantity( may be the

So I still want to find the EOQ, and hence It will be helpful if I get the exact formula. Can u please refer to my earlier post again for that and let me know the right formula.

Arun

I'm going to recommend you get the book, "Introduction to Materials Management (http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?z=y&EAN=9780131128743&itm=1)" by J.R. Tony R. Arnold and Stephen N. Chapman.

This is one of the primary references used throughout APICS' CPIM (Certified in Production and Inventory Management) body of knowledge. It is also a key reference for their CSCP (Certified Supply Chain Specialist) exam as well. For a textbook, it is a pretty read and an excellent reference.

It would be nice if the EOQ and Reorder Point (RP) could be one and the same.

I just did your calculations and something isn't right. I can't get to your 48,000.

The formula is:

Square root of (Annual usage * 2 * Order Cost) / Annual Carrying Cost

Carrying cost is represented as the annual cost per average "on hand inventory unit/s".

So (correct me if I'm wrong with these numbers).....

Annual Demand 3000
Order Cost 2000
Holding Cost 500

Would yield an EOQ of: 155 (rounding up to the nearest whole unit). Not even close to your number. See the attached spreadsheet.

It is also important to remember that just because you only want an EOQ of 90, the supplier may only sell in bundles of 200 (it just isn't in large enough demand to do otherwise). In this instance, your stuck with an order quantity of 200 units.

Wayne

EOQ=(2*D*S/H)^1/2
where,
D=Annual Demand
S=Order cost
H=Annual Holding cost
I have problem in finding the Holding cost. I assumed it to be 25% of the parts cost.so my formula becomes:-

EOQ=[2*D*S/(C*25/100)]^1/2
but this is giving very absurd figure,
for ex-if C=Rs 500,S=Rs 2000 and Annual Demand=3000
then EOQ=48000 which means I m ordering quantity for the next 16 years.



Wayne, I saw the holding costs as $125 (25% of the parts cost-(500*.25), hence the reason I commented I think that value strikes me as extremely low, especially compared to a $2000 order cost.

What do you think?

Wayne, I saw the holding costs as $125 (25% of the parts cost-(500*.25), hence the reason I commented I think that value strikes me as extremely low, especially compared to a $2000 order cost.

What do you think?

Your right, that would change the quantity to 310. It is also why I did the spreadsheet. The giveaway is that the EOQ quantity is larger than the annual volume. If that is truly the case, then I would have to wonder about the costs that are being used.

Wayne

Thanks Wayne and Brad
There was some problem in my EOQ calculations and Wayne was right in making his point.
Can you help me out in clearing a concept.
I am implementing one bin Kanban in a manufacturing firm (mostly assembling). where I can take one bin with a partition(or two bins adjacent to each other) near the assembly line. Suppose I take two bins blue and Red for example. Now I am taking Red bin quantity as Reorder point and blue bin quantity equal to EOQ- RP.
so when the blue bin gets empty its card moves to the board and I get the trigger that my reorder point has arrived(since only Red bin quantity is left). At this point I order the parts and by the time they arrive the Red bin will be almost empty. So this way I am holding minimum inventory.
Now the question is of Blue bin quantity( I know I may be wrong in taking this).I totally agree with your point that EOQ has nothing to do with Kanban and it is based on Cost and not time. But I want to order the quantity as close as possible to the EOQ.So I have taken it as EOQ-RP.Sometimes the EOQ is less than RP and sometimes their difference is not significant. In that case I manipulate the quantity of Blue bin.
I think I am right in taking the Red bin quantity.
If I am wrong then please tell me how I can take the Blue bin and Red bin quantities.
Thanks
Arun

The bins/cartons/etc.; should all have the same quantities. For your own sanity don't have different quantities. Having bins of the same product but with different quantities will cause you to end up problem (not if, but when) which in turn will force you to: miss a shipment from lack of parts, or force you to expidite parts at higher shipping costs.

Keep the quantities the same and utilize additional bins if required. See my attached file (Powerpoint format, just hit F5 and "spacebar" through it) on how the kanban board should work. The "blocker" cards are a way to control periods when demand is changing and you are consuming material at a different pace. As demand picks up, move the blocker card up the chart (this creates a faster re-order point), or move it down the chart when you are consuming less material from slower demand. The blocker cards don't reduce the number of cards in the system, they control the frequency at which addidtional materials are requested.

Your re-order point would be based on the number of bins that are returned. A two-bin system works well internally, but it may not be as feasible when dealing with an external supplier. You should work with the supplier on the packaging (and quantity per package) their product is supplied in, and use the carton with a card already attached from the supplier.

Wayne