Since we’ve already explained what EOQ is in the first part of this post, let’s move on to a practical exercise where we’ll calculate the POQ (Period Order Quantity – the economic order quantity in a production period)
The calculation of POQ is linked to that of EOQ and its aim is to determine the optimal size of a production lot based on linear demand.
Continuing with Aesop’s fable, let’s suppose that the cicada sells 25,000 seeds per year. It processes each seed by putting it in an individual bag (2.3 minutes per seed) and the retail price of each processed seed is €1.20 with a margin of 15% (the holding cost rate is 5.8% per year)
The setup cost is €7.60 where L=2 days.
So, we would have:
Looking back at these two posts on “The Cicada, the Ant, the EOQ & the POQ”, it’s important to understand that several factors come into play when establishing production or purchase lots.
We can’t base them on prices and machine efficiency like we used to do, because this would leave us with huge lots that are hardly acceptable from a financing perspective.
We therefore have to work on each part of the supply chain, providers and customers, in order to define our parameters correctly and prevent our added value from being sapped by the financial costs incurred due to carrying large quantities of inventory.
Aesop was alive over 2000 years ago and his fable gives us a nice moral to tell our children. Unfortunately, it doesn’t apply to modern companies, regardless of how determined some are to follow it to the letter when managing their inventories. At IKOR, we’re ready to manage our clients’ demands based on reality – not fables.