4.5: Economic Order Quantity (EOQ)

4.5. Economic Order Quantity (EOQ)

Most of the data was provided by the hospital to calculate the economic order quantity for each drug. For their current method, to calculate the ordering cost for each drug additional data was collected. The additional data collected was the number of orders placed per year for each drugs. With this data, the holding cost and the ordering cost was determined in order to compare the cost estimates from their current method and the recommended method. This portion of the project was the most challenging to complete because there was some reverse engineering involved to get the total cost for each product. This data is shown in Appendix J. Before going in calculating the EOQ some assumptions needed to be established;

There were two parts in the total annual cost calculation that was looked at nearly in the calculations which were the holding cost and order cost. As shown in table 13, both current and the recommended methods show that both holding cost and order cost are associated to the thirty drugs analyzed. The results looked reasonable, for instance, in their current method their holding cost was low compared to the recommended results. This illustrates that in the recommended method, the hospital would have to store more inventory in their warehouse which would increase their holding cost. But when the order cost associated with the thirty drugs was compared, there was a significant difference in cost. This was because the hospital would order more frequently since they would have low inventory levels which created a high order cost. In the recommended method, both the holding cost and the order cost were equal due to the economic order quantity calculations. As mention earlier, the EOQ would give the optimal order quantity when both the holding cost and order cost are minimized. As shown in table 13, Ayder Referral Hospital could save a significant amount of money by simply apply the EOQ method effectively. Please see Appendix K for a more detail cost estimate for all thirty