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Cost Minimization Through EOQ Model: Group 6B

The document discusses using an economic order quantity (EOQ) model to minimize costs for wheat flour purchased by the mess of Hostel 15 at IIT Bombay. The mess serves over 444,000 meals annually to 775 students. The EOQ model determines the optimal order size to balance ordering costs and carrying costs of inventory. It assumes constant demand, no shortages, constant lead times, and full order quantities received at once. By equating the formulas for total annual ordering costs and carrying costs, the model solves for the order quantity that minimizes total annual inventory costs.

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51 views5 pages

Cost Minimization Through EOQ Model: Group 6B

The document discusses using an economic order quantity (EOQ) model to minimize costs for wheat flour purchased by the mess of Hostel 15 at IIT Bombay. The mess serves over 444,000 meals annually to 775 students. The EOQ model determines the optimal order size to balance ordering costs and carrying costs of inventory. It assumes constant demand, no shortages, constant lead times, and full order quantities received at once. By equating the formulas for total annual ordering costs and carrying costs, the model solves for the order quantity that minimizes total annual inventory costs.

Uploaded by

roopteja
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Cost Minimization through

EOQ model
GROUP 6B

Mohammed Abdullah 169278093

Bhupendra Saikia 169278094

Madaka Venkat Vinod 169278096

P Muthu Siddarthan 169278097

Roopteja Tamatam 169278098

Ajagiya Jigar Laxmnabhai 169278101

Kuvam Bansal 169278103

Nandita Sugandhi 169278105


Project Brief
IIT Bombay is a small township in itself. An island of green in the
otherwise concrete jungle that is Mumbai, the campus at Powai nestles
among hills and is flanked by the Powai and Vihar [Link] facilities
are available on campus itself, including banks, a shopping centre, two
excellent schools for children, and a well-equipped hospital. All
students and most faculty live on campus, in student hostels and IIT
staff quarters.

One among the happening hostels is the two year old Hostel 15, the first
and only co-ed hostel of IIT-B. It is primarily allotted to UG and PG
freshmen. Though only 2 years old, it is well equipped with amenities
comparable to the best on campus. One of the primary reasons the
hostel becomes home away from home is its mess.

Considering the three towers of hostel 15, each with its 10 floors and each
floor with 18 rooms (assuming 80% occupancy and 2% occupancy of
guest rooms) is home to 775 people approximately. Considering that the
mess remains closed for three months of May, June and July, it serves 39
weeks in an year, that is 273 days. Assuming that 70% of the occupants
dine in mess every day, mess serves an astounding 444307 meals in an
year. Therefore saving even 1 rupee a day will save 444307 an year for
hostel 15.

The major material purchased to make meals includes bread, wheat


flour and rice. Considering the fact that rotis and rice share almost an
equal weightage in meals in IIT Bombay, we embarked on cutting the
costs of wheat flour by identifying an optimal order quantity.

We have used the basic EOQ model to identify the optimal quantity
which results in reduction in costs related to wheat flour.

PAGE 1
Basic EOQ Model:
The basic EOQ model is a formula for determining the optimal
order size that minimizes the sum of carrying costs and ordering costs.
The model formula is derived under a set of simplifying and restrictive
assumptions, as follows:

Demand is known with certainty and is constant over time.

No shortages are allowed.

Lead time for the receipt of orders is constant.

The order quantity is received all at once.

The function of the EOQ model is to determine the optimal order size
that minimizes total inventory costs.

Inventory order cycle

The total annual ordering cost is computed by multiplying the cost per
order, designated as Co,times the number of orders per year. Since
annual demand, D, is assumed to be known and to be constant, the
number of orders will be D/Q, where Q is the order size

PAGE 2
Total annual carrying cost is computed by multiplying the annual per-
unit carrying cost, designated as Cc, multiplied by the average
inventory level. The average inventory level is one-half of Q or Q/2

The total annual inventory cost is the sum of the ordering and carrying
costs:

The optimal order quantity occurs at the point where the total cost
curve is at a minimum, which coincides exactly with the point where
the carrying cost curve intersects the ordering cost curve. This enables
us to determine the optimal value of Q by equating the two cost
functions and solving for Q:

PAGE 3
PAGE 4

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