EAR
EAR, or "effective annual rate," is a measure used to compare the annual interest rates from different investments or loans with varying compounding periods. It takes into account the effect of compounding on the interest, providing a standardized way to compare the true annual return on investment or the true annual cost of borrowing.
7 Key excerpts on "EAR"
eBook - ePubManaging Logistics Systems
Planning and Analysis for a Successful Supply Chain
- John M. Longshore, Angela L. Cheatham(Authors)
- 2022(Publication Date)
- Routledge(Publisher)
...The Economic Order Quantity is a set point designed to help organizations minimize the cost of ordering and holding inventory. The cost of ordering inventory falls with the increase in ordering volume due to purchasing on economies of scale. However, as the size of inventory grows, the cost of holding the inventory rises. EOQ is the exact point that minimizes both inversely related costs. It is one of the most common inventory techniques used. Some common EOQ assumptions are as follows: Demand is known and is deterministic – for example, constant. The lead time – for example, the time between placement of the order and the receipt of the order is known and constant. The receipt of inventory is instantaneous – for example, inventory from an order arrives in one batch at one point in time. Quantity discounts are not possible, for example, regardless of how much is order, the price remains the same. Only cost pertinent to the model is the cost of placing the order and cost of holding or storing inventory over time. A good way to visualize these assumptions is through a graph showing inventory usage over time such as illustrated in EOQ Relevance (Sawtooth) Approach graph in Figure 6.5 (Parlar, 1991). Three basic EOQ models are generally used by organization, each for a different purpose, and they are the Simple Basic EOQ model, the Quantity Discount model, and the Production Order Quantity model. The Simple Basic EOQ model needs to include information. The Quality Discount model is factored into the model when certain minimum purchase quantities are reached. It then compares the effect of buying more than is needed but at a lower price which may offset the impact on holding cost. The Production Order Quantity model as opposed to the basic EOQ model assumes that materials produced are used immediately. As a result, lower holding costs are incurred (no instant receipt of replenishment inventory is received as in the basic model)...
eBook - ePubProduction Economics
Evaluating Costs of Operations in Manufacturing and Service Industries
- Anoop Desai, Aashi Mital(Authors)
- 2018(Publication Date)
- CRC Press(Publisher)
...The answer to the second question is arrived at by using reorder point methods. Both of these concepts will be addressed at length in this section. Economic Order Quantity (EOQ) : Economic order quantity corresponds to the most appropriate quantity that must be ordered or produced when an item is demanded as a fairly constant rate. Also, it is assumed that the production rate for said item is significantly greater than the rate at which it is demanded. Such a scenario is also referred to as the “make to stock” scenario. When an item is demanded at a steady rate, the inventory of goods on hand tends to gradually reduce over time. It is then replenished to a predetermined level by placing an order equal to the economic order quantity. This replenishment occurs almost instantaneously when the orders of items are received. The saw tooth pattern that results as a consequence of gradual inventory reduction over a period of time followed by a sudden replenishment is depicted in Figure 8.1. Figure 8.1 Typical sawtooth pattern used to depict inventory reduction over time and compute EOQ. The total inventory cost can be computed by adding the carrying cost and setup cost for the inventory model depicted in Figure 8.1. It will be observed from Figure 8.1 that the average level of inventory is actually equal to the half the maximum level (Q). The total annual inventory cost is expressed by Equation 1 as follows: T I C = Q ⋅ C h 2 + C s u D a Q. (Equation 1) wherein: TIC: Total annual inventory cost, expressed in $/yEAR Q: Order quantity, expressed in number of units/order C h : Carrying cost of holding cost, expressed in $ C su : Setup cost or ordering cost for an order, expressed as $/setup or $/order D a : Annual demand for the item The ratio: D a /Q corresponds to the number of orders or batches that are produced annually...
eBook - ePub- Adil H. Mouhammed(Author)
- 2020(Publication Date)
- Routledge(Publisher)
...The first section explains the economic order quantity (EOQ) model, and the second section analyzes the optimal quantity model or economic lot size model. The third section examines the inventory model with planned shortage. The Economic Order Quantity (EOQ) Model To analyze this model it is assumed that demand for inventory is known with certainty; the ordering firm receives its order (a product) when an order for that product is placed—that is, inventory renewal is instantaneous; carrying and ordering costs per unit are fixed; and inventory is renewed only when inventory level reaches zero. These assumptions suggest that when the demand for inventory is known with certainty and inventory level reaches its optimum point at time t 0, then declines to zero at time t 1 (inventory cycle), the firm has to reorder at time t 1 and the inventory level is replenished to its optimum level again. Figure 5.1 describes this argument. Figure 5.1. Inventory Cycle Mathematically, let CC be the annual inventory carrying cost per unit of output, a cost that is associated with storing an item. This cost is a certain ratio of the value of the inventory item V. Let Cc be the per unit cost of carrying or storing (holding) an item for a yEAR, a cost that consists of deterioration cost, damage cost, interest that could have been obtained had the item not been stored (opportunity cost), taxes, insurance cost, security cost, rent of the warehouse, electricity of the warehouse, and so forth. Cc can be written as Cc = CC × V. For example, if the value of the inventory item is $100 and CC is 5 percent of this value, then Cc, the annual cost of carrying this item, is equal to ($100.00)(0.05) = $5.00. As we know Cc, it becomes easier to find the total annual carrying cost (TC) if the annual inventory level, say Q, is known. In reality, we know two things: the maximum inventory level, Q, and the minimum inventory level, which is 0Q, no inventory...
eBook - ePub- Adil H. Mouhammed(Author)
- 2015(Publication Date)
- Routledge(Publisher)
...The first section explains the economic order quantity (EOQ) model, and the second section analyzes the optimal quantity model or economic lot size model. The third section examines the inventory model with planned shortage. The Economic Order Quantity (EOQ) Model To analyze this model it is assumed that demand for inventory is known with certainty; the ordering firm receives its order (a product) when an order for that product is placed—that is, inventory renewal is instantaneous; carrying and ordering costs per unit are fixed; and inventory is renewed only when inventory level reaches zero. These assumptions suggest that when the demand for inventory is known with certainty and inventory level reaches its optimum point at time t o, then declines to zero at time t 1 (inventory cycle), the firm has to reorder at time t 1 and the inventory level is replenished to its optimum level again. Figure 5.1 describes this argument. Figure 5.1. Inventory Cycle Mathematically, let CC be the annual inventory carrying cost per unit of output, a cost that is associated with storing an item. This cost is a certain ratio of the value of the inventory item V. Let Cc be the per unit cost of carrying or storing (holding) an item for a yEAR, a cost that consists of deterioration cost, damage cost, interest that could have been obtained had the item not been stored (opportunity cost), taxes, insurance cost, security cost, rent of the warehouse, electricity of the warehouse, and so forth. Cc can be written as Cc = CC × V. For example, if the value of the inventory item is $100 and CC is 5 percent of this value, then Cc, the annual cost of carrying this item, is equal to ($100.00)(0.05) = $5.00. As we know Cc, it becomes easier to find the total annual carrying cost (TC) if the annual inventory level, say Q, is known. In reality, we know two things: the maximum inventory level, Q, and the minimum inventory level, which is 0Q, no inventory...
eBook - ePubOperations Research
Operations Research: Theory and Practice
- N.V.S Raju(Author)
- 2019(Publication Date)
- CRC Press(Publisher)
...But till then, they block the money and eat away the profits. Therefore materials managers will be asked to maintain just sufficient stocks. We know well that the higher stocks block the money while under stocks will interrupt production and makes the machines/men idle and hence affects the reputation of the industry for not meeting the demand or not fulfilling the promises. Thus there is a need to arrive a quantity to be stocked that should neither be high nor low. Thus the operating doctrine of inventory (i.e., when and how much to order or stock) depends on how much it costs to the organisation. Thus concept of optimum order quantity (OOQ) or Economic Order Quantity (EOQ) has gained the prominent and significant role in inventory management. The concept of EOQ was first proposed by Ford Wilson Harris in 1913. He has attempted to bring a trade off between the order costs and holding and shortage costs. Suppose you are buying some pens for which you have to spend Rs. 100/- to order. This will he more or less same whether you order 10 or 100. But when you buy 10 the unit cost is rupees ten and when you buy 100 it is one rupee each. Thus the unit orde cost decreases on increase of quantity (but never becomes zero). In case of carrying cost it varies linEARly and the cost on storing increases with increase of quantity. Graphically, it can be observed that the ordering cost er unit decreases hyperbolically with the increase quantity while the unit carrying cost increases linEARly with the increase of quantity. Thus a trade off between these two can be obtained to find a most Economic Order Quantity (EOQ) often denoted by Q* shows most minimum on total cost graph and the normal drawn at EOQ passes through the point of intersection of order cost curve and carrying cost curve indicating annual ordering cost is equal to annual carrying cost (i.e., AOC = ACC) at EOQ. FIGURE 7.2: Limitations of EOQ: Ordering to the nEARest quantities or packing...
eBook - ePubInventory Optimization
Models and Simulations
- Nicolas Vandeput(Author)
- 2020(Publication Date)
- De Gruyter(Publisher)
...We obtained a set of equations known as the EOQ (Economic Order Quantity) model: C = h Q 2 + k D Q (see eq. 2.1 in Section 2.2.1) Q ∗ = 2 k D h (see eq. 2.2 in Section 2.2.2) C ∗ = 2 k D h (see eq. 2.3 in Section 2.2.3) This means that the optimal order quantity Q ∗ is proportional to the square root of the fixed transaction costs k, to the yEARly total demand D ; and inversely proportional to the square root of the variable holding costs per unit h. We noted that a proper setting of the order quantity balances the ordering costs against the holding costs, and that high transaction costs will result in high inventory levels. We saw that the EOQ model is robust to a wrong evaluation of the transaction costs or the holding costs. This allows us to round the optimal order quantity (or the optimal time between two consecutive orders) to streamline our process with only a minimal impact on the total costs. 3 When Should I Order? Now that we know how much we should order, we have to find when we should order. To do so, we will have to discuss two aspects of a supply chain: the supply (or order) lead time and the review period (as shown in Figure 3.1). Figure 3.1 Supply chain model. 3.1 Lead Time Until now, we assumed there was no wait time between the moment an order is made and its reception. In other words, we assumed that as soon as we want to make an order, we receive it. It’s time we remove this assumption—and replace it with a fixed lead time. 1 This means that if we place an order with our (internal or external) supplier, it will take a certain amount of time (fixed) before we receive our goods. How does this influence our inventory policy? Remember that, in a continuous review policy with a reorder point, we order Q units when the on-hand inventory reaches the reorder point s. When we assumed no lead time, we ordered Q units when the on-hand inventory reached 0...
eBook - ePub- Samuel H. Huang(Author)
- 2013(Publication Date)
- CRC Press(Publisher)
...Price fluctuation in the market may justify holding more inventory. However, this is highly speculative and should be left to the financial division of a company to handle. There are several types of costs associated with inventory. Purchasing cost, denoted as c, is the per-unit cost paid to the supplier of the product. When a supplier offers quantity discount, the purchasing cost is a function of the order quantity, denoted as Q. Ordering cost, denoted as O, is the cost associated with placing an order with a supplier. For modeling purpose, this cost is assumed to be independent of the lot size (i.e., order quantity) and is often called fixed ordering cost. Its original formulation is attributed to Harris (1913) in a manufacturing situation where machines need to be set up for the production run. No matter how large the lot size is, the setup cost remains the same. In a purchasing situation, the fixed ordering cost may be the cost related to placing and receiving the order. Inventory ties up capital, requires storage and handling, may need insurance, may incur tax, and may be damaged or become obsolete. All of these cost money. This is called inventory holding cost, denoted as H. When a customer demand cannot be satisfied, understocking cost, denoted as C u, is incurred. The understocking cost could be the lost profit and goodwill if the demand is lost. If the demand is backlogged, the understocking cost could be the discount offered to keep the customer and/or costs associated with record keeping and expedited shipment to the customer. The goal of inventory management is to minimize the costs associated with inventory while satisfying customer demand. 4.2 Economic Order Quantity 4.2.1 Basic Concept of Economic Order Quantity Strickland Propane purchases tanks of propane from AmeriGas and delivers them to customer’s homes. The demand is constant at 50 tanks per week. The purchasing cost for a tank of propane is $12. The ordering cost is $500 per order...
