Economic Order Quantity Analysis:
Management of Emergency Food Provision by NGOs
When ordering supplies, managers of both for-profit and not-for-profit organizations must answer the deceptively difficult question: how large an order should my organization place? The Economic Order Quantity (EOQ) analysis method gives an accurate picture of the variables involved in making order quantity decisions (Finkler, 2009). Some organizations like food pantries, for example, may not have the flexibility to adjust some of these variables (e.g. how much is available from particular suppliers; how much demand is made on resources), so the EOQ equation allows supply managers to adjust other variables to accommodate changes in supply and demand in nuanced ways.
The case study I will examine is a food bank that supplies meals for the homeless. They order large quantities of ingredients through government-subsidized contracts at a fixed price, but demand is not constant and thus carrying cost can change based on the rate of use of a particular item (Buck, 2007). Below, I will enumerate the variables used in the EOQ analysis and talk about how the EOQ analysis produces different results for holding costs over an entire year (i.e. If the entire order was placed at the beginning of the year) versus spread over multiple orders.
The ideal EOQ for Meals for the Homeless’s green bean supply is 2000 large cans. This results in 15 orders for 2000 units being placed per year at a cost of $602.50 per order. This is the local minimum for both holding cost and order cost. If order costs increase, adjusting the model would be a simple matter. If demand for services increases, adjusting the desired quantity up could take past orders into account while optimizing the current EOQ based on the organization’s future expectations. Due to the periodic nature of interest calculations, the EOQ calculation also minimizes interest lost on funds invested in inventory holding and ordering.
By comparison, if Meals for the Homeless ordered only once per year, assuming that the shipment of goods would indeed remain unspoiled for 12 months, their total cost would be $4,538.83. This is sub-optimal in terms of both holding costs and interest although it does keep ordering costs to a minimum. Interestingly, since Meals for the Homeless is not directly compensated for the merchandise it distributes, this one-order system may in fact be optimal. However, if the organization is compensated by governmental agencies based on the amount of meals it delivers to the served population, it may be prudent to utilize the EOQ model to determine optimal order quantity for this and other products.
Buck, M. (2007). A Guide to Developing a Sustainable Food Purchasing Policy. SustainableFoodPolicy.org white paper, accessed June 15, 2011. http://www.sustainablefoodpolicy.org/SustainableFoodPolicyGuide.pdf?attredirects=0
Finkler, S.A. (2009). Financial Management for Public, Health, and Not-for-Profit Organizations, 3rd Ed. Newark, NJ: Prentice-Hall.
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