Improving total cost of inventory management using

ABC and EOQ model

Nguyen Thien Duy Ho Chi Minh City, Vietnam VNU – Ho Chi Minh City University of
Faculty of Mechanical Engineering [email protected] Technology
VNU – Ho Chi Minh City University of Ho Chi Minh City, Vietnam
Technology [email protected]
Doan Thi Quynh
Ho Chi Minh City, Vietnam Faculty of Mechanical Engineering
[email protected] VNU – Ho Chi Minh City University of
Hong Huynh Nha Uyen
Technology
Faculty of Mechanical Engineering
Doan Thi Quynh Ho Chi Minh City, Vietnam VNU – Ho Chi Minh City University of
Faculty of Mechanical Engineering [email protected] Technology
VNU – Ho Chi Minh City University of Ho Chi Minh City, Vietnam
Technology Tran Minh Phat [email protected]
Ho Chi Minh City, Vietnam Faculty of Mechanical Engineering
[email protected] VNU – Ho Chi Minh City University of
Technology Do Ngoc Hien
Nguyen Thuy Hanh Ho Chi Minh City, Vietnam Faculty of Mechanical Engineering
Faculty of Mechanical Engineering [email protected] VNU – Ho Chi Minh City University of
VNU – Ho Chi Minh City University of Technology
Technology Ho Chi Minh City, Vietnam
Truong Anh Tham [email protected]
Faculty of Mechanical Engineering

Abstract— Efficient inventory management is crucial for supply and demand dynamics (Kehinde Busola, Ogunnaike
business success, ensuring the right products are available in Olaleke, 2020). Research has shown that several organization
the right quantities at the right time. This study investigates are faced with the problems arising from capital tie down,
how inventory practices at an electronic manufacturing inability to ascertain time and quantity to purchase, failure to
company impact their financial performance. It focuses on know the frequency of ordering of materials (Banjoko,
classifying inventory items based on importance (ABC 2004). This has spurred the need to research on the role of
analysis) and determining optimal order quantities (EOQ) to ABC classification in inventory management.
minimize overall costs. The study recommends that this
company prioritize tight control with periodic review policy Manufacturing organizations around the world do not
over high-value ingredients like part No. 3001244, 3001269, ignore the need for inventory management practices in their
3001420, 3001745 (EOQ: 46, 194, 90 and 295 bags respectively). day to day activities to attain economic performance (Swaleh
For other inventory items, a looser control approach might be & Were, 2014). The nature of inventory problems in the case
sufficient. study organization is associated with placing and receiving
orders repeatedly. Managers must be able to apply the most
Keywords— Inventory, ABC, EOQ, Economic, Periodic
suitable inventory management technique into their business
review interval.
operations. Therefore this research aims to use the EOQ
I. INTRODUCTION model to determine how inventory should be managed.
In today’s global market, companies are looking for II. OBJECTIVES
growth and opportunities to reduce their total cost and
There are two main objectives of this study.
management of companies would like to increase quality,
efficiency and capability without increasing their investment. A. Categorize the inventory items into ABC categories.
The tradition method of measuring economic performance in In inventory management, ABC classification is a helpful
some organisation is based on the primary goal of such tool for sorting items based on their cost importance
organisation which is usually to maximise profit (Ibidunni, (Bhadiyadra, 2018). Businesses typically have a wide variety
Ufua, Okorie, & Kehinde, 2019). Inventory management is of materials and finished products, and figuring out how
one of the most important factor in organization and the much to order and when is crucial for cost-effective
proportion of inventories to total asset generally varies production and asset management.
between 15 to 25%. Inventory management system has
mainly two concerns, one is level of customer service i.e. to ABC categorizes items based on their price and volume.
have right goods, in right place and at right time and other is A small group of high-cost, high-demand items falls under
cost of ordering and carrying inventories (Indresh Nishad, category A. Category C, on the other hand, includes low-
Dr. Arunkumar, 2018). cost, low-demand items. Category B sits between these two
extremes.
Too much and too less inventory in all levels of the chain
in supply can have an effect on the product availabilility to In today's competitive market, some argue that using just
customers. Several monitoring systems and processes can be cost for ABC classification isn't enough. Other important
employed to check inventory imbalances to minimize the factors include how long items last, how rare they are, and

XXX-X-XXXX-XXXX-X/XX/$XX.00 ©2024 IEEE

how easily they can be replaced or repaired (Ravinder & economic performance focused on profit maximization, a
Misra, 2014). These and other considerations have led to the strategy of producing the most output for a set cost or
development of multi-criteria ABC analysis, which is better minimizing costs to achieve a desired output (Dey, 2014).
suited for modern businesses. This approach assumes efficient resource allocation in a
competitive market (Woubante, 2017). However, modern
The concept behind ABC analysis is similar to Pareto's
approaches go beyond just profits, considering the value a
Principle (Chu, Liang, & Liao, 2008). This principle suggests
company provides through its products and services (Dey,
that 20% of things (materials) account for 80% of the results
2014). This holistic view aims to connect all company
(sales). In inventory terms, this means a small portion of
activities and stakeholders.
high-value items (category A) generates most of the sales for
a company. Category B includes a larger group of items III. METHODOLOGY
contributing to a smaller portion of sales, while category C
Several different techniques have been adopted to assist
contains the least valuable items that contribute the least to
this study in achieving its objectives. Different techniques
sales revenue (Dhoka & Choudary, 2013).
and methods were used at different stages of the study. These
B. Use EOQ model to determine the EOQ, total cost and methods were interconnected, and all of them were intended
re – order point for class A and B items to to mathematically examine the role of inventory
One of the most helpful inventory management tools is management practices on economic performance using ABC
economic order quantity (EOQ). It lets businesses determine and EOQ models in an electronic manufacturing company.
the ideal order amount for each item by placing fixed-size The study adopted quantitative research method, the
orders, which minimizes overall inventory costs (Chiu & quantitative data was collected from the purchasing
Chiu, 2006). Developed for single-item situations, EOQ is a department of the company which was then presented in a
simple yet powerful model that has been around for years. It prescriptive research design (Ogunnaike, Bishop, Akinsulire,
helps companies reduce costs associated with both ordering Kehinde, & Oreagba, 2018).
and holding inventory (Langfield, Thorne, & Hilton, 2008). The ABC tool is effective since it allow to classify the
Economic order quantity (EOQ) considers two key cost products, with the EOQ tool it is possible to plan optimal
factors: amounts of inventory in the warehouse. The study’s
population comprises of 10 inventory items when using the
 Holding Costs (also called carrying costs) ABC Analysis, while using the EOQ technique, the
encompass expenses associated with storing population consists of three inventory items.
inventory. This includes storage space, item
tracking, potential depreciation of the items For this study, the source of data was the secondary data
themselves, and other related costs. source, as information was gathered from archival documents
of the organization from the purchase department. The value
 Ordering Costs (sometimes referred to as setup of the proposal for the X company focuses on the need to
costs) arise from the process of switching increase productivity in inventory management through ABC
production from one batch of items to another. and EOQ. The aim is to eliminate quantitative problems such
These costs can include acquiring materials as the lack of ordering techniques and high stock breaks.
needed for the new batch and any other
activities involved in the production changeover. A. Assumptions of ABC Analysis
ABC Analysis is based on Pareto Analysis which has the
following rules (Dhoka & Choudary, 2013).
 “A Category”: These are items that are
categorized among 10-15% of total inventory
items and 60-70% comprises of total money
spent on the inventory materials.
 “B Category”: These are items that are
categorized among 20-25% of total inventory
items and 20-30% comprises of total money
spent on the inventory materials.

Fig 1. Economic order quantity graph  “C Category”: These are items that are
categorized among 50-70% of total inventory
 Ordering Costs: These costs encompass the items and 10-15% comprises of total money
administrative expenses associated with placing spent on the inventory materials (Kumar, Lihare,
and tracking production or purchase orders. This Sahu, Lal, & Khaperde, 2016).
can include staff time, paperwork processing,
B. Assumptions of EOQ
and communication with suppliers.
 Shortage Costs: These costs arise when there's a The EOQ has been previously defined by Dervitsiotis
stockout, meaning you run out of inventory (1981), Monks (1996), Lucey (1992), and Schroeder (2000)
before you can replenish it. This can lead to lost as the ordering quantity which minimizes the balance of cost
sales, frustrated customers, and potential costs between inventory holding costs and re-orders costs. Lucey
associated with expediting orders or offering (1992) stressed further that in order to be able to compute a
discounts to compensate for the stockout. basic EOQ, some basic assumptions which are necessary as
follows, these assumptions include:
When evaluating a company's economic health, it's
important to consider its specific goals and choose the right  That the rates of demand are known.
performance indicators (Kumar, 2010). Traditionally,  Lead time for the orders is constant
  That there is a known, constant ordering costs. 10 8 1.26%
3001244 $0.00072
 There is no bound to order size due
 Delivery of units ordered is virtually Total 633 100%
instantanteous and lead time is zero
 That there is a known, constant, stock holding
cost.
 There is no discount on quantity
 Shortages in the inventory are allowed and
completely backlogged
 The cost of holding a unit of stock does not
depend on the quantity in stock.
C. Economic Order Quantity Formula
EOQ inventory formula was written by Cargal. This
formula is written below

Where:
Q= √ 2( D)(S)
H (1)

Q: the EOQ order quantity

D: annual demand
S: ordering or setup cost per order
H: carrying cost per unit per year
Also note that:
Q
Annual stock = 2
D
Number of orders per annual = Q
( H )Q
Total annual carrying cost = 2
( S)D
Annual ordering cost = Q
( H )Q (S ) D
Total cost = 2 + Q
IV. DATAANALYSIS
Objective 1: Categorizing the inventory items within
a company using ABC Models

TABLE I. THE BUILD OF MATERIAL PER PRODUCT AND MARKET

PRICES OF EACH COMPONENT

Part BOM Unit price

No %
number quantity ($)
1 3 0.47%
3017162 $0.27000
2 67 10.58%
3016370 $0.00839
3 42 6.64%
3100240 $0.00749
4 331 52.29%
3001745 $0.00058
5 73 11.53%
3001834 $0.00225
6 26 4.11%
3001575 $0.00330
7 40 6.32%
3001269 $0.00140
8 34 5.37%
3001420 $0.00064
9 9 1.42%
3100632 $0.00073
 TABLE II. MONTHLY RAW MATERIAL REQUIREMENT

No
Part No. May Jun Jul Aug Sep Oct Nov Dec Average
.

1 3001244 16920 6157 5955 8799 9427 13198 12614 12614 10711

2 3001269 84600 30784 29776 43994 47136 65990 63072 63072 53553

3 3001420 71910 26166 25310 37395 40066 56092 53611 53611 45520

70006 25473 24639 36404 54607 52192 52192

4 3001745 390050 443151
5 8 6 7 1 1 1
15439 12043 11510 11510
5 3001834 56181 54341 80288 86023 97734
5 2 6 6

6 3100240 88830 32323 31265 46193 49493 69290 66226 66226 56231

7 3100632 19035 6926 6700 9899 10606 14848 14191 14191 12049

8 3001575 54990 20010 19354 28596 30638 42894 40997 40997 34809

14170 11053 10564 10564

9 3016370 51563 49875 73689 78953 89701
5 4 6 6

10 3017162 6345 2309 2233 3300 3535 4949 4730 4730 4016
 TABLE III. MONTHLY RAW MATERIAL REQUIREMENT

Unit
Avg. Q Qty of
No. Part No. price Value % Cumm.%
monthly packaging
($)
3001244 2891. 0.65189
1 10710.6 21.4212 0.27 0.6519
9 8
3001269 433.2 0.09766
2 53553 535.53 0.0081 0.749564
4 4
3001420 340.9 0.07685
3 45520.1 113.8 0.0075 0.826422
5 8
3001745 257.0
4 443151 1477.17 0.0006 0.05794 0.884362
3
3001834 0.04957
5 97734.2 195.468 0.0023 219.9 0.933934
1
3100240 185.5
6 56230.7 112.461 0.0033 0.04183 0.975764
6
3016370 65.48 0.01476
9 89701.3 199.336 0.0007 0.990525
2 1
3001575 22.27 0.00502
8 34809.5 116.032 0.0006 0.995547
8 2
3100632 16.86 0.00380
7 12049.4 30.1236 0.0014 0.99935
9 3
3017162 2.891 0.00065
10 4016.48 11.4756 0.0007 1.000002
9 2
 Analysis: Annual demand (D) = 6426 packs.
ABC classification indicates the categorization of items Carrying cost (H) = $102
based on their respective shares. Part number 3001244 holds
the highest rank, accounting for more than 65% of the total, Ordering cost (S) = $300
followed by 3001269 at 9.77%, and 3001420 at 7.69%. Part Periodic review interval (R) =
number 3001745 and 3001834 follow as the 4th and 5th
ranks respectively, with percentages exceeding 5.79% and
Q Avg 194
= ≈ 0.36 month ≈ 11days
4.96%. 30016370 ranks 6th with a percentage of 1.48%. D Avg 536
Items such as3001575, 3100632, and 3017162 are at the
lowest ranks, with percentages of 0.5%, 0.38%, and 0.07% Cost per review (C R ) = $40
respectively.
Part number 3001244 is classified in Class A due to
comprising over 65% of the total percentage. Part 3001269,
EOQ ( Q )=
√ 2 SD
H

√
3001420 and 3001745 are categorized in Class B,
representing over 23.25% of the total value, while the 2∗300∗6426
Q= ≈ 194 packs
remaining ingredients fall into Class C based on their total 102
inventory cost.
Objective 2: Use EOQ model to determine the EOQ,
total cost and re – order point for class A and B items
( QD ∗S )+( Q2 ∗H )+ ( P∗D )
Total Cost (TC )=

¿( ∗300 )+ ( ∗102 )+ ( 0.14∗6426 ) +

Objective 2: To examine the EOQ for I Company 6426 194 365
∗40 ≈ $ 22
Item No.1 (3001244) 194 2 11
Annual demand (D) = 257 packs. Expected number of order = D/Q
Carrying cost (H) = $102 6426
=33.123 ≈ 33 orders
Ordering cost (S) = $416 194
Periodic review interval (R) = Reorder point where lead time = 2.5 days
Q Avg 46 R = (Annual demand/no of working days in a year) *
= ≈ 2.19 months ≈ 65 days Lead time
D Avg 21
R = (A/365)* L
Cost per review (C R ) = $20
R = (6426/365)*2.5

EOQ ( Q )=
√
2 SD
RH
R = 44.01 ≈ 44 packs
Item No.3 (3001420)

Q=
√
2∗416∗257
102
≈ 46 packs Annual demand (D) = 1366 packs.
Carrying cost (H) = 102

Total Cost (TC )=( QD ∗S )+( Q2 ∗H )+ ( P∗D ) + 365R ∗C R

Ordering cost (S) = 300
Periodic review interval (R) =
Q
¿( ∗416 )+ ( ∗102 )+ ( 0.36∗257 ) +
257 46 365 90
Avg
∗20 ≈ $ 4,875= ≈ 0.79 month ≈ 24 days
46 2 65 D 114
Avg

Expected number of order = D/Q Cost per review (C R ) = $30

√
257 2 SD
=5.587 ≈ 6 orders EOQ ( Q )=
46 H
Reorder point where lead time = 2.5 days
R = (Annual demand/no of working days in a year) *
Lead time
Q=
√ 2∗300∗1366
102
≈ 90 packs

R = (A/365)* L
R = (257/365)*2.5
( QD ∗S )+( Q2 ∗H )+ ( P∗D )
Total Cost (TC )=

¿( ∗300)+ ( ∗102 )+ ( 0.256∗1366 ) +

R = 1.76 ≈ 2 packs 1366 90 365
∗30 ≈ $ 9,
Item No.2 (3001269) 90 2 24
Expected number of order = D/Q
 1366 Reorder 2 9 121
=15.177 ≈ 15 orders point packs
44 packs
packs packs
90
Reorder point where lead time = 2.5 days
R = (Annual demand/no of working days in a year) * V. DISCUSSION OF FINDINGS
Lead time The main aim of this research is to to examine the
R=(A/365)* L importance of inventory control within Electrical Company.
The particular aims of this research include determining the
R =(1366/365)*2.5 ABC classification of inventory and applying the EOQ
model for inventory management in order to enhance
R = 9.35 ≈ 9 packs inventory cost efficiency and minimize operational losses.
Item No.4 (3001745) The primary aim was to establish a method of
Annual demand (D) = 17,726 packs. categorizing inventory based on cost criteria through ABC
analysis. The weights were computed and recorded in table
Carrying cost (H) = 102 4.1. According to the findings, Item – 3001224 emerged as
Ordering cost (S) = 250 the most significant contributor to the inventory
classification in terms of cost. Item - 3001269 and item -
Periodic review interval (R) = 3001745 followed closely, falling under category B. On the
Q Avg 295 other hand, the remaining components accounted for less
= ≈ 0.2 month ≈ 6 days than 5% of the total inventory cost, placing them in category
D Avg 1477
C of the ABC classification. Previous research conducted by
Cost per review (C R ) = $30 Nwanya (2015) has also explored this subject. The ABC
analysis discussed in this study proves to be an effective

√ 2 SD inventory management technique in the food industry.

EOQ ( Q )=
H The secondary aim was to ascertain the economic order
quantity required to place purchase orders at a consistent
Q=
√2∗250∗17,726
102
≈ 295 packs
quantity. Data was gathered and analyzed for both A and B
categories of ABC, which together make up 90 percent of the
overall production inventory (Smith, 2020). In order to
D
( Q
Total Cost (TC )= ∗S + ∗H + ( P∗D )
Q 2 )( ) calculate the EOQ, the organization provided the annual
demand, while holding and ordering costs were determined
through calculations. As a result, the EOQ for Item –

¿( 17726
295
∗250 + )(
295
2 )
∗102 + ( 0.174∗17726 ) +
365 3001224, Item - 3001269, and item - 3001745 was
∗30 ≈ $ 34,977
determined
6 respectively.
to be around 46 packs, 194 packs, and 90 packs,

Expected number of order = D/Q The formula for calculating the reorder point considers
17,726 the lead time demand to be consistent. With a lead time of 4
=60.088 ≈ 60 orders days being the most critical interval, the company should
295 place an order when the inventory levels reach 2 packs of
Reorder point where lead time = 2.5 days Item – 3001224, 44 packs of Item - 3001269, and 9 packs of
item - 3001745. Nwanya (2015) found that one of the results
R = (Annual demand/no of working days in a year) * from their study was in line with the cost savings and cost
Lead time per bakery capacity analysis conducted in this research.
R=(A/365)* L According to Nwanya (2015), the highest Economic Order
Quantity (EOQ) was observed for flour, sugar, and butter in
R =(17,726/365)*2.5 a descending order.
R = 121.411 ≈ 121 packs VI. RECOMMENDATION
This essay could investigate the application of ABC and
TABLE IV. SUMMARY OF EOQ MODEL EOQ models in retail settings, examining how these
measures can enhance economic efficiency. It could also
Item 1 Item 2 Item 3 Item 4
explore case studies of successful implementation of these
EOQ 46 194 90 295 models in retail businesses, showcasing the impact on cost
packs packs packs packs reduction and improved inventory turnover.

Total For category C items, it is suggested to maintain loose

Cost $ 4,875 $ 22,058 $ 9,950 $ 34,977 control and purchase them in large quantities in order to
benefit from bulk purchases, discounts, and transportation
Expected economies. It is recommended to purchase these items less
number frequently but in larger quantities than category A and B
6 33 15 60
of orders items, as this approach would help reduce both the ordering
per year cost and holding cost of items.
 Additionally, the study suggests the economic order
quantity for the following items to be as follows: Item no. 1 -
46 packs, Item no. 2 - 194 packs, Item no. 3 - 90 packs, and
Item no. 4 - 295 packs. The study also recommends that
orders should be placed for these items at least 6, 33, 15, and
60 times respectively, and the reorder point should be when
the leftover stock is 2, 44, 9, and 121 packs respectively.
This essay could center on the difficulties that
organizations encounter when implementing ABC and EOQ
models in supply chain management, such as data accuracy
and system integration. Additionally, it could explore the
potential opportunities, such as streamlining operations and
minimizing carrying costs, and provide recommendations for
overcoming implementation hurdles.
Investigate emerging trends and technologies in
inventory management, discussing how advancements like
artificial intelligence and data analytics are reshaping
traditional inventory optimization models. The essay could
also examine the potential impact of these advancements on
economic efficiency and offer insights into the evolving role
of inventory managers in the digital age.
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