Purchase model with instantaneous replenishment without

shortage
D be the annual demand in units
Co be the ordering cost/ order
Cc be the carrying cost/ unit/ year
P be the purchase price per unit
Q be the order size
The number of orders/ year = D/Q
Average inventory = Q/2
Cost of ordering = D*Co/Q
Cost of carrying/ year = Q*Cc/2
Purchase cost/ year = D*P
Total inventory cost (TC)/ year =
P D
C Q
Q
C D
c o
+

2
Differentiating w.r.t. Q yields to
c
o
C
D C
Q
2
2

c
o
C
D C
Q
2
*
Number of orders = D/Q*
Time between orders = Q*/D
Manufacturing Model without shortage
r = Annual demand of an item
k = Production rate of the item (No of units produced/yr)
Co = Cost per set up
Cc = Carrying cost /unit/period
p = Cost of production per unit
Economic Batch Quantity

,
_

k
r
C
r C
EBQ
c
o
1
2
t
1
* = Q*/k
r
k
r
Q
t
1
]
1

1 *
*
2
Cycle time =
*
2
*
1
t t +
Purchase Model with shortage
D be the demand in units/ period
Co be the ordering cost/ order
Cc be the carrying cost/ unit/ period
Cs be the shortage cost/ unit/ period
Q = Economic order quantity
Q
1
= Maximum Inventory
Q
2
= Maximum stockout
( )
s c
c s o
C C
C C D C
EOQ Q

+

2
*

,
_

,
_

c s
s
c
o
C C
C
C
D C
Q
2
*
1
*
1
* *
2
Q Q Q
t* = Q*/D