366751514.

xlsx

Inventory Policy 1
What is the best ordering policy for a warehouse to minimize cost, while meeting demands?
The warehouse has a limited storage capacity of 50000 cubic meters (m3).

Storage
Storage Ordering space
Holding Space per Demand cost per available
Cost unit (m3) per month order (m3)
Product 1 $25 440 200 $50 50000
Product 2 $20 850 325 $50
Product 3 $30 1260 400 $50
Product 4 $15 950 150 $50
Quantity to order each month
EOQ Cost Space used (m3)
Product 1 25 28.28427 $713 5500
Product 2 25 40.31129 $900 10625
Product 3 25 36.51484 $1,175 15750
Product 4 25 31.62278 $488 11875
Total $3,275 43750

Problem
A warehouse sells 4 products with a different demand for each product. Each product has a different holding cost
and requires a certain amount of space. What should the ordering policy for the warehouse be, given its limited
storage capacity?

Solution
There is an analytical solution for this problem, which is known as the Economic Order Quantity (EOQ) and is
given by the following formula: q = SQRT(2 k d/h), where q is the quantity to order, k is the cost to place an order,
d is the demand and h is the holding cost of the product. Unfortunately, this formula doesn't always work in the real
world. Demand usually fluctuates, ordering time is variable, and other factors arise to further complicate the
problem. In this model we have one such factor, a limited storage space.

1) The variables are the amounts to order each month for each product. These are defined as Quantities in this
worksheet. By changing these variables we change the total cost.
2) The constraints are very simple. We have a logical constraint and the storage capacity constraint. This gives
Quantities >= 0 via the Assume Non-Negative option
Space_used <= Available_space
If the latter constraint wasnt present, the solution to the problem could be calculated by the formula given above.
3) The objective is to minimize the total cost, which is defined as Total_cost. It is calculated by adding the
individual costs for each product. Those costs are calculated by using the formula:
Cost = h q /2 + k d /q, where h, q, k and d are as above.
This formula is easy to understand if we realize that the average inventory level is q/2 and the average number of
orders is d/q.

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Inventory Policy 2
What is the best ordering policy for a warehouse to minimize cost, while meeting demands?
The warehouse has a limited storage capacity of 50000 cubic meters (m3) and a budget of $30,000.

Storage
Holding Space per Demand Ordering cost Price per
Cost unit (m3) per month per order unit
Product 1 $25 440 200 $50 $200
Product 2 $20 850 325 $50 $300
Product 3 $30 1260 400 $50 $275
Product 4 $15 950 150 $50 $400

Storage Capacity 50000 Budget $30,000

Quantity to order each month Cost of holding Space
EOQ and ordering used (m3)
Product 1 25 28.28427 $713 5500
Product 2 25 40.31129 $900 10625
Product 3 25 36.51484 $1,175 15750
Product 4 25 31.62278 $488 11875
Cost of products $29,375 Total $3,275 43750

Problem
This model continues to build on the first inventory policy model. We expand the model by giving the warehouse a
budget for buying new products. In other words: A warehouse sells 4 products with a different demand for each
product. Each product has a different holding cost and requires a certain amount of space. What should the ordering
policy for the warehouse be, given its limited storage capacity and limited budget?

Solution
The variables are exactly the same as in the first model. So is the objective, and the way it is calculated. The
difference is that we have an extra constraint which keeps us within the budget. This new constraint is expressed as:
Cost_of_products <= Available_money and we also have
Space_used <= Available_space as before
We still have Quantities >= 0 via the Assume Non-Negative option. This time, we also require integer quantities:
Quantities = integer

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