Abstract: 

Fierce competition in global markets with the shorter life cycle of products have forced
business enterprise to invest in, and focus on their supply chains. Managers usually
search best solutions to optimize the enterprise’s resources usage by implementing
software applications in order to integrate all business activities. In this paper, the below
two case study shows theoretical supply chains and common ERP types of problems
including production planning and inventory management. The purpose of this
conceptual paper is to identify the problem characteristics, the components of each model
and apply the formula to obtain the optimal solution for the enterprises. This paper also
requires to know how to use Excel Solver and QM for Windows software applications to
solve production planning and inventory problems in SCM (Supply Chain Management). 
Keywords: Production planning, inventory management, optimal quantity 
1. Introduction: LIST THE MAIN POINTS IN A BRIEF AND
COMPREHENSIVE MANNER OF THE CASE
Case 2:
Inventory management is a challenging problem area in supply chain management. As
the inventory control manager at Nightingale Drugstore, Robert Gates has been
experiencing problems keeping Totalee toothbrushes in stock. He found out that
customers prefer to use Totalee rather than other brand names and customers are willing
to buy the toothbrushes at Nightingale because of 20% less in price than other stores.
This demand for toothbrushes makes the drugstore be out of stock frequently. Moreover,
the current inventory model of ordering whenever out of stock causes many problems.
For instance, the emergency orders cost unnecessary time and customers become
unpleasant when they must return to drugstore to buy later. Therefore, Robert need to
have inventories in warehouses in order to fulfil customer demand, meanwhile these
inventories have holding costs and this is frozen fund that can be lost. Therefore, the task
of inventory management is to find the quantity of inventories that will fulfil the demand,
avoiding overstocks. 
This case study of “Brushing up on inventory control” presents some common types of
inventory management. Robert needs to understand the cost components of each
inventory model, describe the economic order quantity for automation of inventory
process and use software applications such as Excel Solver and QM for Windows to find
the optimal order quantity under each condition. 

2. Theories: APPLICATION THE THEORIES TO FORMULATE THE MODEL

2. Theories: APPLICATION THE THEORIES TO FORMULATE THE MODEL

2.2.c.
This case applies the EOQ model with Planned Shortages, which is a variation of basic
EOQ model described in the preceding two parts. This model assumes that the demand
rate is constant and the order quantity to replenish inventory arrives all at once just when
desired. When a shortage occurs, the affected customers will wait for the toothbrushes to
become available again in Nightingale. Their backorders are filled immediately when the
order quantity arrives to replenish inventory. 
This model has two decision variables — the order quantity Q and the maximum shortage
S. The objective in choosing Q and S is to
Minimize TVC = total variable inventory cost per year.
This TVC needs to include the same kinds of costs as for the basic EOQ model plus the
cost of incurring the shortages. Thus,
TVC = annual setup cost + annual holding cost + annual shortage cost.
With: Annual shortage cost = p times (average shortage level when a shortage occurs)
times (fraction of time shortage is occurring) = 𝑝*(𝑆/2)*(𝑆/𝑄)
This leads to the following formulas for their optimal values, Q* and S*. 

h+ p 2 KD h
Q* =
√ √
p h
, S* = (
h+ p
)Q*

This model with Planned Shortage does a good job of reducing the annual holding cost
well below that for the basic EOQ model when h is fairly large compared to p.

2.2.d.

This case is a variation of the EOQ model with planned shortages. According to the case,
the shortage cost is simply an estimate, which varies from minimum value to maximum
value. With each changing estimate of unit shortage cost, Robert want to know whether
this effect would change the inventory policy and total variable cost per year found in
part (c).

According to the case, Robert also believes that customers would become upset with the
inconvenience of shopping at Nightingale and would perhaps begin looking for another
store providing better service. He estimates the costs of losing customer goodwill and
future sales as $C4 per unit short per year. Meanwhile, annual demand rate keeps the
same and planned shortages are allowed. As we know that the pattern of inventory levels
over time assumed by the EOQ model with planned shortages, where both the order
quantity Q and the maximum shortage S are the decision variables. Therefore we decide
to choose EOQ model with planned shortages to apply to solve this case. There is some
formula we intend to use:

D
Annual Setup cost = K
Q∗¿ ¿

Annual holding cost = h * average inventory level * fraction of time inventory level
 2
Q−S Q−S (Q−S )
=h (
2 )( Q )
=h
2Q

2.2.e EOQ Model with quantity discounts:

This case is a variation of the EOQ model with quantity discounts. According to this
case, the company has decided to institute a discount policy to encourage more sales.
Totalee will charge $C5 per toothbrush for any order of up to 500 toothbrushes, $C6 per
toothbrush for orders of more than 500 but less than 1,000 toothbrushes, and $C7 per
toothbrush for orders of 1,000 toothbrushes or more. The pattern of the inventory levels
over time assumed by EOQ model with quantity discounts, suppliers always wish to
increase their sales by offering quantity discounts for large orders. We intend to apply
this model to find the optimal quantity order to minimize the total cost. Here is some
formula we are going to use: