Inventory System

Inventory: is the set of the items that an organization holds for later use by the organization. An Inventory System is a set of policies that monitors and controls inventory. It determines how much of each item should be kept, when low items should be replenished, and how many items should be ordered or made when replenishment is needed.

The Functions of Inventory

Provide a stock of goods to meet anticipated customer

demand and provide a selection of goods Decouple suppliers from production and production from distribution Allow one to take advantage of quantity discounts To provide a hedge against inflation To protect against shortages due to delivery variation To permit operations to continue smoothly with the use of work-in-process

Disadvantages of Inventory
Higher costs
Item cost (if purchased) Ordering (or setup) cost Costs of forms, clerks wages etc. Holding (or carrying) cost Building lease, insurance, taxes etc.

Difficult to control Uncertain demand Uncertain lead time

Types of Inventory
Raw materials
Purchased parts and supplies Work-in-process Component parts Tools, machinery, and equipment Finished goods

Raw material

Component parts and supplies Finished goods Work-in process In-process (partially completed) products

Purchasing part

Tools, machinery, and equipment

Types of Inventory

Two forms of Demands

Independent Demand: are those items that we sell to customers. Ex. Ford Motor Company, their main independent demand will be the cars, trucks and van that they sell. A small part of the independent demand would the parts that they sell to customers. Finished products Based on market demand Requires forecasting Dependent Demand: are those items whose demand is determined by other items. When Ford Motors Company has demand for a car, that translates into demand for four tires, one engine, one transmission, and so on. The items used in the production of that car. Parts that go into the finished products Dependent demand is a known function of independent demand No forecasting is required

Reasons To Hold Inventory

Meet unexpected,seasonal, cyclical, and variations

demand Take advantage of price discounts Hedge against price increases Quantity discounts (To get a lower price) To decouple work-centers To allow flexible production schedule As a safeguard against variations in delivery time (lead time)

Costs of Inventory
Visible Costs of Inventory. They are holding, shortage, reordering, and setup cost. Hidden Costs of Inventory Costs result from longer or uncertain leadtime, or by following bad inventory control system

The Visible Cost of Inventory

1.

2.

Holding Cost: These are all the cost the organization incurs in the purchase and storing of the inventory. They include the cost of financing the purchase , storage costs, handling costs, taxes, obsolescence, pilferage, breakage, spoilage, reduced flexibility, and opportunity costs. They are also called Carriage cost. High holding cost favor low inventory levels and frequent replacements and vice versa. Setup Cost: This is the cost of switching a production line from making one product to making a different product. Setup cost apply only to items the organization produces itself. High setup cost favors large production runs and the resulting larger inventory and vice versa.

The Visible Cost of Inventory

3. Ordering Cost: This is the cost of placing an order for an item the organization purchases. It include placing the order, tracking the order, shipping costs, receiving and inspecting the order and handling the paperwork. High ordering costs favor fewer orders of larger size and resulting large inventory and vice versa. 4. Shortage Costs: This is the cost to the organization of not having an item when it is needed. These costs include loss of goodwill, loss of sale, loss of a customer, loss of profits and late penalties. Many of these costs are difficult or impossible to measure with any accuracy. High shortage cost favor large inventory and vice versa

Cyclic Inventory Control

Inventory control at Ware-Mart-Example The purchasing department is offering 7 alternative cycles and times (T): 1. Order every week, 52 times per year, T=1 week 2. Order every second week, 26 times per year, T=2 weeks 3. Order every month, 12 times per year, T=1 month 4. Order every second month, 6 times per year, T=2, months 5. Order quarterly, 4 times per year, T= 3 months 6. Order semiannually, twice per year, T=6 months 7. Order every year, once a year, T=1 year

Brent estimates :
Yearly demand rate = Quarterly demand Average inventory 12000 pots = 3000 pots = 1500 pots

Every day demand

Price/ pots

= 100 pots
= $6.75 20% of the purchasing cost for

Corporate holding cost = holding cost

Unit Annual holding cost = 0.20 *6.75=$1.35 Forecast for the annual holding cost = 1500 * 1.35 = 2025 Ordering cost is between $25 and $30

Average Ordering cost

Annual Ordering cost

=
=

$28
4*28 = $112

Annual Combined Cost = Annual Ordering Cost + Annual Holding cost = $2025+$112 = $2137

Ware-Mart
Order Plans For Pots

Model Annual demand D Cost per unit C Interest rate to hold i Ordering cost O Quantity each order D/N Number of orders N Unit holding cost H=C*i Annual holding cost QH/2 Annual ordering cost NO Combined cost QH/2+NO Annual purchase cost DC Total cost

Weekly Bi-Weekly Orders Orders 12,000 12,000 $6.75 $6.75 20% 20% $28.00 $28.00 230 461 52 26 $1.35 $1.35 $155 $311 $1,456 $728 $1,611 $1,039 $81,000 $81,000 $82,611 $82,039

Monthly Bi-Monthly Quarterly Semi-Annual Orders Orders Orders Orders 12,000 12,000 12,000 12,000 $6.75 $6.75 $6.75 $6.75 20% 20% 20% 20% $28.00 $28.00 $28.00 $28.00 1,000 2,000 3,000 6,000 12 6 4 2 $1.35 $1.35 $1.35 $1.35 $675 $1,350 $2,025 $4,050 $336 $168 $112 $56 $1,011 $1,518 $2,137 $4,106 $81,000 $81,000 $81,000 $81,000 $82,011 $82,518 $83,137 $85,106 Smallest

Annual Orders 12,000 $6.75 20% $28.00 12,000 1 $1.35 $8,100 $28 $8,128 $81,000 $89,128

$90,000 $88,000 $86,000 $84,000 $82,000 $80,000 $78,000 52 26 12 6 4 2 1 Orders Per Year

 Purpose of the inventory system is to decide how much to order and when Objectives of inventory system
Keep enough inventory to meet customer demand Control inventory costs

According to that there are different models for the inventory

Inventory Control Models

Parameters Ordering cost Holding costs Stock out costs Demand (Certainty,Uncertainties) Variables Time sequence of ordering Quantity sequence of ordering

Model

Performance measure Profit Cost Service level

Influence Chart for selecting Inventory Controls Models

Inventory Control Models

Probabilistic
Periodic review model Also known as a Fixed order period models Single-period models Multi-period models

Deterministic
Continues review model Also known as a Fixed order quantity models Economic order quantity EOQ Production order quantity Quantity discount

Triggered policy Quantity triggered model Time triggered model

Inventory Controls Models

Probabilistic Model: Where performance measures use expected values in realistic cases which involves uncertainty. Deterministic Models: are sufficient by ignoring uncertainty , provided the decision maker takes both qualitative and quantitative factors into account. Continuous Review Models: Assumes that inventory levels are monitored continuously and that orders are placed depending on the level of inventory. Periodic Review Models: assume that the monitoring is performed only at a stated times, such as monthly or quarterly. Fixed Order Quantity Models: assume that a constant quantity is order each time an order is placed.

Fixed Order Period Models: assume that a ordering cycle is fixed, such as 1 week or 1 month Multi period Models: assumes that the orders will be placed repeatedly. Single Period Models: deals with situations in which only single orders is placed.

Quantity-Triggered Models: specify ordering when the inventory level sinks to a stated quantity. Time-Triggered Models: specify ordering at specific time periods, such as weekly, monthly or quarterly.

 Continuous inventory systems also known as fixed-order-quantity system whenever inventory decreases to predetermined level known as a reorder point, new order is placed order is for fixed amount (EOQ) that minimizes total inventory costs Periodic inventory systems also known as fixed-time-period system inventory on hand is counted at specific time intervals after inventory level determined, order is placed which will bring inventory back to desired level new order quantity determined each time

Deterministic Model Fixed Order Quantity Models Economic order quantity EOQ

The Economic Order Quantity Model (EOQ)

EOQ model is a deterministic model with a fixed ordering cycle and fixed quantity ordered. The model determines the EOQ that minimizes the combined total cost of ordering and holding inventory over a fixed time interval, often one year. Excels what-if capabilities make the EOQ a potentially useful tool by allowing the decision maker to learn about inventory cost structure while performing the analysis. The what-if scenario result can be useful inputs to decision making.

Economic Order Quantity (EOQ) Models

EOQ the optimal order quantity that will minimize total inventory carry costs Basic EOQ model
determines optimal order size that minimizes the sum of carrying costs and ordering costs

EOQ Assumptions
Known and constant demand Known and constant lead time Instantaneous receipt of material No quantity discounts Only order (setup) cost and holding cost No stock outs

Developing the EOQ Model

Parameter
Annual Demand Unit Holding Cost Unit Ordering Cost

Performance measure EOQ Formula

Optimum order quantity Q* Minimum annual combined (holding and ordering) cost

Quantity sequence of ordering

Decision Variable

EOQ Model notations

D C I H O Q T Annual Demand Cost per unit interest to hold the Inventory. Expressed as a percentage of costs (C*I) Ordering costs The Quantity to be ordered Length of the Time

Number of annual order

Unit holding Cost (H)= c * i EOQ or Qopt or Q*=squareroot((2*D*O)/H)

Q* = 2* D*O H

No. of orders (N)=D/EOQ Annual Holding Cost (AHC)=H * EOQ/2 Annual ordering Cost (AOC)= O *N Combine Cost (CC)= AHC+ AOC Purchase Cost (PC)= D*C Total Cost= CC + PC Duration between Orders or Time between orders (T) = No of Working Days/N

EOQ Models
Optimal order quantity (Qopt) = square root [(2OD) / H ]
Occurs where total cost is at a minimum This happens where Holding cost curve intersects with Ordering cost curve Is an approximate value Round to nearest whole number EOQ model is robust (resilient to errors)

EOQ Model How Much to Order?

Annual Cost

Order (Setup) Cost Curve

Optimal Order Quantity (Qopt)

Order Quantity (Qopt)

Purchasing cost C Holding cost (I) Ordering cost O Demand D

EOQ $6.75 H 20% $28.00 12000

1.35

[(H)(Q)] / 2 [(O)(D)] / Q

Order Quentity 100 400 700 1000 1300 1600 1900 2200 2500 2800 3100

Number of order per year Holding Cost Order Cost combined cost 120 67.5 $3,360.00 $3,427.50 30 270 $840.00 $1,110.00 17 472.5 $480.00 $952.50 12 675 $336.00 $1,011.00 9 877.5 $258.46 $1,135.96 8 1080 $210.00 $1,290.00 6 1282.5 $176.84 $1,459.34 5 1485 $152.73 $1,637.73 5 1687.5 $134.40 $1,821.90 4 1890 $120.00 $2,010.00 4 2092.5 $108.39 $2,200.89

[(O)(D)] / Q + [(H)(Q)] / 2

4000 3500 3000 2500 2000 1500 1000 500 0 100 400 700 1000 1300 1600 1900 2200 2500 2800 3100

The graphical figure shows the combined cost as a function of the order quantity Q. The annual holding costs are a linear, straight-line function of Q. The ordering costs are represented by an inverse, diminishing curve. The combined cost is U-shaped, starting high, decreasing to minimum and then increasing again. The minimum cost is at the bottom of the U, (intersection of the Holding and Ordering cost) where the slope is zero.

Purchasing cost C Holding cost (I) Ordering cost O Demand D Optimal Q Holding cost Ordering cost Combined cost

Optimal EOQ $6.75 H 20% $28.00 12000 705.53368 476.23524 476.23524 952.47047 17.0084 0.058794

1.35

Number of order per year Time between orders

4000 3500 3000 2500 2000 1500 1000 500 0 100 400

0.71

21.17

700 1000 1300 1600 1900 2200 2500 2800 3100

Base Case: Order 26 Times a Year Pots 12,000 $6.75 20% 28 462 26 $1.35 $312 $728 $1,040 $81,000 $82,040

Base Case: Use EOQ Formula Pots Demand 12,000 Cost per unit $6.75 Interest rate to hold 20% Ordering cost 28 Unit holding cost 1.35 Quantity each order 706 Number of orders $17 Annual holding cost $476 Annual ordering cost $476 Combined cost $952 Annual purchase cost $81,000 Total cost $81,952

Demand Cost per unit Interest rate to hold Ordering cost Quantity each order Number of orders Unit holding cost Annual holding cost Annual ordering cost Combined cost Annual purchase cost Total cost

Fundamental Assumptions of Traditional Manufacturing

It is expensive to process orders for purchased items, and

quantity discounts are available as a result, orders for parts are placed infrequently, in large quantities Setups are lengthy and expensive as a result, large batches of each product are made

Production Lot Size

According to traditional thinking, Setup costs decrease as production lot or batch size increases Inventory levels and holding cost increases as batch size increases The lot size that minimizes the net cost is called the Economic Production Lot (EPL)

Kinds of Lots Production or process lot

Purchase or order quantity
Transfer batch Delivery quantity

Economic Production Lot Size

The Economic Production Lot (EPL) size model is a

variation of the basic EOQ model. A replenishment order is not received in one lump sum as it is in the basic EOQ model. Inventory is replenished gradually as the order is produced (which requires the production rate to be greater than the demand rate). This model's variable costs are annual holding cost and annual set-up cost (equivalent to ordering cost). For the optimal lot size, annual holding and set-up costs are equal.

Economic Production Lot Size

Assumptions
Demand occurs at a constant rate of D items per year.
Production rate is P items per year (and P > D ). Set-up cost O per run. Holding cost H per item in inventory per year. Purchase cost per unit C is constant (no quantity

discount). Set-up time (lead time) is constant. Planned shortages are not permitted.

Production, Demand and Inventory

60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 Time period
Economic Production Lot
Fluctuating Inventory

Quantity

Production Demand Inventory

EPL or EPQ
Inv Unless you stop production, since you cannot sell the parts at the same or faster rate that you are making them, your inventory will grow. Note: P and D should be in same units Time

Slope=P-D

EPL
Inv
H

Slope=P-D Slope=-D

Start Prod.

T1

Stop Prod.

T2

Time
Start Prod.

Economic Production lot Size Model

O Ordering Cost

P
t

Production rate
time need to produce the lot

Q=Pxt

t = Q/P
Maximum inventory = ( P x t) ( D x t ) = ( P D ) x t = ( P D) x Q/P =(1 D/P) x Q Average inventory = (1 D/P) x Q/2 F = 1 D/P is critical in lot size calculations.

To Establish the model, we use the same EOQ formulas, but when calculating the holding cost,
we replace Q by Q x (1 D/P) = QF Annual holding cost = [ Q x ( 1 D/P)] x C x (i/2) = Q x F x (Ci/2)

Annual setup cost = D/Q x O

To minimize the total combined cost, we use the same EOQ formulas, but Q is Q x (1- D/P) for the holding cost.

The value of Q that minimizes the combined cost available when:

Q(1-D/P)H/2 + DO/Q = QFH/2 + DO/Q

So the optimal value of the order quantity Q is
Q* = 2DO H(1 - D/P)

The annual cost of holding and ordering (which are equal) is

DxOxH (1 D ) P 2 DxOxHxF 2

SO the minimum annual combined cost is

2 xDxOxHx (1 D ) 2 xDxOxHxF P

Economic Production Lot Size Model

Production Build-up = (P-D)

Production Duration = Q/P

Maximum Inventory = (P-D)Q/P or (1-D/P)Q Average Inventory = (1-D/P)Q/2 Time between production starts = Q/D Number of Production runs per year = D/Q Total Annual Cost = AD h(1 D / P)Q Y(Q) = Dc Q 2
Setups Holding Purchase

Economic Production Lot Size 2DO

Q* = H(1 - D/P)

Zap Electronics
What-If Analysis for Microphones
Economi c Producti Model on D 12,000 C $6.75 i 20% O 28 P 48,000 Q* =sqrt((2DO)/((Ci)*(1-D/P))) 815 N=D/Q 15 H=C*i $1.35 AHC=(QH/2)*(1-D/P) $412 NO $412 QH/2*(1-D/P)+NO $825 DC $81,000 $81,825

Demand Cost per unit Percent to hold Ordering cost Production rate Lot size Number of orders Unit holding cost Annual holding cost Annual ordering cost Combined cost Annual purchase cost Total cost

12000 6.75 0.2 28 48000 =sqrt((2*C4*C7)/((C5*C6)* =C4/C9 =C6*C5 =(C9*C11/2)*(1-C4/C8) =C10*C7 =C12+C13 =C5*C4 =C15+C14

CASE1: Brent order 26 times a year, so each additional dollar cost of ordering should increase annual cost by $26. CASE 2: If the ordering cost goes up by $1, the combined cost goes by 17 x $1= $17.
Ordering cost $1,040 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Combined annual cost 831.54 857.54 883.54 909.54 935.54 961.54 987.54 1013.54 1039.54 1065.54 1091.54 1117.54 1143.54 1169.54 1195.54 1221.54 26.00 Ordering cost $952 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Combined annual cost 816.40 833.41 850.42 867.43 884.44 901.45 918.45 935.46 952.47 969.48 986.49 1003.50 1020.50 1037.51 1054.52 1071.53 17.01

CASE 1: What-if the ordering cost goes up 10%? The ordering cost is $28, so a 10% increase leads to an increase of $2.80. = 26x2.80=72.80 CC=$1039 + $72.80=$1112.80 means increase of 7%. A 10% increase in ordering cost leads to 7% increase in combined cost. What about CASE2 ?
% increase in ordering Combined cost annual cost $1,039
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

% increase in ordering cost $952

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Combined annual cost 998.96 44.42 4.66% 1043.38 1085.98 1126.98 1166.53 1204.79 1241.87 1277.87 1312.89 1347.00

1111.98 72.80 7.01% 1184.78 1257.58 1330.38 1403.18 1475.98 1548.78 1621.58 1694.38 1767.18

CASE 1 : What if the interest rate charged as holding cost i changes ? Only the holding cost changes, and the formula to use is CC= QCi/2 +DO/Q= 1557.6 x i + 728 If the percentages goes to 30%-50% increase, then CC= 1557.6 x .3 + 728= 467.3 +728= 1195 This is $155 higher than the base-case cost of $1039. To summarize, 50% increase in the percentage results in a 155/1039=14.9% increase in CC. What about CASE 2 ?
% Increase in Interest rate to hold $1,039
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Combined annual cost 883.59 155.59 1039.18 155.59 1194.76 155.59 1350.35 1505.94 1661.53 1817.11 1972.70 2128.29 2283.88 14.97%

Ordering cost % Increase in Interest rate to hold $952

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

714.35 238.12 952.47 1190.59 1428.71 1666.82 1904.94 2143.06 2381.18 2619.29 2857.41

25.00%

CASE 2 :The minimum cost obtained by using the EOQ is $952.50, so increasing the order quantity by 10% leads to a total cost increase of only $4.30, which is only 0.45% of the base cost.
Changing the order quantity by a small amount has very little effect on the combined cost. And this allow more flexibility in using the EOQ as a guide to decision making. What about CASE1?
% Increase in quantity Combined each order annual cost $1,039
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

% Increase in quantity Combined each order annual $952 cost 31.12 62.23 93.35 124.47 155.59 186.71 217.82 248.94 280.06 311.18 2.99% 5.99% 8.98% 11.98% 14.97% 17.97% 20.96% 23.96% 26.95% 29.94%
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1070.29 1101.41 1132.53 1163.65 1194.76 1225.88 1257.00 1288.12 1319.23 1350.35

956.80 968.34 985.44 1006.90 1031.84 1059.62 1089.74 1121.80 1155.50 1190.59

4.33 15.87 32.97 54.43 79.37 107.15 137.27 169.33 203.03 238.12

0.45% 1.67% 3.46% 5.71% 8.33% 11.25% 14.41% 17.78% 21.32% 25.00%

What- IF Scenarios
3) The formula are simpler if we use factors instead of percent changes. What if the unit cost C or the interest rate is I changes by a factor of F, F=1.1 corresponding to 10% increase? The annual ordering cost does not changes, but the annual holding cost is multiplied by the factor F, so the formula for the combined cost is CC=AH x F + AO= 311.50 x F +728 4) What if the ordering cost O changes by a factor of K? The annual holding cost remains the same but the annual ordering cost changes by the factor K. The formula to use is CC=AH+AO x K= 311.50 + 728 x K

Demand Cost per unit Interest rate to hold Ordering cost Quantity each order Number of orders Unit holding cost Annual holding cost Annual ordering cost Combined cost Annual purchase cost Total cost

Pots Pots 12,000 12,000 $6.75 $6.75 20% 20% 28 28 461.54 461.54 26 26 $1.35 $1.35 $312 $312 $728 $728 $1,071 $1,112 $81,000 $81,000 $82,071 $82,112

Holding Combined cost $1,071 0.5 883.8 0.6 914.9 0.7 946.1 0.8 977.2 0.9 1008.4 1 1039.5 1.1 1070.7 1.2 1101.8 1.3 1133.0 1.4 1164.2 1.5 1195.3 1.6 1226.5 1.7 1257.6 1.8
1288.8 1319.9 1351.1

Ordering $1,112 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2

Combined Cost
675.54 748.34 821.14 893.94 966.74 1039.54 1112.34 1185.14 1257.94 1330.74 1403.54 1476.34 1549.14 1621.94 1694.74 1767.54

F k

1.1 1.1

1.9 2

Digram 26 Order per Year

2000 1800 1600 1400 1200 1000 800 600 400 200 0 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2 Cahnge Factor Holding EOQ 1039 Ordering

Cost

EOQ Model With Price Breaks Discount Quantities

An Inventory ordering situation in which there are small price breaks when ordering in quantity. These is called Quantity Discounts. Quantity discount occur in numerous situations where suppliers provide an incentive for large order quantities by offering a lower purchase cost when items are ordered in larger lots of quantities. In this section we show how the EOQ model can be used when quantity discount are available.

EOQ Model With Price Breaks Discount Quantities

The parameters of the model are as: Yearly Demand ( D ) = 10000 units Unit ordering cost (O ) =$30 Inventory holding percentage (I ) = 20% Unit cost is given as follows:

If Q < 600, then C= $7.50

If 600 >= Q<=1000 then C=$7.48 If 1000 <= Q then C=7.46 The purchasing cost is include in this model because it is not constant its varying with the discount related to the amount of quantity.

EOQ Model With Price Breaks Discount Quantities

To get the total annual cost, we need to add three annual costs: Annual holding cost : Annual ordering cost : AH = Q x C x I/2 AO = D x O/Q

Annual purchasing cost : C x D

If Q < 600, then C= $7.50

Total = 1000 * 7.5 * 0.2/2 + 10,000 * 30/1000 + 7.5 * 10,000 = 76,050 If 600 >= Q<=1000 then C=$7.48 Total = 1000 * 7.48 * 0.2/2 + 10,000 * 30/1000 + 7.48 * 10,000 = 75,848 If 1000.<= Q then C=7.46 Total = 1000 * 7.46 * 0.2/2 + 10,000 * 30/1000 + 7.46 * 10,000 = 75,646

D I IF Q < 600 IF 600 <= Q <= 1000 IF 1000 <= Q Que ntity C

10,000 O 20.00% C 7.5 7.48 7.46 Annua l holding cos t 300 337.5 375 412.5 448.8 486.2 523.6 561 598.4 635.8 673.2 710.6 746 783.3 820.6 857.9 895.2 932.5 969.8 1007.1 Annua l orde ring cos t 750 666.7 600.0 545.5 500.0 461.5 428.6 400.0 375.0 352.9 333.3 315.8 300.0 285.7 272.7 260.9 250.0 240.0 230.8 222.2

30

400 450 500 550 600 650 700 750 800 850 900 950 1000 1050 1100 1150 1200 1250 1300 1350

7.5 7.5 7.5 7.5 7.48 7.48 7.48 7.48 7.48 7.48 7.48 7.48 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46

Annua l purcha s ing cos t 75,000 75,000 75,000 75,000 74,800 74,800 74,800 74,800 74,800 74,800 74,800 74,800 74,600 74,600 74,600 74,600 74,600 74,600 74,600 74,600

Tota l cos t

76,050 76,004 75,975 75,958 75,749 75,748 75,752 75,761 75,773 75,789 75,807 75,826 75,646 75,669 75,693 75,719 75,745 75,773 75,801 75,829

76,100 76,000 75,900 75,800 75,700 75,600 75,500 75,400

400

450

500

550

600

650

700

750

800

850

900

950

1000

1050

1100

1150

1200

1250

1300

1350

EOQ with C = 7.5 Q = SQRT( 2*10,000*30/(7.5*.2)) = 632.45 EOQ with C = 7.48 Q = SQRT( 2*10,000*30/(7.48*.2)) = 633.31 EOQ with C = 7.46 Q = SQRT( 2*10,000*30/(7.46*.2)) = 634.14 Minimum at C = 7.48

When . purchase depends on quantity, the total global or overall minimum is either at a point where the slope is zero, as identified by the EOQ formula, or where is a price break.