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Inventory Management EOQ
Inventory Management EOQ
Inventory Management EOQ
1
Production Order Quantity
Model
Part of inventory cycle during which
production (and usage) is taking place
Inventory level
t Time
From EOQ model
Annual holding cost (Avg. inventory level) (holding cost per unit per yr)
Q0
(H)
2
Not valid
Production Order Quantity
Model
Q Q min
Avg. Inventory max
2 p = Daily production rate
Q lot produced
d = Daily demand/usage rate
Total produced during the production run pt
Q max Total consumed during the production run dt
Inventory level
Max. Inventory pt - dt p d t
t Q d Time
Avg. Inventory 1
2 p
For EOQ model
Annual holding cost (Avg. inventory level) (holding cost per unit per yr)
Q d
1 H
2 p
Answer to Inventory Management Questions for
EOQ Model
For Optimal :
Annual setup cost Annual holding cost
D Q d
S 1 H
Q 2 p
2 DS
Q 2
d
H 1
p
2 DS
Q
d
H 1
p
Production Order Quantity
• In case the replenishment is not immediate and grows at a rate p
2 DS
Q
d
H (1 )
p
7
Inventory Management
Quantity Discount Models
8
Quantity Discount Models
Reduced prices are often available when larger
quantities are purchased
Trade-off is between reduced product cost and
increased holding cost
D Q
TC = QS + H2+ PD
Quantity Discount Models
Discount Discount
Number Discount Quantity Discount (%) Price (P)
1 0 to 999 no discount $5.00
2 1,000 to 1,999 4 $4.80
Table 12.2
Quantity Discount Models
Steps in analyzing a quantity discount
1. For each discount, calculate Q*
2. If Q* for a discount doesn’t qualify,
choose the smallest possible order size
to get the discount
3. Compute the total cost for each Q* or
adjusted value from Step 2
4. Select the Q* that gives the lowest total
cost
Quantity Discount Models
0 1,000 2,000
Order quantity
Quantity Discount Example
Calculate Q* for every discount 2DS
Q* =
IP
2(5,000)(49)
Q1* = = 700 cars/order
(.2)(5.00)
2(5,000)(49)
Q2* = = 714 cars/order
(.2)(4.80)
2(5,000)(49)
Q3* = = 718 cars/order
(.2)(4.75)
Quantity Discount Example
Calculate Q* for every discount 2DS
Q* =
IP
2(5,000)(49)
Q1* = = 700 cars/order
(.2)(5.00)
2(5,000)(49)
Q2* = = 714 cars/order
(.2)(4.80) 1,000 — adjusted
2(5,000)(49)
Q3* = = 718 cars/order
(.2)(4.75) 2,000 — adjusted
Quantity Discount Example
Annual Annual Annual
Discount Unit Order Product Ordering Holding
Number Price Quantity Cost Cost Cost Total
1 $5.00 $25,000 $350 $25,700
700 $350
2 $4.80 $24,000 $480 $24,725
1,000 $245
3 $4.75 $23.750 $950 $24,822.50
2,000 $122.50
Table 12.3
Choose the price and quantity that gives the lowest total cost
Buy 1,000 units at $4.80 per unit
Inventory Management
Robustness of EOQ
Where
Q = Lot size ordered
Q*= optimal lot size