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INVENTORY
MODELS
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ECONOMIC ORDER QUANTITY

(EOQ)
➢ Is a model applicable when the demand for an item shows a
constant, or nearly constant, rate and when the entire quantity
ordered arrives in inventory at one point in time.
➢ Constant demand rate – assumption means that the same
number of units taken from inventory each period such as 5 units
everyday, 25 units every week, 100 units every four-week period
and so on.
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ECONOMIC ORDER QUANTITY

(EOQ)
Assumptions:
✓ Demand D is deterministic and occurs constant rate.
✓ The order quantity Q is the same for each other. The inventory
level increases byu Q units each time an order is received.
✓ The cost per order Co is constant and does not depend on the
quantity ordered.
✓ The purchase cost per unit C is constant and does not depend on
the quantity ordered.
✓ The inventory holding cost per unit per time period Ch is constant.
The total inventory holding cost depends on both Ch and the size
of inventory.
✓ Shortages such as stock-outs or backorders are not permitted.
✓ The lead time m for an order is constant.
✓ The inventory position is reviewed continuously. As a result, an
order is placed as soon as the inventory position reaches the
reorder point.
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Sample Problem!
EOQ
 ECONOMIC ORDER QUANTITY
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(EOQ)
Bub Beer has the following data on annual demand, ordering cost,
annual inventory holding cost rate, cost per unit, working days per
year, and lead time in days.

Given
Annual Demand D 104,000
Ordering Cost Co $32.00
Annual Inventory Holding Rate (%) I 25%
Cost per unit UC $8.00
Working days per year WD 250
Lead Time (days) m 2
d = D / WD : (104,000 / 250) 416
Ch = UC x I : (8 x .25) 2
 ECONOMIC ORDER QUANTITY
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(EOQ)
ECONOMIC ORDER QUANTITY ANNUAL INVENTORY
FORMULA: √((2 x D x Co)/(Ch) FORMULA: Q* / 2
Solution: Solution:
√((2 x 104,000 x 32) / 2 1824.28 / 2
= 1,824.28 units of order = 912.14 units of annual inventory

REORDER POINT TOTAL HOLDING COST

FORMULA: d = d x m FORMULA: (Q* X .5) x (Ch)
Solution: Solution:
(416 x 250) (1824.28 x .5) x 2
= 832 units of demand per day 912.14 x 2
= 1,824.28 of total holding cost per year
CYCLE TIME
FORMULA: (WD x Q*) / D TOTAL ORDERING COST
Solution: FORMULA: (D / Q*) x (Co)
(250 x 1824.28) / 104,000 Solution:
= 4.39 times of order per year (104,000 / 1824.28) x (32)
= 1824.28 of total ordering cost per year
 ECONOMIC ORDER QUANTITY
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(EOQ)
TOTAL COST TOTAL COST w/ UNITS
FORMULA: Total Holding Cost + FORMULA: Total Cost + PD
Total Ordering Cost Solution:
Solution: 3648.56 + 832,000
1824.28 + 1824.28 = 835,648.60
= 3648.56 of total inventory cost
per year ORDER PER PERIOD (YEAR)
FORMULA: D / Q*
UNIT COST (PD) Solution:
FORMULA: UC x D 104,000 / 1824.28
Solution: = 57.01 or order per year
8 x 104,000
= 832,000
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Sample Problem!
PL
 PRODUCTION LOT SIZE MODEL
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Wilson Publishing Company produces books for the retail market. Demand for
a current book is expected to occur at a constant rate of 7,200 copies. The cost
of one copy of the book is $14.50. The holding cost is based on an 18% annual
rate, and production setup costs are $150 per setup. The equipment on which
the book is produced has an annual production volume of 25,000 copies.
Wilson has 250 working days per year, and the lead time for a production run is
15 days. Use the production lot-size model to compute the following values:
Given
Demand Rate D 7200
Setup Cost Cs 150
Unit Cost UC 14.50
Annual Rate I 18%
Working Days WD 250
Lead Time m 15
P 25,000
d = D / WD : (7200 / 250 = 28.8) d 28.8
Ch = I x UC : (18% x 14.50 = 2.61) Ch 2.61
p = P / WD : (25,000 / 250 = 100) p 100
 PRODUCTION LOT SIZE MODEL
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(PLSM)
OPTIMAL PRODUCTION QUANTITY LENGTH OF PRODUCTION RUN
FORMULA: Q* = √(2 x D x Co) / (Ch x (1 – D / FORMULA: Q* / p
P)) Solution:
Solution: = 1078.12 / 100
√(2 x 7200 x 150) / (2.61 x (1 – 7200 / 25,000)) = 10.78 days of production run
= 1078.12 unit of production per day
MAXIMUM INVENTORY
PRODUCTION RUNS PER PERIOD (YEAR) FORMULA: Q* (1 – D / P)
FORMULA: D / Q* Solution:
Solution: = 1078.12 (1 – 7200 / 25,000)
= 7200 / 1078.12 = 767.62 units of maximum inventory
= 6.68 production run per year during the production run

CYCLE TIME AVERAGE INVENTORY

FORMULA: (WD X Q*) / D FORMULA: Q* (1 – D / P) X .50
Solution: Solution:
= (250 X 1078.12) / 7200 = 1078.12 x (1 – 7200 / 25000) x .50
= 37.43 days to finish producing a batch of = 383.81 average inventory per year
1078.12
 PRODUCTION LOT SIZE MODEL
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(PLSM)
TOTAL HOLDING COST
FORMULA: Q* x .50 x (1 – D / P) X Ch
Solution:
TOTAL COST
= 1078.12 x .50 x (1 – 7200 / 25000) x 2.61
FORMULA: Total Holding Cost
= 1001.75
+ Total Ordering Cost
Solution:
TOTAL ORDERING COST
= 1001.75 + 1001.75
FORMULA: (D / Q*) x Cs
= 2003.49
Solution:
= (7200 / 1078.12) x 150
TOTAL COST w/ PD
= 1001.75
FORMULA: Total Cost + PD
Solution:
UNIT COST (PD)
= 2003.49 + 104400
FORMULA: UC x D
= 106,403.50
Solution:
= 14.50 X 7200
= 104,400
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Sample Problem!
QDM
 QUANTITY DISCOUNT MODEL
SLIDESMANIA.COM

(QDM)
Osler, the Materials Director of Samsung Flat Screen TV, wants to
determine the most optimum inventory practice for the company. He
was able to determine the demand and inventory costs needed in his
analysis. The annual demand is 10,000 units. The ordering cost is
Php100,000 per order, and the holding cost per unit per year is 30% of
the product cost which is $50,000 per unit. There is no discount if the
volume of purchase is less than 1,000 units, 1% discount of the volume
is at least 1,000 units, and 2% if the volume is at least 2000 units. What
is the economic order quantity? How much is the total annual
inventory cost? How many units should be purchased?
 QUANTITY DISCOUNT MODEL
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(QDM)
Given
Annual Demand (units) D 10,000
Ordering Cost (Php000) Co 100,000
Holding Cost (percentage) Ch 30%

Discount Level Discount Quantity Cost per Unit Discount (%)

(Php000)
1 0 – 999 50 0
2 1000 – 1999 50 1
3 2000 and up 50 2
 QUANTITY DISCOUNT MODEL
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(QDM)
DISCOUNT COST

FORMULA: UC x ( 1 – Discount )

Solution:

Discount Cost 1: 50 x ( 1 – 0%) = 50.00

Discount Cost 2: 50 x ( 1 – 1%) = 49.50

Discount Cost 3: 50 x ( 1 – 2%) = 49.00

= 49.00 of discounted product

Cost of volume is at least
2000.
 QUANTITY DISCOUNT MODEL
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(QDM)
HOLDING COST

FORMULA: Discount Cost x Ch

Solution:

Holding Cost 1: 50.00 x 30% = 15.00

Holding Cost 2: 49.50 x 30% = 14.85

Holding Cost 3: 49.00 x 30% = 14.70

= 14.70 of holding cost per unit
per year if volume is at least
2000 units
 ECONOMIC ORDER QUANTITY
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(EOQ)
ECONOMIC ORDER QUANTITY

FORMULA: √(2 x D x Co / Holding Cost)

Solution:

Q*1: √(2*(10000)*(100) / 15.00) = 365.15 = 365.15 or 0 to 999

Q*2: √(2*(10000)*(100) / 14.85) = 366.99 = 366.99 or 1000 to 1999

Q*3: √(2*(10000)*(100) / 14.70) = 368.86 = 368.86 or 2000 and up

If 2000 units of order if quantity is
2000 and up or level 3.
 QUANTITY DISCOUNT MODEL
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(QDM)

TOTAL ORDERING COST TOTAL HOLDING COST

FORMULA: (D / Q*) x (Co) FORMULA: (Q* / .5) x (Ch)
Solution: Solution:
TCo1 = (10,000 / 365.15) x 100 = 2738.61 TCh1 = (365.15 x .5) * (15.00) = 2738.61
TCo1 = (10,000 / 366.99) x 100 = 2724.87 TCh1 = (366.99 x .5) * (14.85) = 2724.87
TCo1 = (10,000 / 368.86) x 100 = 2711.06 TCh1 = (368.86 x .5) * (14.70) = 2711.06

ORDER PER PERIOD

FORMULA: D / Q*
Solution:
(10,000 / 365.15) = 27.39
(10,000 / 366.99) = 27.25
(10,000 / 368.86) = 27.11