7/7/2024

What is inventory?

Inventory Control &

In general,
 Inventory is a list of items or goods;

Management  Inventory refers to the ‘materials in stock’;

 Stored accumulation of material resources in a
transformation system.
 For example, inventory in a library means the list of
books, journals, periodicals, furniture, fans, etc.

A typical firm carries different inventories such as:

 raw materials and purchased parts;
 partially completed goods called work-in-process;
M. Abu Hayat Mithu, PhD
Professor  finished-goods or merchandise in retail stores;
 replacement parts, tools, and supplies; and
Department of Industrial and Production Engineering  goods-in-transit to warehouses or customers
Shahjalal University of Science and Technology (SUST),Sylhet, Bangladesh

Lecture Outline What is inventory?

• Inventory is the stock of any item or resource used in

 What is inventory?
an organization and can include: raw materials,
 Why is inventory necessary?
finished products, component parts, supplies, and
 What are the advantages and disadvantages of
work-in-process items.
holding inventory?
 How much inventory should an operation hold?
 When should an operation replenish its inventory? An inventory system is the set of policies and controls that

 How can inventory be controlled? monitor levels of inventory and determines what levels should
be maintained, when stock should be replenished, and how
 Understand the strategic significance of
large orders should be
managing inventory
 Knowledge insights with quantity discounts (Piece
Firms invest 25-35 percent of assets in inventory but many do
break model)
not manage inventories well
 EOQ for multiple items with resources constraints
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What is inventory? Why is inventory necessary?

Basic question:
General concept: What is the purpose of holding stocks?
• Fuel for the car Milk to drink

• Milk to sell Production with setups Find the answer: Inventories serve the following purposes:

• Motherboards to assemble computers To meet anticipated (predicted) demand.

Inventories are required to satisfy expected demand.
Example:
Examples: demand are electronic items, tools, clothing.
But for blood services, such as Blood Bank Service:

1 Collection, involves recruiting and retaining blood

donors, encouraging them to attend donor sessions To smooth production requirements.

2 Processing, blood down into its constituent parts Meeting the seasonal and off-season demands to meet
(red cells, platelets & plasma) blood-based products overly high requirements during certain seasonal
periods. Example: fresh fruits, vegetables deal with
3 Distribution, transports blood from blood centers to
hospitals in response to emergency requests. seasonal inventories; greeting cards, Christmas trees.

What is inventory? Why is inventory necessary?

The key questions in inventory control are:

 What business are we in? Is it manufacturing or assembly? To decouple components of the production-distribution

 To what extent does the firm want to own assets system.

throughout the supply chain? Inventory buffers to continue temporarily while machine
breakdowns are resolved. Finished good inventories are
 With which suppliers (and numbers of suppliers) does the
firm want to have for long-term relationships? used to buffer sales.

 What is the extent of the suppliers’ involvement?

To protect against stock-outs.
Delayed deliveries and unexpected increases in demand
The basic questions are to solve in IC&M: increase the risk of shortages. Delay can occur because

How much of the inventory is to be kept and /or of weather conditions, traffic congestion, supplier
stock-outs, deliveries of wrong materials, quality
ordered?
problems, etc.
When should this be done?
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Why is inventory necessary? Types of Inventories

To take advantage of order cycles. Depending on the supply and demand at different points in
any operation lead to five types of inventories are:
To buy and produce in economic lot size in order to
1. Buffer inventory,
minimize purchasing and inventory costs.
2. Cycle inventory,
To hedge against price increases. 3. De-coupling inventory,
Purchasing a larger quantities for quantity discounts in 4. Anticipation inventory, and
unit price & due to discounts and lower transport cost. 5. Pipeline inventory.

To ensure against scarcity of materials. Buffer Also called safety inventory, is to compensate
inventory for the unexpected fluctuations in supply and
To meet demands in unplanned shocks (labor strikes, demand.
For example, a retail seller, can never forecast
natural disasters, surges, flood, rushes, etc.) demand perfectly, even when it has a good idea of
the most likely demand level; order goods as there is
always a certain amount of most items in stock.
To maintain customer-supplier–producer relationship.

Drawbacks of holding inventory Types of Inventories

A number of negative aspects are:

Cycle The portion of inventory that varies directly
ties up money, in the form of working capital; inventory with order quantity. It fluctuates as goods are
×
purchased or produced and sold, replenished
incurs storage costs (leasing space, maintaining
× by new orders.
appropriate conditions, etc.);
For example, because of the nature of the mixing
may become obsolete, can be damaged, or deteriorate, lost, and baking process, only one kind of bread can be
×
be expensive to retrieve, etc.; produced at any time.

could be as it gets hidden amongst other inventory;

×
De-coupling A strategic approach in SC Management
might be hazardous to store (e.g., flammable solvents, Inventory where inventory is strategically placed or
×
explosives, chemicals and drugs);
managed to decouple dependencies between
requiring special facilities and systems for safe handling; different stages of production or distribution.
×
uses space that could be used to add value; The goal is to enhance flexibility, responsiveness,
×
and efficiency in the supply chain by reducing the
involves administrative and insurance costs; impact of disruptions and improving overall
×
performance.
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Types of Inventories Inventory Costs

Several types of costs are directly associated with order size.

Anticipation Anticipation inventory can be used to cope
These are:
inventory with seasonal demand.

• It is used to compensate for differences in the 1. Cost of Placing Order

timing of supply and demand.
• Most commonly used when demand fluctuations
The costs associated with the placing an order, a
are large but relatively predictable. number of transactions are needed which incur costs.
These include
 the clerical tasks of preparing the order,
Pipeline Pipeline inventory, also known as transit  the documentation associated to the order,
inventory inventory or in-transit inventory, that is in the  arranging for the delivery to be made,
process of being transported between two
 arranging to pay the supplier for the delivery, and
points in the supply chain.
 the general costs of keeping all the information.
It represents goods that are moving from suppliers
 In addition, there could also be a ‘changeover’ cost
to manufacturers, from manufacturers to
distribution centers, or from distribution centers to  to supply the items caused by the need to change.
retailers or customers.

Raw Materials Finished Goods 2. Price discount Costs

Inventory Inventory Sometimes, suppliers offer discounts on the normal
Work-in-Progress (WIP) purchase price for large quantities; alternatively they
might impose extra costs for small orders.
Inventory

Goods in Transit or Safety Stock

Pipe line inventory Inventory 3. Stock-out Costs

Anticipatory The cost associated to failing to supply customers’

order for a misjudge the order-quantity and
Inventory inventory runs out.
Cycle Inventory Seasonal
The loss incur for both internal and external customers.
Inventory
 For external, they may take their business elsewhere;
 For internal, stock-outs could lead to idle time at the
Maintenance, Repair, and next process, inefficiencies and, eventually, again,
Operations (MRO) Inventory Obsolete Inventory dissatisfied external customers.
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Inventory Costs
Prime Costs associated to Inventories
4. Working Capital Costs
After receiving a replenishment order, the supplier will
demand payment for their goods. Eventually, there is a lag
between payment and receiving payment. The costs
Carrying costs Acquisition costs
associated with it are
(i) bank interest to pay the bank, and Carrying costs:
(ii) the opportunity costs of not investing it elsewhere. • Cost of carrying material in inventory.
Ch • The annual cost of carrying a production inventory.
5. Storage Costs
Acquisition costs:
The costs associated with physically storing the goods. • A certain portion of wages and operating expenses of
 Renting, such departments as purchase and supply, production
control, receiving etc.
 heating and lighting the warehouse,
 insuring the inventory in special conditions,
Co • The cost of stationery, computer time, telephone, fax
 ensuring high security etc. and forms of purchasing etc.

Inventory Costs
Nature of Inventory: Adding Value through Inventory
6. Obsolescence Costs • Speed
When an order of large quantities is placed, then there is
location of inventory has gigantic effect on speed
a risk that the items might either become obsolete. • Cost
For example: in the case of a change in fashion, or direct: purchasing, delivery, manufacturing
deteriorate with age in the case of most foodstuffs, indirect: holding, stockout.
medicines, biodegradable items etc.
• Quality
inventory can be a “buffer” against poor quality; conversely,
low inventory levels may force high quality
7. Operating Inefficiency Costs • Flexibility
location, level of anticipatory inventory both have effects
According to lean synchronization philosophies, high
inventory levels prevent us seeing the full extent of • Function
problems within the operation.
Buffer, transit, Seasonal, Decoupling, Speculative, Lot
Sizing or Cycle, Mistakes, Promotional
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Requirements for Effective Inventory Techniques of Effective Inventory

These requirements are:

Perpetual Known as ‘continual system’ which keeps track of
Inventory
A system to keep track of the inventory on hand and on order. removals from inventory on a continuous basis.

• Find out how much we have, and how much we should have
When the amount on hand reaches a predefined
based on stock-level fluctuations, rate of demands, etc.
minimum, a fixed quantity is ordered. This system
• Then take steps to close the gap between the two.
offers continuous monitoring and the setting of
A reliable forecast of demand that includes an indication of
optimal order quantity.
possible forecast error.
• There is an added cost for record keeping and
 Knowledge of lead times and lead time variability. physical count is needed to verify inv. records.
• Discrepancy could occur due to errors, theft,
 Reasonable estimates of inventory holding costs, ordering
spoilage, and other factors.
costs, and shortage costs.
• Examples: bank, supermarkets, pharmacy,

 A classification system for inventory items. discount shops, and department stores etc.

Techniques of Effective Inventory

Inventory Counting System Periodic inventory: A Two-bin System
Inventory counting systems can be:
 Very elementary and most commonly used system.
(i) periodic, or  It is also called the min-max system.
(ii) perpetual.
 The items are divided into two bins: the first one is for
satisfying the current demand, while the second one is
Periodic A physical count of items in inventory is made at to satisfy the demand during the replenishment period.
Inventory
periodic intervals (e.g., weekly, monthly) in order
to decide how much to order for each item. Bin-2
Bin-1
Examples: A small retailer, placing orders for
many items at the same time.
Items are withdrawn from bin-1 until its contents are exhausted;
then place an order using order card placed at bottom of first bin.
There is a lack of control between reviews and
there is a need to protect against shortage Bin-2 contains enough stock to satisfy expected demand until the
between review periods by carrying extra stock. order is filled, plus extra cushion of stock that reduces the chance
of stock-out if the order is late or if usage is greater than expected.
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Techniques of Effective Inventory

Periodic inventory: A Two-bin System Demand forecast & Lead time information

Advantages:  It is simple, reliable, and easy to explain  To satisfy the demands, it is essential to have reliable
and operate, estimates of demand, and the lead time (time between
 There is no need to record each submitting an order and receiving it).
withdrawal from inventory.  The greater the potential variability, the greater the
need for additional stock to reduce the risk of shortage
between deliveries.
Disadvantages:  Reorder card may not be turned in for a
Profile of Inventory Level Over Time
variety of reasons (e.g., misplaced, the
Q
Usage
person responsible forgets to turn it in), Quantity rate
on hand
 Absence of adequate data on stock levels
and consumption rates. Reorder
 Affects the evaluation of batch sizes for point

orders that can be reduced by slow, Receive Place Receive Place Receive Time
order order order order order
medium, and fast moving. Lead time

Inventory Control Techniques

Inventory can be controlled by these two techniques:
Perpitual inventory: Ordering cycle system
1. Qualitative techniques,
 Based on periodic reordering of all items. 2. Quantitative techniques.
 With every cycle, stock of each item is brought up to its
level, which is dependent on the length of the cycle, the Qualitative Techniques:
replenishment period, and the consumption rate.
 Consist of selective control methods based on Pareto 80-
 Reorder quantity increases with cycle time if the
20 principle, which states that there are a critical few
replenishment period and demand rate do not change.
and trivial many.

Advantages  All items are classified into some broad groups on certain
 All orders for replenishment are issued at the same time. basis and attention is paid to their control accordingly.
 Ordering mechanism is regular and not subject to  Some of the popular control techniques are:
sporadic arrivals of warning signals from the store.
 ABC classification
Disadvantage:  FSN classification
 Usually more stock is held when this system is adopted
 VED classification
than with the 2-bin system.
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Inventory Control Techniques Inventory Control Techniques

Classifying inventory according to measure of importance:

Quantitive Techniques:
Can be split into two types depending on the demand A - very important High
rate and the nature of demand:
A
B - mod. important Annual
• Deterministic models, and $ value B
of items
• Probabilistic or non-deterministic models. C - least important

Low C
Low High
Deterministic models  A items generally account % of Items

In this model, the demand of an item is known and fixed. for about 15 - 20 % of items but about 60 – 70% of $ usage,
on the other end, C items might account for about 60% of

Probabilistic models items but only about 10% of $ usage of an inventory.

In this model, the demand of an item is not known and  The actual number of categories varies from organization

called stochastic. to organization, depending on the extent to which a firm

wants to differentiate the control efforts.

Inventory Control Techniques

ABC classification
 ABC stands for ‘always better control’. Example: ABC Analysis
A computer hardware company has organized its 10 items on an
 Items on hand are classified into A, B, and C types on the annual dollar volume basis. Details like item numbers, their annual
basis of the value in terms of capital or annual money demand, unit cost, annual dollar volume, and percentage of the total
represented by each item are shown in Table (R. N. Roy, A Modern
usage (i.e., dollar value per unit × annual usage) Approach to Operations Management, New Age International, pp. 106 .
 Items with high value and low volume are kept in A-type,
items with low value and high volume are kept in C-type,
and the items with moderate value and moderate volumes
belong to the B-type.

 Attention is given based on the type sorted (A-type are

given the maximum, and so on while ordering,

 Three classes of items are called: A (very important), B

(moderately important), and C (least important).
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Inventory Control Techniques Inventory Control Techniques

FSN Classification Deterministic model: Basic EOQ Model

 Items are classified according to the rate of consumption. Materials can be either produced or purchased, but in both
 Materials are fast (F), slow (S) and non-moving types (N). situations, one needs to know the following:
 F-type materials get maximum attention, and N type get
• How much to produce in one time?
minimum attention for their control and procurement.
• How much to procure (order) in one time?
Example: Let this concept in our kitchen, sorting all items
The answer to these questions depends on the total-cost of
 F = Rice, salt, sugar, tea are consumed almost daily at
production or total cost of purchase of items: Then,
relatively faster rate and they need more attention.
 S = Fruit, dry fruits are consumed at a moderate speed • What are the cost of production or purchase them?

and need moderate attention. A company orders from an outside supplier. The supplier
 N = Medicine, shaving blades, cosmetics are consumed at delivers to the purchasing plant precisely the quantity it
a very negligible rate and need less attention. asks for; and it passes that stock onto its customers.

Inventory Control Techniques Inventory Control Techniques

VED Classification Cycle Counting

 Economic order quantity (EOQ) model
 Materials are classified according to its criticality in the
production system. Thus, materials can be The order size that minimizes total annual cost
 vital (V),
 Economic Production Model
 essential (E), and
 Quantity Discount Model
 desirable (D) types.

 Maximum attention is paid to procurement and control Economic order quantity (EOQ) model
of vital items and less to the desirable ones, and so on.
 Every time an order is placed, Q items are ordered.
 It is so because the lack of vital items can bring the
Demand for the item is then steady and perfectly
production of the plant down and the plant is running
predictable at a rate of D units per month.
into losses.
 Example, 1000 items of a steel plant, V = 200—Much attention, E = 300—  When demand is depleted, another order of Q items

Moderate attention, D = 500—Less attention is given to these items. instantaneously arrives, and so on.
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Inventory Control Techniques Inventory Control Techniques

Assumptions for EOQ EOQ Model Cont….

𝑸
This model makes the following assumptions: The average inventory = (because the two shaded areas are equal)
𝟐
 Only one product is involved 𝑸
The time interval between deliveries = 𝑫
 Annual demand requirements known Frequency of deliveries = reciprocal of time interval = 𝑫 𝑸
 Demand is even throughout the year
Steady and predictable demand
Order
 Lead time does not vary Quantity, Q Slope= demand rate

 Each order is received in a single delivery Avg. Inv. 𝑸

Inventory
𝟐

level
 There are no quantity discounts

 Fixed set-up cost for each order, called order cost.

𝑸 Time
𝑫
 Variable stock holding cost per unit per year.
Instantaneous deliveries at a rate of 𝑫
𝑸 per period

 No safety stock is maintained.

Fig. Inventory profiles chart the variation in inventory level, Ref. N. Slack, et. al.

Inventory Control Techniques

EOQ Model
To find out EOQ model, Annual carrying cost

holding costs are taken into account by including: 𝑄

● working capital costs = 𝐻
2
● storage costs
Q = Order quantity in units
● obsolescence risk costs. H = Holding (carrying) cost per
Holding costs = holding cost/unit × average inventory unit per year
𝑸
Holding costs = 𝑪𝒉 ×
𝟐 Annual ordering cost

Order costs are calculated by taking into account: 𝐷

● cost of placing the order (including transportation) =𝑆
● price discount costs.
𝑄
Ordering costs = ordering cost × number of orders per period where
D = Demand, usually in units per year
𝑫 S = Ordering cost per order
Ordering costs = 𝑪𝒐 ×
𝑸
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Inventory Control Techniques

EOQ Model Cont….

Cost Minimization Goal

The Total-Cost Curve is U-Shaped
Q D
TC  H  S

Annual Cost
2 Q

Ordering Costs

QO (optimal order quantity) Order Quantity (Q)

Using the EOQ:
𝑬𝑶𝑸
Time between orders = 𝑫
𝑫
Order frequency = 𝑬𝑶𝑸 per period

EOQ Model Cont….

EOQ Problems

From before: A local distributor for a national tire company expects

Total cost = holding cost + order cost
to sell approximately 9,600 steel-belted radial tires
𝑪𝒉 𝑸 𝑪𝒐 𝑫
𝑪𝒕 =
𝟐
+
𝑸
of a certain size and tread design next year. Annual
carrying cost is $16 per tire, and ordering cost is $75.
The rate of change of total cost is given by the first differential
of Ct with respect to Q :
The distributor operates 288 days a year.

a. What is the EOQ?

The lowest cost will occur when dCt/dQ = 0, that is:
b. How many times per year does the store reorder?
c. What is the length of an order cycle?
where Qo = the EOQ. Rearranging this expression gives:
d. What is the total annual cost if the EOQ
quantity is ordered?
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Inventory Control Techniques

Economic Production Quantity (EPQ): The EPQ model is

particularly useful for manufacturing processes where the
production rate exceeds the demand rate. Key elements of this
model are:
o Annual demand (D), Setup cost (S), Holding cost (H):
These costs remain same as EOQ of inventory for a year.
o Production rate (P): The rate at which items are
produced (units per year).
o Order quantity (Q): The number of units per order.
o p = Daily production rate, and d = Daily demand rate, or
usage rate, and
o t = Length of the production run in days

Problem 5: A manufacturing company makes and sells its

Piddling Manufacturing assembles security monitors. It products (wheels) to the retail automobile market. The
purchases 3,600 black-and-white cathode ray tubes a company forecasts for its wire wheels are 1,000 units next
year at $65 each. Ordering costs are $31, and annual year, with an average daily demand of 4 units. However, the
carrying costs are 20 percent of the purchase price. production process is most efficient at 8 units per day. So,
Compute the optimal quantity and the total annual the company produces 8 per day but uses only 4 per day.
cost of ordering and carrying the inventory. The company wants to solve for the optimum number of
units per order. (Note: This plant schedules production of
this wheel only as needed, during the 250 days per year the
shop operates.) [Answer: 283 wheels].
Given that,
D = 3,600 CRT/yr
S = $ 31
H = $ 65 * 0.20
= $ 13
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Problem 6: Race One Motors is an Indonesian car

manufacturer. At its largest manufacturing facility, in The buyer's goal with quantity discounts is to
Jakarta, the company produces subcomponents at a rate of select the order quantity that will minimize
300 per day, and it uses these subcomponents at a rate of total cost, where total cost is the sum of
12,500 per year (of 250 working days). Holding costs are $2 carrying cost, ordering cost, and purchasing
per item per year, and ordering (setup) costs are $30 per (i.e., product) cost:
order.
What is the economic production quantity?
How many production runs per year will be made?
where, P = Unit price
What will be the maximum inventory level?
What percentage of time will the facility be producing Recall that in the basic EOQ model, determination
components? of order size does not involve the purchasing cost.
The rationale for not including unit price is that
What is the annual cost of ordering and holding inventory? under the assumption of no quantity discounts,
price per unit is the same for all order sizes.

Quantity Discounts

Quantity discounts are price reductions for

larger orders offered to customers to induce
The total-cost curve with
them to buy in large quantities. quantity discounts is
composed of a portion of the
Chicago surgical total-cost curve for each price
supply company
publishes the price list

If quantity discounts are offered, the buyer

must weigh the potential benefits of reduced
Comparison of TC curves for
purchase price and fewer orders that will constant carrying costs and
result from buying in large quantities against carrying costs that are a
the increase in carrying costs caused by percentage of unit costs

higher average inventories.

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A toy manufacturer uses 48,000 rubber wheels per

year for its popular dump truck series. The firm
makes its own wheels, which it can produce at a rate of
800 per day. The toy trucks are assembled uniformly
over the entire year. Carrying cost is $1 per wheel a
year. Setup cost for a production run of wheels is $45.
The firm operates 240 days per year. Determine
the following:
a. Optimal run size
b. Minimum total annual cost for carrying and setup
c. Cycle time for the optimal run size
d. Run time

The procedure for determining the overall EOQ

Given that,
D = 48,000 wheels per year For carrying costs that are constant, the procedure is as
S = $ 45 follows:
H = $ 1 per wheel per year 1. Compute the common minimum point.
p = 800 wheels per day
u = 48,000 wheels per 240 days, or 200 wheels per day

2. Only one of the unit prices will have the

minimum point in its feasible range since the
ranges do not overlap. Identify that range.

If the feasible minimum point is on the lowest price range,

that is the optimal order quantity.
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Problem: 70 cases can be bought at $18 per case because 70 falls

The maintenance department of a large hospital uses about 816 in the range of 50 to 79 cases. The total cost to
cases of liquid cleanser annually. Ordering costs are $12, purchase 816 cases a year, at the rate of 70 cases per
carrying costs are $4 per case a year, and the new price schedule
order, will be:
indicates that orders of less than 50 cases will cost $20 per case,
50 to 79 cases will cost $18 per case, 80 to 99 cases will cost $17
per case, and larger orders will cost $16 per case. Determine the TC70 = Carrying cost + Order cost + Purchase cost
optimal order quantity and the total cost. = (Q/2)H + (D/Q)S + PD
= (70/2)*4 + (816/70)*12 + 18(816) = $14,968
1. Compute the common minimum point.
In order to buy at $17 per case, at least 80 cases must
be purchased. The total cost at 80 cases will be
TC80 = (80/2)*4 + (816/80)*12 + 17(816) = $14,154

To obtain a cost of $16 per case, at least 100 cases per

order are required, and the total cost at that price
break will be:

TC100 = (100/2)*4 + (816/100)*12 + 16(816) = $13,354

From the calculation

TC70 = $ 14,968
TC80 = $ 14,154
TC70 = $ 13,354

Because 100 cases per order yields the lowest total

cost, 100 cases is the overall optimal order quantity.
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EOQ Related Problems

A building materials supplier obtains its bagged cement The manager of a bottle-filling plant which bottles soft
from a single supplier. Demand is reasonably constant drinks needs to decide how long a ‘run’ of each type of
throughout the year, and last year the company sold drink to process. Demand for each type of drink is
2,000 tons of this product. It estimates the costs of reasonably constant at 80,000 per month (a month has
placing an order at around $25 each time an order is 160 production hours). The bottling lines fill at a rate of
placed, and calculates that the annual cost of holding 3,000 bottles per hour, but take an hour to clean and reset
inventory is 20 per cent of purchase cost. The company
between different drinks. The cost (of labor and lost
purchases the cement at $60 per ton.
production capacity) of each of these changeovers has
(i) How much should the company order at a time?
been calculated at $100 per hour. Stock-holding costs are
(ii) Why/ why not order a convenient 100 tons?
Comment. counted at $0.1 per bottle per month.
(i) Find the EPQ (or EBQ).
(ii) The staff who operate the lines have devised a method
of reducing the changeover time from 1 hour to 30
minutes. How would that change the EBQ?

A manufacturer uses 96,000 screws per year for its

A large law firm uses an average of 40 boxes of copier
socket production. The firm makes its own screws, which
paper a day. The firm operates 260 days a year. Storage
it can produce at a rate of 200 per hour (8 hour day). The
and handling costs for the paper are $30 a year per box,
sockets are assembled uniformly over the entire year.
and it costs approximately $60 to order and receive a
Carrying cost is $1 per screw a year. Setup cost for a
shipment of paper.
production run of screws is $45. The firm operates 240
days per year. Determine the: What order size would minimize the sum of annual
ordering and carrying costs?
(i) Optimal run size. (ii) Minimum total annual cost for
carrying and setup. (iii) Cycle time for the optimal run Compute the total annual cost using your order size
size. and (iv) Run time. from part a.
Except for rounding, are annual ordering and carrying
costs always equal at the EOQ?
The office manager is currently using an order size of
200 boxes. The partners of the firm expect the office to
be managed “in a cost-efficient manner.” Would you
recommend that the office manager use the optimal
order size instead of 200 boxes? Justify your answer.
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A mail-order house uses 18,000 boxes a year. Carrying

costs are 60 cents per box a year, and ordering costs are
$96. The following price schedule applies. Determine
(i) The optimal order quantity.
(ii) The number of orders per year.

Number of Boxes Price per Box

1,000 to 1,999 $1.25
2,000 to 4,999 1.20
5,000 to 9,999 1.15
10,000 or more 1.10

A manufacturer of exercise equipment purchases the

pulley section of the equipment from a supplier who lists
these prices: less than 1,000, $5 each; 1,000 to 3,999,
$4.95 each; 4,000 to 5,999, $4.90 each; and 6,000 or
more, $4.85 each. Ordering costs are $50, annual
carrying costs per unit are 40 percent of purchase cost,
and annual usage is 4,900 pulleys. Determine an order
quantity that will minimize total cost.