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    Economic Order Quantity

    Uploaded by

    Jyoti kohli
    The document discusses four inventory models: 1. The economic order quantity (EOQ) model, which determines the optimal order size to minimize total inventory costs. 2. An EOQ model for production runs that allows non-instantaneous receipt of inventory as it is depleted through production. 3. An inventory model with planned shortages that allows for backordering when inventory is depleted and calculates total costs including ordering, holding, and shortage costs. 4. The document provides an example calculation for determining EOQ and total costs using given values for annual demand, ordering cost, holding cost per unit, and backorder cost per unit.

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    Economic Order Quantity

    Uploaded by

    Jyoti kohli
    102 views15 pages
    The document discusses four inventory models: 1. The economic order quantity (EOQ) model, which determines the optimal order size to minimize total inventory costs. 2. An EOQ model for production runs that allows non-instantaneous receipt of inventory as it is depleted through production. 3. An inventory model with planned shortages that allows for backordering when inventory is depleted and calculates total costs including ordering, holding, and shortage costs. 4. The document provides an example calculation for determining EOQ and total costs using given values for annual demand, ordering cost, holding cost per unit, and backorder cost per unit.

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    EOQ model 3 and 4

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    The document discusses four inventory models: 1. The economic order quantity (EOQ) model, which determines the optimal order size to minimize total inventory costs. 2. An EOQ model for production runs that allows non-instantaneous receipt of inventory as it is depleted through production. 3. An inventory model with planned shortages that allows for backordering when inventory is depleted and calculates total costs including ordering, holding, and shortage costs. 4. The document provides an example calculation for determining EOQ and total costs using given values for annual demand, ordering cost, holding cost per unit, and backorder cost per unit.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    102 views15 pages

    Economic Order Quantity

    Uploaded by

    Jyoti kohli
    The document discusses four inventory models: 1. The economic order quantity (EOQ) model, which determines the optimal order size to minimize total inventory costs. 2. An EOQ model for production runs that allows non-instantaneous receipt of inventory as it is depleted through production. 3. An inventory model with planned shortages that allows for backordering when inventory is depleted and calculates total costs including ordering, holding, and shortage costs. 4. The document provides an example calculation for determining EOQ and total costs using given values for annual demand, ordering cost, holding cost per unit, and backorder cost per unit.

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    You are on page 1of 15

    Economic Order Quantity

    Model 3 : EOQ Model for


    Production Runs Model 4 :
    Inventory Model with Planned Shortages

    Submitted to:
    Submitted by:
    Dr. Devendra Kumar
    Economic Order Quantity
    EOQ is the size of the lot to be purchased
    which is economically viable. This is the
    quantity materials which can be purchased at
    minimum costs.
    The cost of a managing inventory is solely
    made of two parts:
    a) Ordering cost ( it includes costs associated
    with the processing and chasing of the
    purchase order, transportation, inspection
    for quality, & so on.)
    Model 3: EOQ Model for
    Production Runs

    In this EOQ model an order is


    received gradually, as inventory is
    simultaneously being depleted it
    means non-instantaneous receipt
    model.
    When the production begins, a
    constant number of units are
    Inventory profile

    Q
    Maximum inventory
    Inventory Level

    p
    d
    P-d

    tp
    Time
    T
    To calculate the Total Inventory cost:- Ordering cost
    + Holding cost
     Set up Cost : DA/Q { O(Q) = N x A }
    D = total demand, Q = order size, A = set up cost, N = No. of
    times an order is placed
     Holding Cost = h x average inventory
    tp= Q avg. inventory= tp(p-d)
    p 2
     Holding Cost : hQ 1 - d
    2 2 p
    Here, h = holding cost per unit per year
    d = consumption (demand)
    p = production rate
    total cost: T(Q) = DA /Q + hQ 1 - d
    2 p

    From this, the optimal order quantity (Q*),


    determined,
    Q* = 2AD
    1-d
    h p

    = 2AD p
    h p- d
     Total cost (of holding & ordering) corresponding
    to Q*
    T(Q*) = 2ADh 1 – d
    p

    Q.The brown sugar corporation sells baking supplies to


    foodies over the internet. The company mixes a special blend
    to multigrain flour with the trade name of wild horses. The
    annual demand for wild horses is 5000 one pound bags. The
    cost to set-up a production run to mix the flour is Rs 50 per
    set-up. The cost to hold one bag of flour for 1 year is Rs 2/
    bag. The production rate is 50 pounds per day. determine the
    EOQ & total cost?
    D = 5000 ; A= 50 ; h = Rs 2 ; p = 50 d = ?
    To calculate d,
    d = D = 5000 = 13.70
    365 365
    Q* = 2x50x5000 50
    2 50 – 13.70
    = 586.81units

    T(Q*) = 2x 50x 5000x2 1 – 13.70


    50 =Rs 852.05
    Model 4: Inventory Model with Planned
    Shortages
     This model allows the Back Ordering situation.
    Back order is an order for a good or service that
    cannot be filled at the current time due to lack of
    available supply.
     Here we are allowing the shortages in the
    inventory & for fulfilling these shortages we have
    to build back order.
    Inventory profile

    I
    Inventory level

    t2
    t1
    S
    Q
    T
    To calculate the Total Inventory cost:- Order cost + Holding cost +
    Shortage cost
    Ordering cost:
    Item cost = D x A
    If D = Annual demand, Q = order size, So cost of no. of orders per
    year will be
    Ordering cost = DA
    Q
    Holding cost = Average inventory x holding cost (t1)
    = I ht1
    2
    Q-S =I, Which last a period t1, Q-S = t1d, where d is usage rate.
    Similarly Q is adequate to last cycle T, &, therefore, Q = Td. On
    dividing the first of these equations by the second, we get
    Q – S = t1d
    Q Td
    t1 = T(Q – S )
    Q
    Holding cost = Q – S h T (Q – S )
    2 Q
    2
    =( Q – S ) hT
    2Q
    Shortage cost : S bt2 ( b = back order cost , S= Max. level of shortages )
    2
    As before, we note that d = Q, Similarly S = dt2 So, t2 = TS
    T Q
    shortage cost = S b TS = bTS2
    2 Q 2Q
    2 2
    T(Q) = DA + ( Q – S ) h + bS
    Q 2Q 2Q
    From this, the optimal order quantity (Q*), determined,
    Q* = 2AD h+b S* = Q* h
    h b h+b

    T(Q*) = 2ADh h+b


    b

    Q. We have, D=10,000/Year, A=Rs 300/Order, per Unit cost


    of item is Rs20 and h= Rs 4/unit per year and b= Rs 25/unit
    per year. Calculate EOQ and total cost?
    Q*= 2x1oooox3oo (4+25)
    4x25
    = 1319.09 units

    T(Q*) = 2x300x10000x4 4+25


    25

    = Rs 5276.36
    THANK YOU!

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