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    EOQ

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    Tarang Solani
    The document discusses various inventory management concepts including inventory control systems, economic order quantity models, quantity discounts, and reorder points. It defines types of inventory like raw materials and work-in-process. It also describes inventory costs like carrying costs and ordering costs. Key concepts covered are ABC classification, the basic EOQ model including deriving the optimal order quantity, quantity discounts, and how to calculate reorder points.

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    EOQ

    Uploaded by

    Tarang Solani
    130 views31 pages
    The document discusses various inventory management concepts including inventory control systems, economic order quantity models, quantity discounts, and reorder points. It defines types of inventory like raw materials and work-in-process. It also describes inventory costs like carrying costs and ordering costs. Key concepts covered are ABC classification, the basic EOQ model including deriving the optimal order quantity, quantity discounts, and how to calculate reorder points.

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    EOQ[1]

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    The document discusses various inventory management concepts including inventory control systems, economic order quantity models, quantity discounts, and reorder points. It defines types of inventory like raw materials and work-in-process. It also describes inventory costs like carrying costs and ordering costs. Key concepts covered are ABC classification, the basic EOQ model including deriving the optimal order quantity, quantity discounts, and how to calculate reorder points.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    130 views31 pages

    EOQ

    Uploaded by

    Tarang Solani
    The document discusses various inventory management concepts including inventory control systems, economic order quantity models, quantity discounts, and reorder points. It defines types of inventory like raw materials and work-in-process. It also describes inventory costs like carrying costs and ordering costs. Key concepts covered are ABC classification, the basic EOQ model including deriving the optimal order quantity, quantity discounts, and how to calculate reorder points.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 31

    Lecture Outline

    w Elements of Inventory Management w Inventory Control Systems w Economic Order Quantity Models w Quantity Discounts w Reorder Point

    What Is Inventory?
    w Stock of items kept to meet future demand w Purpose of inventory management
    n n

    how many units to order when to order

    Types of Inventory
    w Raw materials w Purchased parts and supplies w Work-in-process (partially completed) products (WIP) w Items being transported w Tools and equipment

    Two Forms of Demand


    Dependent
    Demand for items used to produce final products Tires stored at a Goodyear plant are an example of a dependent demand item

    Independent
    Demand for items used by external customers Cars, appliances, computers, and houses are examples of independent demand inventory

    Inventory Costs
    Carrying cost
    cost of holding an item in inventory

    Ordering cost
    cost of replenishing inventory

    Shortage cost
    temporary or permanent loss of sales when demand cannot be met

    Inventory Control Systems


    Continuous system (fixed-orderquantity)
    constant amount ordered when inventory declines to predetermined level

    Periodic system (fixed-timeperiod)


    order placed for variable amount after fixed passage of time

    ABC Classification
    w Class A
    n n

    5 15 % of units 70 80 % of value 30 % of units 15 % of value 50 60 % of units 5 10 % of

    w Class B
    n n

    w Class C
    n

    ABC Classification: Example


    PART 1 2 3 4 5 6 7 8 9 10 UNIT COST $ 60 350 30 80 30 20 10 320 510 20 ANNUAL USAGE 90 40 130 60 100 180 170 50 60 120

    ABC Classification: Example (cont.)


    PART TOTAL PART VALUE %UNIT COST OFANNUAL USAGE OF TOTAL % TOTAL VALUE QUANTITY % CUMMULATIVE

    9 8 2 1 4 3 6 5 10 7

    $30,600 1 16,000 2 14,000 3 5,400 4 4,800 5 3,900 3,600 6 3,000 CLASS 7 2,400 8 A 1,700 B 9 $85,400 C 10

    35.9 6.0 $ 60 18.7 5.0 350 16.4 4.0 30 6.3 9.0 80 5.6 6.0 30 4.6 10.0 4.2 18.0 20 % OF TOTAL 3.5 13.0 ITEMS 10 VALUE 2.8 12.0 320 9, 8,2.0 2 71.0 17.0 1, 4, 3 16.5 510 6, 5, 10, 7 12.5 20

    6.0 90 11.0 40 A 15.0 130 24.0 60 30.0 B 100 40.0 58.0 180 OF TOTAL % 71.0 QUANTITY 170 83.0 C 50 15.0 100.0 60 25.0 120 60.0
    Example 10.1

    Economic Order Quantity (EOQ) Models


    w EOQ
    n

    optimal order quantity that will minimize total inventory costs

    w Basic EOQ model w Production quantity model w w

    Assumptions of Basic EOQ Model


    Demand is known with certainty and is constant over time No shortages/stockouts are allowed Lead time for the receipt of orders is constant Order quantity is received all at once No quantity discounts Only order (setup) cost & holding cost

    Inventory Order Cycle


    Order quantity, Q

    Reorder point, R

    Inventory Level

    Demand rate

    Lead time Order Order placed receipt

    Lead time Order Order placed receipt

    Time

    EOQ Model
    Annual Cost

    Order Quantity

    EOQ Model
    Annual Cost

    Holding Cost

    Order Quantity

    EOQ Model
    Annual Cost

    Holding Cost Order (Setup) Cost Order Quantity

    EOQ Model
    Annual Cost Total Cost Curve Holding Cost Order (Setup) Cost Order Quantity

    EOQ Model
    Annual Cost Total Cost Curve Holding Cost Order (Setup) Cost Optimal Order Quantity (Q*) Order Quantity

    EOQ Cost Model


    Co - cost of placing order Cc - annual per-unit carrying cost D - annual demand Q - order quantity CoD Q CcQ 2

    Annual ordering cost = Annual carrying cost =

    CoD CcQ Total cost = Q + 2

    EOQ Cost Model


    Deriving Qopt TC = Co D Q + CcQ 2 Proving equality of costs at optimal point Co D Q Q2 = = CcQ 2 2CoD Cc 2CoD Cc

    CoD Cc TC =- 2 + Q Q 2 0= Qopt = C0 D Q2 + Cc 2

    2CoD Cc

    Qopt =

    EOQ Cost Model (cont.)


    Annual cost ($) Slope = 0 Minimum total cost Cc Q Carrying Cost = 2 Total Cost

    CoD Ordering Cost = Q Optimal order Qopt Order Quantity, Q

    EOQ Example
    Cc = $0.75 per yard Qopt = Qopt = 2CoD Cc
    2(150)(10,000) (0.75)

    Co = $150

    D = 10,000 yards

    CoD CcQ TCmin = + Q 2 TCmin =


    (150)(10,000) (0.75)(2,000) + 2,000 2

    Qopt = 2,000 yards


    Orders per year = D/Qopt = 10,000/2,000 = 5 orders/year

    TCmin = $750 + $750 = $1,500


    Order cycle time = 311 days/(D/Qopt ) = 311/5 = 62.2 store days

    Quantity Discounts
    Price per unit decreases as order quantity increases
    CoD CcQ TC= + + PD Q 2 where P = per unit price of the item D = annual demand

    Quantity Discount Model (cont.)


    ORDER SIZE 0 - 99 100 199 200+ PRICE $10 8 (d1) 6 (d2)

    TC = ($10 ) TC (d1 = $8 ) TC (d2 = $6 )

    Inventory cost ($)

    Carrying cost

    Ordering cost Q(d1 ) = 100 Qopt Q(d2 ) = 200

    Quantity Discount: Example


    QUANTITY 1 - 49 50 - 89 90+ Qopt = For Q = 72.5 TC= For Q = 90 PRICE $1,400 1,100 900 2 Co D Cc Co D Qopt = Co = $2,500 Cc = $190 per computer D = 200 2(2500)(200) = 72.5 PCs 190

    CcQopt + 2 + PD = $233,784

    CcQ CoD TC= + 2 + PD = $194,105 Q

    Reorder Point
    Level of inventory at which a new order is placed R = dL where d = demand rate per period L = lead time

    Reorder Point: Example


    Demand = 10,000 yards/year Store open 311 days/year Daily demand = 10,000 / 311 = 32.154 yards/day Lead time = L = 10 days R = dL = (32.154)(10) = 321.54 yards

    Safety Stocks
    Safety stock
    buffer added to on hand inventory during lead time

    Stockout
    an inventory shortage

    Service level
    probability that the inventory available during lead time will meet demand

    Variable Demand with a Reorder Point


    Q

    Inventory level

    Reorder point, R

    LT Time

    LT

    Reorder Point with a Safety Stock


    Inventory level

    Q
    Reorder point, R

    Safety Stock

    LT Time

    LT

    EOQ Example

    SaveMart needs 1000coffee makers per year. The cost of each coffee maker is Rs.78. Ordering cost is Rs.100per order. Carrying cost p.a. is 40%of per unit cost. Lead time is 5days. SaveMart is open 365 days/yr.

    What is the optimal order quantity & ROP?

    SaveMart ROP
    EOQ = 80 coffeemakers
    ROP = demand over lead time = daily demand x lead time (days) =dxl D = annual demand = 1000 Days / year = 365 Daily demand = 1000 / 365 = 2.74 Lead time = 5 days ROP = 2.74 x 5 = 13.7 => 14

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