Inventory Control by Woolsey and Maurer

INVENTORY CONTROL
(FOR PEOPLE WHO REALLY HAVE TO DO IT)

Robert E. D. Woolsey, Ph.D., F.I.D.S.
and
Ruth Maurer, Ph.D.
2000 Lionheart Publishing, Inc.

Printed in USA
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Contents
Inventory Control
(For People Who Really Have to Do It)
Volume II in the Useful Management Series
By Robert E. D. Woolsey, Ph.D., F.I.D.S.
And
Ruth Maurer, Ph.D.
Preface: Questions and Answers About This Book
Chapter 1. A Requiem for the EOQ
The Economic Order Quantity Model
Learning the Model and the First Experience of Reality
Killing the EOQ Vampire, the Silver Stake Method
The Cost of the Item
The Holding Rate
The Setup or Ordering Cost
The Annual Demand or Annual Requirement
References
Chapter 2. Lot Sizing Methods of Inventory Control
What This Chapter Is For
The Economic Order Quantity Method
Periodic Order Quantity
Part-Period Balancing
Dynamic Programming
The Method of Silver and Meal
A Better Silver and Meal Method
Silver and Meal Quick and Dirty Fill-In-The Blank Inventory Form
First Silver and Meal Nomogram Example
Second Silver and Meal Nomogram Example
Silver and Meal Nomograph Example
Greenings Nomograph for Forecasted Demands
When Do I Use Which Method?
References
Chapter 3. The Woolsey Never-Fail Spare Parts Reduction Method
If Youre Using the EOQ, At Least Do it Right!
Setting the Scene
With the Computer Jocks and What Happened There
The Long Awaited Recalculation and What Happened Then
Icing on the Cake Recalculating the Order Point
Final Warnings and Suggestions
Flowchart of the Woolsey Never-Fail Spare Parts Reduction Method
Inventory Example Problems
The Learning Organization
Chapter 4. El Pistolero del Inventorio
La Problema y Zopilote
Venustusiano Oso
Una Pregunta por Las Gerentes
El Neuvo Metodo
El Rey
Mas Preguntas de Importancia
Reference
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Preface
Questions and Answers About this Book
What is this book for?
This is a cookbook of quick and dirty methods for solving problems in realworld, no B.S. inventory control.
Who is this book for?
This book is for bottom- to middle-level managers, third-world countries, and
small business where computers are either too expensive or labor is too cheap or too
uneducated to justify anything but the use of common sense.
It is also aimed at unpretentious community colleges and business schools that
want to teach people something they can use!
How smart does the reader have to be?
Smart enough to know that there are no pure technical problems in this world.
There are just technical problems imbedded in political problems. This book is dedicated to the idea that if you dont deal with the political problems as well as you
deal with the technical problems, the political problems will deal with YOU!
Does this imply that politics will be covered too?
Big time! The first author starts the book by taking on the most used (wrongly)
method in the inventory world called the economic order quantity. He points out
that this method (like any other) depends on data you can trust, such as delivery
dates and the real need dates seldom given you by the sales types. He also tries to
warn the unwary reader that every method carries a bag of assumptions that need
to be carefully addressed before embarking on any method. A number of chapters
on political aspects of inventory control based on the experiences of the authors are
gleefully included. These chapters are more important than the others.
Do I need calculus, algebra, or statistics for this book?
No, common sense only is required.
Does this book come with a computer program or a diskette?
NO. This book is almost totally made up of certifiably obsolete inventory methods that no up-to-date large corporation or agency would even consider using.
They certainly can be programmed but the approach of the book is for the by-hand
user to have something they can use and understand.
Im an assistant professor at a business school, can I use this book?
YES, if you ever met a payroll in the real world.
Otherwise, NO!
Preface
This book is only an outline. Actual experience is an absolute requirement to flesh

out this book enough for classroom use. Also if you want to get promoted, and are
resident at a school with pretensions to academic respectability rather than utility,
you dont want to be found dead in a field with this book!
Have the authors done this stuff for money in the real world?
You bet! The first author has only worked on a money-back guarantee plus interest on payments at the prime rate if not satisfied. No requests for refunds to date.
He has worked for over 40 of the Fortune 400 and has now worked in America,
Australia, Canada, Denmark, England, Israel, Macao, The Netherlands, New
Zealand, South Africa and Sweden.
Has the first author ever really blown it?
Big time! In those cases no fee or expenses were required or accepted. Anyone who
says they never make a mistake in this field lies about his sex life TOO!
Why did the authors write this book?
Lets face it, the right answer for inventory control is Just-In-Time and KANBAN
approaches. Unfortunately, attempts to move these methods in toto from Japan
have been less than successful. These methods, in our opinion, simply require (for
perfection) that you own, or control by any means possible, your suppliers (who are
also physically close) and that you have a well-educated homogeneous work force.
In third-world countries such as most of the United States, watching the mixture of
northeastern city people and southern crackers (such as the first author) try to be
homogeneous in the typical light-industry workplace is futile. Thus, we propose
methods that even civil servants (such as ourselves) can use easily.
What are the authors really like?
Both authors have met payrolls, are opinionated, conceited, childish, intolerant of
pomposity (except in themselves), highly experienced, and by most crass, materialistic measures: successful.
Chapter 1(Political)
A Requiem for the EOQ

The Economic Order Quantity Model
In operations research, the most fundamental inventory model usually taught is
called the (Wilson) Economic Order Quantity (EOQ) Model. The purpose of this
chapter is to demonstrate that this models requirements are virtually never met in
practice. I believe its continued indiscriminate use to be dangerous to your corporate health. In an article in the Production & Inventory Management Journal by
Osteryoung, McCarty and Reinhart [1], we find the following statement:
The conclusions of this article lead to the usual empirical paradox. That is, the
EOQ model which is advocated in financial textbooks is being widely used as a decision-making tool in practice. Unfortunately, the assumptions necessary to justify use
of the model are not met.
I believe that the above statement is dead right. The usual nonsensical assumptions are of constant demand, constant carrying costs, constant price and unlimited storage capacity. Lets face it, the EOQ model is taught by academics because
a) they have no experience of reality, and b) (most importantly) it is easy to teach.
It is then used by businessmen because a) its what the professor taught them, and
b) it is easy to use. This chapter is proposed as, hopefully, a silver stake through the
heart of the Economic Order Quantity Model. I will recount here my own experience with learning, applying and discarding the EOQ model. If I can do this right,
this essay will (hopefully) be the end of the matter.
Learning the Model and the First Experience of Reality
Like most other people, I learned the model in college and, being young and stupid, I believed that it worked. (After all, the professor was convinced.) My first experience with inventory reality was when I was assigned, fresh out of Air ROTC as a
young lieutenant, to the 70th Organizational Maintenance Squadron, Little Rock
AFB, Ark. I rushed down to talk to the supply sergeant, confident that any organization as big as the Air Force was using the latest thing. I asked him to tell me how
he set the order quantities of the spare parts for the dozens of B-47s that were our
responsibility. I, of course, had little doubt that he used the EOQ.
He told me that he watched carefully the demand patterns on major subassemblies, and ordered as best as he could subject to the TO (technical order) involved.
A thorough reading of the TOs revealed nothing, so I hung around a short while
and watched what he did. It didnt take me long to realize that he was operating on
essentially the old two-bin system, with emergency procurement parts handled separately. Clearly, it was my duty to reform the supply system of the Air Force, starting with this sergeant.
Chapter 1
The next day I showed up and with pencil and paper drew the usual graph of the
Order Quantity, Q, versus time, giving the well-known sawtooth wave shown in
Figure 1.
Q
Q/2
Figure 1
I explained that if we started with Q items in inventory and used them up at some
(known and deterministic) rate, we would run out at time T. However, at the lead
time, we would launch another order that, surprise, would arrive exactly at time T,
and so on and on. Clearly, if we start with Q items, go down to zero, restart with Q
items and go down to zero, and etc., all we have to do is draw a line at Q/2 through
the diagram, as shown above, to get the average inventory. The next step was to get
him to agree that if we had a cost C of the part and a holding rate of I, then CIQ/2
was the average annual holding cost of the item. Clearly, as the number of items in
the order quantity Q increased, the cost increased. I then walked him through the
setup or ordering cost part. If it cost the Air Force S bucks to launch an order, and
the order size was the requirement R, divided by the order quantity Q, then clearly
S(R/Q) would get smaller as Q increased. I then wrote out, just as I had been taught,
the classic formula below.
SR
TEC = CIQ
2 +Q
He had no trouble with the idea that the minimum cost had to occur where the
rising holding cost line crossed the falling ordering cost line, and that it would be at
the lowest point of the total expected cost line made up of the sum of annual holding and ordering costs.
I was delighted; victory was in my grasp. Then things turned to #$%@. He asked
me how I got the good old EOQ from the formula. I told him that all we had to do
was to take a derivative of the total expected cost formula, which I did on the spot.
He looked a bit uncertain, and politely asked (after all I was a second lieutenant)
how I knew that formula was right. I cheerfully answered that all we had to do was
to take a second derivative. He then, still politely (I was still a second lieutenant)
informed me that he didnt know what in Hades a first derivative was, much less a
Chapter 1
second one. At this point I did what I should have done in the first place. I shut up,
thanked him for his time, and learned to do it his way, before making any more hotdog suggestions for improvement.
Killing the EOQ Vampire, the Silver Stake Method
Many years have passed, but the experience is still fresh in my mind. Come with
me now as I take this model apart like a clock, and perhaps convince you never to
use it again. First, let us write the usual formula for the EOQ as follows, using an
appropriate reference that doesnt believe it either: Woolsey [2]. We define as above
the TEC, total expected cost, as the sum of the annual holding cost plus the annual
ordering cost, or:
SR
TEC = CIQ
2 +Q
Where, as usual:
C is the cost of the item in $/unit,
I is the holding rate in % of price/item/unit time,
S is the set-up or ordering cost in $/order,
R is the annual requirements in units, and
Q is the order quantity in # items/order.
In the rest of this chapter, I am going to replace any symbol about which we have
some doubts with a LARGE question mark. Note that Q is a variable depending on
all the others (we will only concern ourselves with the known constants). We will
now take each of the known constants, in turn, and treat them with the amusement
they deserve.
The Cost of the Item, C
Let us begin with C, the cost of the item, as our first doubtful symbol. For openers, I always get amused when the costs are given in most textbooks without any discussion of first-in-first-out, last-in-first-out, lower-of-cost-or-market, or how-wedo-it-here costing. It is always assumed that the cost accounting system is irrelevant
for lot-sizing purposes. Secondly, I am a firm believer that the only real measure is
dollars after tax at present value, adjusted for inflation. For those of you with short
memories, let me recall for you the time in the good old United States of America
when a peanut farmer was president and:
The inflation rate was 20+ percent.
The prime rate was 20+ percent.
The catalogs no longer came with price lists.
When you called for a price and they gave you one,
it was good only for a short time.
When you ordered and they billed you, it was more.
Chapter 1
Now this little inflation factor becomes even more important among our readers
in countries such as Bolivia, Israel, and Argentina, where people have been paid
twice a day so they could spend it before the exchange rate went down some more.
Trying to use an EOQ in such countries, even as close as Mexico, can be a terrifying
experience; I dont recommend it. On the basis of this argument we award our first
question mark to C and our formula above becomes:
SR
TEC = ?IQ
2 +Q
The Holding Rate, I
We now come to the well-beloved holding rate, usually given as a percentage of
the price per item per unit time. I have been greatly amused for over two decades
now when the typical textbook graph of the total expected cost of the EOQ (plotted against the order quantity) looks like Figure 2 below.
TEC
TEC
Error in TEC*
TEC*
CIQ
SR/Q
Q
Q1
Q*
Q2
Error in Q*
Figure 2
Chapter 1
It is immediately seen that the TEC curve is very flat in the area of the optimal
order quantity, Q*, because of the small angle of the holding cost line usually shown
in most textbooks, as in the above picture. In this case, we can assume that we could
be in error around the optimum Q* between the points marked Q1 and Q2. Note
the wonder of the result; a large error in the constants that make up the optimal
order quantity Q*, when reflected on the TEC line, is seen to be of minimal effect
on optimum total cost TEC*.
In short, a big error in Q seems to result in a small error in TEC. This seems to
imply that if you feed this formula some garbage values of C, I, S, or R, it really wont
hurt you very much in terms of total expected cost. There is only one other thing in
the world that you can feed such garbage to and get something good out of; its
called a pig. If you feed a pig garbage, eventually you get bacon. However, it is
important to note that the creation of bacon requires total commitment from the
pig. Total commitment to the EOQ may be equally fatal to your profits. We will show
this next.
I argue that the variance of the holding rate is more than most people imagine.
Most people, and businesses, tend to assume that the holding rate is the cost of
money, i.e., prime rate plus points. I believe this to be a bloody dangerous assumption, and I will demonstrate it. I believe that there are really only four kinds of products that most businesses really care about. These products are measured only by
market demand and profit margin or markup as shown below in Table 1.
Table 1: The Four Types of Products
Type
1
2
3
4
Mkt. Demand
High
High
Low
Low
Markup
High
Low
High
Low
Translation
Customers beating on doors, profit obscene
Customers beating on doors, profit zip
Nobody wants it, profit obscene
Nobody wants it, profit zip
One doesnt have to be too smart to agree that, if you could, you would only stock
type 1, high market demand and high markup. Let us now realize what else this little classification tells us. It really says that, given a choice, we would like to stock the
parts with the biggest markup in an expanding market.
The next step, however, once you buy this argument, is a killer. It really implies
that the minimum holding rate is the rate of return you are getting on your highest
markup item in an expanding market, because, if you could, you would put everything there (but you cant). This means that far from being the prime rate, the holding rate is lower bounded by your highest markup on your best selling product. In
short, the line you see for holding cost in most textbooks is usually drawn like
Figure 2, reflecting cost of money, or prime rate. Clearly, you should be using a
Chapter 1
holding rate greater than your cost of money or you have no business being in business.
Say that we discover that our best mover in our product line, which also makes a
bundle after tax at present value, has a markup of 60 percent. Lets now redraw our
graph above with the new holding rate but using the same ordering cost line as
before. This is shown in Figure 3.
TEC
CIQ/2
Error
in
O"
TEC*
SR/Q
Q1
Q*
Q
Q2
Error in O"
Figure 3
From the above graph, we note that a) our minimum Total Expected Cost is much
higher, and b) with the same amount of error as in the previous graph, we can be in
deep trouble with its effect on total cost. I hope that I have now convinced you that we
Chapter 1
now have so much variance in our holding rate, I, that we should replace it with the
appropriate question mark in our formula above, resulting in:
SR
TEC = ??Q
2 +Q
The Set-Up or Ordering Cost, S
With this one, I usually get strong arguments like: Why, we have that data to four
decimal places; it comes from job standards taken by our industrial engineers. Now
let us say that we have a happy inventory clerk working efficiently in his tool crib.
He is approached by an industrial engineer who says, somewhat speedily:
Hitherehappyinventoryperson,Imyourlocalindustrialengineerheretodoatimeand
motionstudytoincreaseyoursafetyandproductivity,just ignore me.
While the clerk is trying to figure out what he said, the IE produces his clipboard
and punches his stopwatch to time the next order that has just come in. Now I am
here to tell you as a senior member of the Institute of Industrial Engineers that I
know what will happen next. That clerk will (particularly if unionized), before your
very eyes, turn into a good imitation of Mikhail Baryshnikov doing Swan Lake, and
make every movement at this speed or slower. This, ladies and gentlemen, is what you have to four decimal places as job standards. What you really have
to four decimal places is nonsense. The only way to set real job standards is to do it
yourself, or take your data from behind a distant mountain with binoculars. On this
basis, I award our third question mark to our ordering cost, S, resulting in:
?R
TEC = ??Q
2 +Q
The Annual Demand or Annual Requirement, R
Showing that the annual requirement is deserving of a question mark is really
shooting fish in a barrel. Lets face it, we know where the requirement comes from.
It is extracted by the right- or left-hand rule from some appropriate orifice by the
marketing department. Everybody knows that marketing routinely inflates their
demand forecasts. Let us, for the inexperienced, discuss why this happens. It should
be clear to anyone with production experience that where you stand depends on
where you sit. A sales manager, when asked by his CEO about his projection for the
next quarters sales, must say something like this (or lose his job):
Sales, sir, will be UP, and I mean UP, were going to blow the competition
AWAY!
Now lets imagine for a moment, that the sales manager has an honesty attack and
tells the ultimate biggy something like:
Well, boss, we are going to be hanging on by our fingernails this quarter, our
competition is going to eat us alive.
Chapter 1
This statement would be followed by a gunshot, the sound of a Winchester being

recocked and the CEO saying ominously, Bring me another sales manager.
Now there may be a few marketing types out there who always tell the truth to
production, and I humbly apologize to those two. Any old production person
knows that he is constantly ground between the upper and nether millstone of
a) sales and b) accounting. For example, occasionally the sales manager will appear
with the ultimate biggy, look at the production floor and loudly proclaim to all and
sundry:
Why we cant sell from an empty wagon, weve got to fill our warehouse UP! WE
NEED MORE PRODUCTION!
Under the beady eye of the CEO, you respond by making more of what the jerk
cannot possibly sell, with the usual result of visible in-process inventory on the floor
and in the warehouse. You are hardly surprised that some months later, this stuff
(also still on your profit and loss sheet) is still there. The sales manager that caused
it all is, also a surprise, incommunicado. It is not long after you do this that you get
a visit from the comptroller. It is important to remember that accountants only get
promoted when they kill things. Through his green eyeshade he views this inventory and, in a puff of smoke, turns into Clint Eastwood hissing the following words:
Well now, we need to first write off this inventory and then we will see about
writing off the production manager that was stupid enough to make it. Thatll really make my day.
Have you ever noticed that you never see sales managers and comptrollers at the
same time? They are like the little plastic weather houses I grew up with. When the
weather was good, the children came out, and when it was stormy, the witch came
out. But it was impossible for them both to be out simultaneously.
What all of the above really means is that the annual requirement will be all over
the map, due to the above political problems and Woolseys law of the forecast [3],
which is:
1. The forecast is wrong, and
2. It will change!
On the basis of the above arguments, I award our last question mark to the annual requirement R, resulting in:
??
TEC = ??Q
2 +Q
At this point in time, we look at the above formula and see if there is anything we
can rely on. Yes, there is one thing left that we can believe in. It obviously isnt the Q
because after all Q is, for cats sake, the VARIABLE. This means that in that whole
formula above, there is only one constant, one truly solid assumption, one thing that
Chapter 1
is unchanging through the ages, yea verily, like unto the Rock of Gibraltar, it is (are
you ready for this), the:
2
But wait, that 2 is there because we have made the heroic assumption that we have
constant demand, which means that the demand pattern looks like the picture we
started this whole thing with (see Figure 4 below).
Q
Q/2
Figure 4
Has anyone who is reading this in their life ever seen a demand pattern that looks
like that? I have now worked and taught on five continents, and I have yet to see an
example of constant demand. We know perfectly well that demand patterns looks
more like a graph of earthquakes measured on the Richter scale than the graph
above. After all, how often have you seen your marketing types penalized for giving
you nonsense production forecasts? We experienced types also know that the zero
on the graph above is really somewhere below the bottom of this page, the difference being known as, dare I say it, SAFETY STOCK. Under these circumstances, if
you want to get Q/2, all you have to do is close your eyes and draw a line anywhere
on the graph. It really wont make any difference, trust me.
So it turns out we cant even trust the 2. At this point we award another question
mark to the 2, and a final one to the variable Q, giving the desired result:
?? = ?
TEC = ???
? + ?
Recommendation
If you, or your firm are using the EOQ model, does it occur to you that an
accounting audit of costs might be in order? If you continue to love and use the EOQ
without knowing what it is costing you, I can only suggest that you deserve each other.
References
1. Osteryoung, J. S., Nosari, Eldon, and McCarty, Daniel E., Use of the EOQ
Model for Inventory Analysis, Production and Inventory Management, Vol. 27,
No. 3, (1986), pp. 39-46.
2. Woolsey, R.E.D., and Swanson, H.S., Operations Research For Immediate
Application, A Quick & Dirty Manual, New York, Harper & Row Publishers,
(1975), pp. 39-41.
3. Woolsey, R.E.D., and Lienert, C. E., Ordering Inventory When The Forecast Is
Ridiculous, Production and Inventory Management, Vol. 27, No. 1, (1986), pp.
144.
The above paper appeared originally as:
4. Woolsey, R.E.D., A Requiem For The EOQ: An Editorial, Production and
Inventory Management,Vol. 29, No. 3, Third Qtr,. 1988, pp. 68-72.
Chapter 2
Lot Sizing Methods of

Inventory Control
What This Chapter is For
This chapter will display five different methods for lot sizing inventory to minimize total inventory costs. These methods are :
Economic Order Quantity
Dynamic Programming
Silver and Meal
Each of these methods has a number of assumptions associated with their use
that are seldom, if ever, met in practice. In this time of material requirements planning, MRP II, OPT, Just-in-Time and KANBAN, why are such obsolete, highly limited methods being presented here? Because the author believes that often their
application is better than the present system that they might replace. In addition,
they attack slightly different problems than do the newer methods.
Readers are hereby cautioned that application of any of the above methods
requires first a reading of the previous chapter on the political aspects of lot sizing,
especially with the EOQ method. In that chapter, the reader will have discovered
that a high order of cynicism is an absolute requirement when confronted with the
usual data requirements of any of the methods.
The first four methods above are presented in order of increasing complexity and
increasing accuracy. EOQ is the easiest to teach, to understand and to use incorrectly. It also has the greatest potential to be dead wrong. The next-to-last method,
dynamic programming, is mathematically and computationally complex, expensive
to use, but is absolutely optimum, if you agree that the forecast will NOT change! My
experience tells me that the two laws of the forecast are:
The forecast is wrong!, and
The forecast will CHANGE!
To expect the forecast not to change in the workplace is roughly equivalent to stating that, using calculus and neglecting air resistance, the cannon ball will fall right
there. Any old artilleryman will tell you the safest place to stand is where calculus
tells you the ball will fall. This is because by assuming away air resistance, we have
also blithely assumed away reality.
The last method, that of Silver and Meal, is clearly the authors favorite. It assumes
that the forecast is wrong and will change. However, it is so simple to use that we
really dont have to care. Silver and Meal do a rigorous mathematical derivation in
[1]. I will derive it using some mathematically shaky but reality-based commonsense arguments based on many years of bitter experience.
Chapter 2
Finally, if you can afford it, and you can control your suppliers and your sales forecast sufficiently, you shouldnt touch any of the above methods with a barge pole
but should use a lot size of 1.
The Economic Order Quantity Method
This method is rightly considered the fundamental model in inventory control
and can, correctly used, still generate more consistent results than rule of thumb
methods. The usual reference is to Harris [1]. This method makes the assumption
that we start off with Q items in inventory, over a given time, we will use these items
at a known and constant rate until we run out. Sometime before running out, we
note the bloodshot eyeball of the inventory control clerk looking ahead and realize
that we are going to run out! At some time before running out, the clerk launches
another order. This trigger point is a set level of inventory that will just last until we
run out, using the present demand rate. In short, the Trigger Point may be defined
as (Annual Demand)*(Lead time in days)/(365 days). In theory, if the clerk launches the order on or before the lead time for it to arrive, this persons backside is sufficiently covered. It is, however, good to remember that the lead time for the order
to arrive is supplied by the vendor, who has every reason to lie to you. If he or she is
sufficiently truthful about the extended time it will take to deliver your order, you
just might seek out another supplier. If the order arrives exactly at the time you run
out, you have the beloved sawtooth shaped curve seen below.
Q
Q/2
Figure 5
All that is required in the above situation is to note that if we start with Q in
inventory and go down to zero repeatedly, we can draw the average inventory line
seen above labeled Q/2.
We now define that the cost of the item is C dollars per unit. We further define
that the holding cost per item per day (expressed as a percentage of the cost, C) is I.
For example if we have an item that costs $25 dollars with an annual holding rate
of 12 percent, and our order quantity is 40 items per order, the average holding cost
per year is:
Holding Cost = C * I * (Q/2) = $25 * .12 * (40/2) = $60
Chapter 2
In short, we can express the annual holding cost as AHC = CIQ/2. It is instructive
to note the dimensions of the above holding cost explained below.
Holding Cost ($/year) = (Price ($/unit))*(Holding Rate ($/$ . year))*
(Q units/order)/(2 (1/order)).
As it is assumed that C and I are known, we just have the relationship Cost =
Constant * Q. This may be easily graphed with Q versus cost as shown in Figure 6.
Cost
O
Figure 6
What the above graph tells us is: The more we hold in inventory, the more its
going to cost us in holding cost. Now lets derive the second part of the Economic
Order Quantity Model, the annual ordering cost.
Let us define that the cost to launch an order, get it in, and shelve it is S dollars per
order. Let us also define the forecasted demand for the year as D items per year. Now
if we order Q items in an order, it should be apparent that the number of orders per
year is:
# orders per year = (D items per year)/(Q items in an order).
And it follows, using the above example, that if we have an annual demand of 120
items and an ordering cost of $20 per order, the cost of such annual ordering should
be:
Annual Ordering Cost = S * D/Q = $20 * 120/40 = $60.
Chapter 2
As before, we note the dimensions of the process as:

Annual Ordering Cost ($/year) = (S ($/order))*(D units/year)/Q (units/order).
In short, we can express the annual ordering cost as AOC = SD/Q. As it is assumed
that S and D are known, we just have the relationship Cost = Constant/Q. This may
be easily graphed with Q versus Cost as shown in Figure 7.
Cost
Figure 7
What the graph in Figure 7 tells us is: The more often we order, the more its
going to cost us in ordering cost. Combining the two graphs in one where Q is now
plotted against both costs, we create the combined graph in Figure 8.
Cost
Figure 8
Chapter 2
Picking any points on the Q line, say Q1, Q2 and Q3, we add up the contribution
of both the holding cost and the ordering cost to generate the graph for the Total
Annual Cost as shown in Figure 9.
Cost
O
Figure 9
The graph in Figure 9 tells us that we need to balance the contributions of holding and ordering costs to minimize our total cost. The minimum will obviously
occur where the increasing holding cost line crosses the decreasing ordering cost
line. Put another way, this is where CIQ/2 = SD/Q.
However, solving the above expression for Q gives us the famous Economic Order
Quantity, Q*, or:
2*S*D
CI
Q*=
Lets now take the following example, and apply the method above:
Month
Demand
1
10
2
10
3
10
4
10
5
10
6
10
7
10
8
10
9
10
10
10
11
10
We will use the values given above, which are:

C= cost of item = $25/item
I= holding rate = 12 percent of cost/year
D= annual demand =120 items
S= cost of order = $20/ order
Using the formula: TEC = CIQ/2 + SD/Q, we get:
TEC = (25 * (.12)/2)*Q + 20 * (120/Q) = 1.5*Q + 2400/Q
12
10
Chapter 2
Using the formula above for the EOQ we get:

Q*=
2*20*120
= 40
25*.12
This tells us that the cost minimizing lot size is 40 items an order. Now lets check
this month by month to confirm that this is the right answer:
Month
Demand
Order
Start
End
Average
1
10
40
40
30
35
2
10
0
30
20
25
3
10
0
20
10
15
4
10
0
10
0
5
5
10
40
40
30
35
6
10
0
30
20
25
7
10
0
20
10
15
8
10
0
10
0
5
9
10
40
40
30
35
10
10
0
30
20
25
11
10
0
20
10
15
12
10
0
10
0
5
We see at once that as we order three times, our annual ordering cost is 3
orders/year * $20/order = $60/year. Our annual average holding cost is
(35+25+15+5+35+25+15+5+35+25+15+5)/12 = 20 items/year * $25/item * .12 =
$60/year.
Political Discussion
The fundamental problem with this method is the assumption that we have constant demand. In other words, we assume the sawtooth illustration we saw before is
correct. The hard facts are, however, that you will be hard pressed to find a forecast
that is not subject to, at least seasonal trends, such as the example below:
Month
Demand
1
10
2
10
3
15
4
20
5
70
6
7
8
9
10
180 250 270 230 40
11
0
12
10
Using a cost of $2 per unit per month, a ordering cost of $300 and an annual total
demand of 1105, the optimum EOQ is found to be Q* = 166. Applying this to the
above problem as before we get:
Month
Demand
Order
Start
End
Average
1
10
166
166
156
161
2
10
3
15
4
20
5
70
6
180
166
156 146 131 111 207
146 131 111 41 27
151 138.5 121 76 117
7
250
223
250
0
125
8
270
270
270
0
135
9
230
230
230
0
115
10
40
166
166
126
146
11
0
12
10
126 126
126 116
126 121
Total Cost = Ordering Cost + Holding Cost = 1,800 + 3,065= $4,865
Chapter 2
We note that we order six times at $300/order, so our ordering cost is $1,800. But
our average inventory is now 1,532.5, which gives an annual average holding cost of
$2*1,532.5 = $3,065. We notice at once that our happy assumption that the minimum cost will occur when the increasing holding cost line crosses the decreasing
ordering cost line is violated. This is because we no longer have satisfied the necessary
assumption of constant demand. In short the lumpiness of demand is doing us in.
We need some way to smooth out this lumpiness. Thus, the next method.
We can often reduce inventory carrying costs by finding an economic time interval between orders. Divide the EOQ found above which is ______, by the mean
demand rate (total demand divided by the number of periods), which is in this case
1105/12 = _____. Doing this, we get _______ months. We can just round this up to
___ months and apply it to the example below:
Month
Demand
Order
Start
End
Average
1
10
20
20
10
15
2
10
10
0
5
3
15
35
35
20
27.5
4
20
20
0
10
5
70
250
250
180
215
6
7
180 250
520
180 520
0
270
90 395
8
9
270 230
270
270 270
0
40
135 155
10
40
40
0
20
11
0
10
10
10
10
12
10
10
0
5
Total Cost = Ordering Cost + Holding Cost = 1,800 + 2165 = $3,965

The first thing we notice is that we are still ordering six times, but our average
inventory has taken a drop to 2,165 from 3,065. In short, by doing one divide, we
have realized a reduction in cost of almost 20 percent (actually 18.5 percent).
However, we may do better with a little more computation overhead using the
next method.
This method simply says: Keep increasing the number of periods you are ordering for until your holding cost is as close as you can get to the ordering cost. Lets
see the example above again:
Month
Demand
1
10
2
10
3
15
4
20
5
70
6
7
8
9
10
180 250 270 230 40
11
0
12
10
Lets recall that our ordering cost is $300/order. If we were to order only for the
first month, our holding cost would be $2/item/month *10/2 average items = $10.
As this is nowhere close to $300, we consider ordering for two months. If we ordered
the second months demand of 10 to come in at the first of January, we would hold
Chapter 2
it all of January and half of February, which gives a cost of $2/item/month * 3/2 *
10 = $30. But to get the total cost for ordering for two months, we would have to
add in the $10 we got before for Januarys demand, giving a total of $10 + $30 = $40.
So for up to now we have:
Ordering for one month is $2 * 10 * 1/2 = $10.
Ordering for two months is $10 + $2 * 10 * 3/2 = $40.
Clearly, ordering for three months would give:
$40 + $2 * 15 * 5/2 = $115.
And ordering for four months would give:
$115 + $2 * 20 * 7/2 = $255.
And ordering for five months would give:
$255 + $2 * 70 * 9/2 = $885.
Now as ordering for four months is $255, which is closer to the ordering cost of
$300 than ordering for five months for $885, our first order would be for four
months and 55 items.
Using the space below, calculate the other orders and enter them in the table
below and calculate the expected holding and ordering cost for this method.
Month
Demand
Order
Start
End
Average
1
10
55
55
45
50
2
10
0
45
35
40
3
15
0
35
20
27.5
4
20
0
20
0
10
5
6
7
8
9
10 11 12
70 180 250 270 230 40 0
10
_________________________________
_________________________________
_________________________________
_________________________________
If you did it right you get the display below:

Month
Demand
Order
Start
End
Average
1
10
55
55
45
50
2
10
3
15
4
20
45
35
40
35 20
20 0
27.5 10
5
70
70
70
0
35
6
180
180
180
0
90
7
250
250
250
0
125
8
270
270
270
0
135
9
230
270
270
40
155
10
40
11
0
40
0
20
0
0
0
12
10
10
10
0
5
Total Cost = Ordering Cost + Holding Cost = 2,100 + 1,385= $3,485

In this case, we note that we now have ordered seven times for an ordering cost of
$2,100, and we have incurred a holding cost of $1,385 for an additional reduction
of 12.1 percent. Notice that the computational burden has increased substantially to
obtain this difference. Economists have a name for this, its called diminishing
returns. Let us now discuss the method that will get us the optimum solution, usually known as the Wagner-Whitin method [2], or dynamic programming.
Chapter 2
Dynamic Programming
What this method does is to implicitly examine every possible way to order the
inventory and then choose the best of these. This method requires that you fill in
the table shown below. Note that for a 12-period forecast for one item you might
have, in a worst-case scenario, to fill in 144 entries in the table below. This means
that if you were using this method to lot-size 36,000 items for a year that you might
have to make calculations to fill in 36,000 * 144 or 5,184,000 entries. Also, the really bad news is that you have to do the whole thing over again every time ANY single periods forecast changes. The good news is that the method gives the optimum
solution, the bad news is that the computational burden is ferocious. I will cheerfully admit that there have been many advances in reducing this computational burden. For examples, see the Production & Inventory Management Journal issues for
1990-1993. However, the hard facts, in my opinion, are that this method is outstanding in theory but hard to understand, and virtually impractical in the real
world.
Lets start filling in the table as follows.
The intersection of column one and row one is the inventory cost to order for one
month in period one. We should recall from part-period balancing that this is $300
to order plus an average holding cost of $2 * 10 * 1/2 for a total of $310.
Month
Demand
1 310
2 340
3 415
4 555
5 1110
6 x
7 x
8 x
9 x
10 x
11 x
12 x
Order
1
10
620
665
765
1255
x
x
x
x
x
x
x
x
55
2
10
655
715
1065
3
4
5
6
7
15 20 70 180 250
735 925 1405 1955 2525
945
70
8
270
3055
3175
3175
3245
9
230
3395
3395
3445
10 11 12
40 0
10
3175 3485
3505
180 250 270 280 0
The intersection of column one and row two is the inventory cost to order for two
months in period one. As this is just $310 plus the additional holding cost of $2 *
10 units held for 3/2 of a period we get a total of $340.
The intersection of column one and row three just adds to the above $340, the
additional holding cost of $2 * 15 units held for 5/2 of a period, a total of $340 +
$75 or $415.
Chapter 2
The intersection of column one and row four just adds to the above $415 the
additional holding cost of $2 * 20 units for 7/2 of a period, a total of $415 + $140
or $555.
The intersection of column one and row five adds in the non-trivial additional
cost of holding 70 items for 9/2 periods or $2 * 70 * 9/2, giving $1,110. Notice, this
incremental cost of $640 is greater than the additional ordering cost of $300 for
another order, so we could stop further calculations down this column as the situation will just get worse.
The intersection of column two and row one should contain the cost to order for
one month in period two, assuming that you ordered for one month in period one.
This is simply $300 plus to order, plus average holding cost of $2 * 10 * 1/2 or $310,
plus the cost of ordering 10 units in period one which is also $310 for a total of
$620. We may then proceed as before until we step over our ordering cost of $300
as before. The intersection of column three and row one should be the minimum
cost to order for one month in period 3 given that you made the best decision for
ordering for the first two months. As our choices are to order for month one in
month one and month two in month two at $620 or to order for month one and
two in month one at $340, the choice is obvious. So we add to this $340 the cost of
ordering in month three (which is $300) and the holding cost (which is $2 * 15*1/2
=15) which gives $655. The reader is invited to check the other entries in the table
if he or she is so inclined.
Month
Demand
1 310
2 340
3 415
4 555
5 1110
6 x
7 x
8 x
9 x
10 x
11 x
12 x
Order
1
10
620
665
765
1255
x
x
x
x
x
x
x
x
55
2
10
655
715
1065
3
4
5
6
7
15 20 70 180 250
735 925 1405 1955 2525
945
70
8
270
3055
3175
3175
3245
9
230
3395
3395
3445
10 11 12
40 0
10
3175 3485
3505
180 250 270 280 0
After the table is completely filled in, we start at the cost in the upper right hand
corner of the table (the entry in row 1, and column 12). We now look diagonally
down the table moving always down and to the left, looking for the cheapest cost on
Chapter 2
this diagonal. Once we have found it (its $3,245) we enter the total items (= 280)
for this last order into the order row at the bottom. We then look at row one in the
last column before the column that generated the previous order, and do the procedure again, filling in the orders as shown above.
Putting the above results into our usual table gives:
Month
Demand
Order
Start
End
Average
1
10
55
55
45
50
2
10
3
15
4
20
45
35
40
35 20
20 0
27.5 10
5
70
70
70
0
35
6
180
180
180
0
90
7
250
250
250
0
125
8
270
270
270
0
135
9
230
280
280
50
165
10
40
11
0
50
10
30
10
10
10
12
10
10
10
0
5
Total Cost = Ordering Cost + Holding Cost = 1,800 + 1445= $3,245
Political Discussion
We have found the optimal solution, but the computational cost is definitely nontrivial. Further, as we must find out the optimal order now by going back to front,
this means that what we do now is a function of the forecast at the end of the forecast period. It is important to realize that the further out we get in the forecast, the
greater the expected error. This method says go out to where the forecast is least reliable, and figure out what to do now! I must tell you that I have real problems with
this concept. My experience tells me that the forecast is wrong and that it will
change. If you agree with me, this says that the computational requirements to get
the optimum is going to be rarely, if ever, justified by the use of this method. But
there is good news yet, the method of Silver and Meal follows next.
Chapter 2
The Method of Silver and Meal

Lets pause for a moment and let me tell you what I believe about inventory control. First off, lets see the graph of the EOQ again, shown in Figure 10.
TEC*
TEC
Error in TEC"
TEC*
CIQ/2
SR/Q
Q1
Q*
Q
Q2
Error in O"
Figure 10
Now, I do believe that the minimum cost for inventory situations occurs where
the ordering costs and the holding costs balance. I further believe that as we get further and further out in a forecast the expected error of the forecast is roughly equal
to the time period squared multiplied by the size of the forecasted order in that period. In equation form we could write:
Expected Error of the Forecast = T2*D(T)
I believe this because my experience tells me that errors in forecasts go up roughly as the square of the time periods from now. And it is certainly true that the bigger the order in the future, the greater the probability that it will CHANGE!
Chapter 2
Lets take a look at the measure of the above equation; assume that the time period is months and the demand is in tons/month. If this is the case the measure is:
Expected Error + Months2*Tons/Month = Months*Tons
It only remains to find some combination of the cost of the item (C), the holding
rate (I), and the ordering cost (S), that has the same measure of months*tons. We
dont have to look far to find:
S/CI = Months-Tons
We therefore conclude that a rough and ready approximation to when we should
order is given by:
S
T2*D(T) > CI
In short, the above rule says:
Launch the order when the time period, squared, times the demand in that
period becomes greater than the ratio of the ordering cost to the holding cost.
Now your first reaction should be that no way in Hades could lot sizing be that simple and cover your backside. Lets test it on our well-beloved problem and see. Recall
that the first five months of forecasted demand look like:
Month
1
2
3
4
5
Demand
10 10 15 20 70
We first try T = 1, with a holding cost of $2/item/period and an ordering cost of
$300, which gives:
T2*D(T) > S/CI, or,
12*10 > 300/2
Clearly, the answer is no, so lets try T=2, which gives:
22*10 > 300/2
Again the answer is no, so lets try T=3, which gives:
32*15> 300/2
Once more, the answer is no, so try T=4, which gives:
42*10 > 300/2
The answer is yes! This tells us that we should order four periods demand or 55
items to come in at the start of the first period. This is also the first answer found
by dynamic programming above.
The method above is really rough and ready, and should not be used for anything
other than a ball-park estimate of where the lot sizes are. Lets see if we cant define a
more representative model than the (admittedly) quick and dirty one above.
Chapter 2
A Better Silver and Meal Method

If we order for one month, and we assume that we count our inventory at the end
of the month, clearly our cost per unit time is:
TEC(T=1)= 1 *(S)= 1 *($300)=$300/month
T
1
Because by the time we count the inventory at the end of January, we have used
it, so we incur no holding cost at all.
If we order for two months on the same basis, our cost per unit time is:
TEC(T=2)=1 *(S+CI*D(T))= 1 *($300+2*10)=$160/month
T
2
The first thing we notice here is that our cost per unit time has been almost cut
in half by ordering for two months rather than one.
If we order for three months, as before, our cost per unit time is:
TEC(T=3)= 1 (S+CI*(D(T)+2*(D(T+1))= 1 *($300+$2*(10=2*15))=$126.66/month
3
T
Again, we note that once more, our total cost per unit time drops. We should also
realize that if we ordered Marchs demand to come in at the first of January, that we
will count it twice, once at the end of January and once at the end of February.
Now ordering for four months, our cost per unit time is:
TEC(T=4)= 1 *(S+CI*D(T))+2*(D(T+1)+3*(D(T+2))
T
= 1 *($300+2*(10+2*15+3*20))=$125/month
4
This time, we got only a very small reduction, but a reduction none the less.
Clearly, as long as our total cost decreases we should continue to march. So for five
months we know holding Aprils 70 units at $2/item/month is going to increase our
costs, which it does, giving:
TEC(T=5)= 1 *(S+CI*(D(T))+2*(D(T+1)+3*(D(T+2)+4*D(T+3))
T
= 1 *($300+2*10+2*15+3*20+4*70))=$212/month
5
We quickly conclude that, to minimize cost per unit time, our first replenishment
should be for 55 units. (Sound familiar?)
From the above process, we may state a general formula which is:
TEC(T)= 1 *(S+CI*(1*D(2)+2*D(3)+3*D(4)... +T*D(T+1))
T
Chapter 2
Or, using summation notation, we have:
j=T
))
TEC(T) = 1 * S + CI* (j - 1)*D(j)

j=1
T
The stopping rule is simple. As soon as TEC(T+1) > TEC(T), STOP! However, we
dont want to have to calculate however many steps it may take to find the optimum,
so lets design a nomogram or a fill-in-the-blank form to do it for us. To do this, we
must first modify the above general formula by dividing both sides through by CI;
this gives:
TEC(T) = 1 * S + j=T
TEC(T)
(j - 1)*D(j)
CI
j=1
T CI
( (
))
I hope that the reader will agree with me that dividing both sides of the above
equation by a constant shouldnt change the stopping point. It will, however, change
the values of the total costs at various times by the factor of CI. Lets test the above
problem again to convince ourselves that even though the costs change, we stop at
the same place.
If we order for one month, and we assume that we count our inventory at the end
of the month, clearly our cost per unit time is:
TEC(T=1)= 1 *(S/CI)= 1 *($300/2)=$150/month
T
1
If we order for two months on the same basis, our cost per unit time is:
TEC(T=2)= 1 *(S/CI+(D(T))= 1 *($300/2+10)=$80/month
T
2
If we order for three months, as before, our cost per unit time is:
TEC(T=3)= 1 *(S/CI+(D(T)+2*(D(T)+1))
T
= 1 *($300/2+(10+2*15))=$63.33/month
3
Now ordering for four months, our cost per unit time is:
TEC(T=4)= 1 *(S/CI+(D(T)+2*(D(T)+1)+3*(D(T+2))
T
= 1 *($300/2+(10+2*15+3*20))=$62.50/month
4
1
TEC(T=5)= T *(S/CI+(D(T)+2*(D(T)+1)+3*(D(T+2))+4*D(T+3))
1
= 5 *($300/2+(10+2*15+3*20+4*70))=$62.50/month
We therefore see that our stopping point is the same as before. To minimize cost
per unit time, our first replenishment should be for 55 units, just as before. Lets
now use this modified method to design the promised fill-in-the-blank form.
Chapter 2
Silver and Meal Quick and Dirty Fill-in-the-Blank Inventory Form

This method assumes that you have a forecast for some number of periods in the
future for the item of interest. It further assumes that you have a decent idea of:
A) The set-up or ordering cost to place an order, and
B) The holding cost per unit per period to hold one unit of the item in inventory for one period.
How to do it:
1. Divide the ordering cost by the holding cost and put it next to where it says
RATIO in column 0.
2. Enter the forecasted demand in row B.
3. Starting at the first column, multiply the entry in row A by the entry in row B
and enter the result in row C.
4. Add the entry in row C to the last entry in row D and enter the result in row D.
5. Divide row D by row E (the number of time periods) and enter in row F. (This
is simply the total average cost divided by the holding cost.
6. When the value in the F row increases, STOP! Sum up the demand to the period before the F row value increases and order that number of items.
A
B
C=A*B
D=RATIO
E
F = D/E
Reference
Hesse, Rick and Woolsey, R.E.D., Applied Management Science, Science Research
Associates, Inc., Chicago; Palo Alto, Calif., 1980, pp. 63-65.
Chapter 2
First Silver and Meal Nomogram Example

Now lets test our Q&D form with the problem we have been using.
Period
1
2
3
4
5
Demand
10
10
15
20
70
A
B
C
D
E
F
0
10
0
150
1
150
1
10
10
160
2
80
2
15
30
190
3
63.33
3
20
60
250
4
62.5
4
70
280
530
5
106
5
180
Its easy to see that the values generated coincide with those from the modified
formula above.
The next replenishment would look like:
A
B
C
D
E
F
0
70
0
150
1
150
1
180
180
330
2
155
2
250
This tells us we should order 70 as the second replenishment, if the forecast doesnt change! Continuing on with the form we would generate the orders as shown
below with associated costs.
Period
Demand
Order
Start
End
Averg.
1
10
55
55
45
50
2
10
3
15
4
20
45
35
40
35 20
20 0
27.5 10
5
70
70
70
0
35
6
180
180
180
0
90
7
250
250
250
0
125
8
270
270
270
0
135
9
230
280
280
50
165
10
40
11
0
12
10
50
10
30
10
10
10
10
0
5
Total Cost = Ordering Cost + Holding Cost = 1,800 + 1,445 = $3,245

We now see that Silver and Meal, in this particular case, gets the optimal solution,
with a lot less pain and agony than dynamic programming. It can be argued that the
author has cleverly selected an example that supports his own point of view. Let us
have no doubts about this, the charge is true. I like this method because it allows you
to be able to react to changes in the forecast and it tells you where the trigger points
are! Lets consider the following example.
Chapter 2
Second Silver and Meal Nomogram Example

Say we have the forecast below for the next three months, with a holding cost of
$3 per item per month and an ordering cost of $561.
Month
Demand
1
35
2
45
3
67
Plugging this into our Q&D we get:

A
B
C
D
E
F
0
35
0
187
1
187
1
45
45
232
2
116
2
67
134
366
3
122
3
77
4
120
This tells us that our first replenishment is to order 80 units to come in at the start
of the first period. At this point a grizzled old foreman looks over your shoulder and
says, You know if your demand in March was 58, youd get a different answer. Is
he right? Lets use another Q&D and see.
A
B
C
D
E
F
0
35
0
187
1
187
1
45
45
232
2
116
2
58
116
348
3
116
3
77
231
579
4
144.7
4
120
Yes indeed; the foreman saw the trigger point. Now lets discuss how he did that.
Remember if the entry in the F row ever goes up, WE STOP, and order up TO that
point. Lets look at the original problem again:
A
B
C
D
E
F
0
35
0
187
1
187
1
45
45
232
2
116
2
67
134
366
3
122
3
77
4
120
Chapter 2
Look at the second entry in the A row (=1). Now divide that entry into the first
entry in the F row (=187). This gives 187/1=187. This is telling you that you will
not order for the first period unless the demand in the second month is greater than
187. Say the February demand is 188, this gives:
A
B
C
D
E
F
0
35
0
187
1
187
1
188
188
375
2
187.5
2
67
3
77
4
120
As the cost goes up, but not by much, we would order for the first period only.
Following exactly the same logic and looking at the original problem again we
have:
A
B
C
D
E
F
0
35
0
187
1
187
1
45
45
232
2
116
2
67
134
366
3
122
3
77
4
120
We now do what the foreman did, and divide the third entry in the A row (=2),
into the second entry in the F row (=116). This gives 58, so he knows that you
wouldnt order for just two months if the demand in March was 58 or less. The whole
idea of this method is, once you have filled in the forecast, the bumps in demand
should pretty well tell you where the break points are. As there may actually be times
when the big dogs need to know where the ball park is, we now display another
Silver and Meal Form that only requires the use of a straightedge. This is called the
Silver and Meal Nomograph and appears in the following section.
Chapter 2
Silver and Meal Nomograph Example

Say that we have the problem given above, with an ordering cost of $566 and
holding cost of $3/item/period. On the nomograph form in Figure 11, we first find
on the left hand line, the value of our ordering cost of $566. Make a big black dot
there. Next, we find on the left-hand diagonal line, the holding cost of $3. Make
another big black dot there. Now lay a straightedge through these two dots and
make another big black dot on the index line in the middle of the page.
Now move to the right-hand side line and make a BBD at the 1, to tell us that
we are considering ordering for one month. On the right-hand diagonal line find
the value of demand in January and make another BBD at 35. Now lay a straightedge through these two Big Black Dots, crossing the index line. If the straightedge
crosses the index line above its BBD, and it does, this tells you that you should continue to the next period.
Moving again to the right-hand side line, make a BBD at the 2, to tell us that we
are considering ordering for two months. On the right-hand side diagonal line make
another BBD at Februarys demand of 45. Now lay the straightedge through these
two Big Black Dots, crossing the index line. Once more, the straightedge crosses the
index line above the BBD on the Index line. This tells us that we must look further.
Making a BBD at the third month on the right hand side line and also at 67 on
the demand line, the straightedge this time will pass below the BBD on the index
line. This tells us that its more expensive to order for three months than two, so our
first order is 35 + 45 = 80 items to come in at the start of January.
CAUTION!
The nomogram or fill-in-the blank form above is the most accurate method of
Silver and Meal. The formula of:
T2*D(T) > S/CI
and the nomograph on which it is based are both very inaccurate, but easy to use
and easy to understand. The simple formula and the nomograph should never be
used for anything other than ball park estimates. You can, however, easily define a
nomograph to fit any situation where accuracy is not of great concern by using the
step-by-step method laid out in reference [6] at the end of this chapter.
Greenings Nomograph for Varying Forecasted Demands
1. Locate your ordering cost/set-up cost on the far left line.
2. Locate your holding cost on the line just to left of center.
3. Using a straightedge, draw a line through these two points and through the index
line in the center.
Chapter 2
4. Locate the period you are in on the far right line.

5. Locate your first periods forecasted demand on the line just to the right of center.
6. Using a straightedge, draw a line through these two points and through the index
line in the center.
7. If the new line crosses the index line above your mark made in step three,
GO TO the next period and the next periods demand and GO TO step 6.
8. If the new line crosses the index line below your mark made in step three, STOP!
Order the total demand up to (but NOT including) the period you are in.
6
800
700
I)
(C
CO
LD
HO
70
600
200
50
.5
500
40
(T
IN
30
AN
ST
EM
400
PERIODS
2
1.
20
ORDERING COSTS
ST
300
CA
300
10
400
RE
500
FO
200
600
10
0
T2 D(T)
800
Figure 11
700
20
S /CI
100
2
1
Chapter 2
When Do I Use Which Method?

This is the end of commonsense methods of inventory control that I think are
worth presenting. I have repeatedly cautioned the reader about the technical
assumptions required for the methods, but another time never hurts.
EOQ
Only if the demand is constant, item cost is low, holding rate is reasonable, ordering cost is cheap and you took the above data yourself!
Remember, its really based on the EOQ.
Part Period Balancing
This requires that the holding cost line is equal to zero at an inventory level of
Q=0. This may not be true as your accounting system may have some amortized
fixed costs included. Check it out.
Dynamic Programming (Wagner-Whitin)
Only if your forecast doesnt change and/or you are doing your inventory management on a Cray. If optimality is crucial, price is not a consideration and/or you
are the government, I suspect that Harvey Wagner will make it work.
Silver and Meal
Should best be used on high value inventory with big set-up or ordering costs and
extreme variability in the forecast.
Final Suggestion
The RIGHT answer is probably none of the above, its most likely Just-in-Time,
(Lot Size = 1), with a KANBAN tracking system, if you can afford it and control
your forecast and your suppliers. Good luck!
Chapter 2
References
1. Harris, F. W., How Much Stock To Keep On Hand, Factory, The Magazine of Management,
Vol. 10, No. 3, pp. 240-241, 281-284.
2. Kaimann, R.A., EOQ vs. Dynamic Programming Which One To Use For Inventory
Ordering? Production & Inventory Management, Fourth Quarter, 1969, pp. 66-74.
3. Kaimann, R. A., A Comparison of the EOQ and Dynamic Programming Inventory Models
With Safety Stock Considerations, Production & Inventory Management, Third Quarter, 1972,
pp. 72-91.
4. Silver, E.A., and Meal, H.C., A Simple Modification of the EOQ for the Case of A Varying
Demand Rate, Production & Inventory Management, Vol.10, No. 4, Fourth Quarter, 1969, pp.
52-65.
5. Woolsey, R.E.D., Ordering Inventory When the Forecast Is Ridiculous, Production &
Inventory Management, Vol. 27, No. 1, First Quarter, 1986, pp. 144-148.
6. Woolsey, R.E.D., A Nomograph For Ordering Inventory When The Forecast Is Ridiculous,
Production & Inventory Management, Vol. 27, No. 4, Fourth Quarter, 1986, pp. 128-133.
7. Woolsey, R.E.D., A Requiem For The EOQ, Production & Inventory Management, Vol. 28,
No. 3, Third Quarter, 1988, pp. 64-66.
Chapter 3 (Political)
June 7, 1996 Revision
The Woolsey Never-Fail

Spare Parts Reduction
Method
If Youre Using the EOQ, At Least Do it Right!
In a previous chapter, I showed that continued use of the Economic Order
Quantity Model without knowing what it might be costing you was dangerous to
your continued corporate health. This chapter is a step-by-step example of checking the cost of inventory in a computerized spare parts inventory system still stupidly using an Economic Order Quantity model to determine order levels and order
points. Following the method outlined below, almost anyone may be a hero to their
company or agency in a few short hours. All that is required is some slight knowledge of the usual EOQ model, common sense, some basic programming ability and
a certain humorous level of entrepreneurship. A flowchart of the method is even
provided for academics with no practical experience of the workplace.
Setting the Scene
Once upon a time there was a nameless city with a Regional Transportation
District (bus company) that was being publicly pilloried by a local newspaper. It
seems that an investigative reporter had found some evidence that they were grossly overstocked (or had grossly overordered) both spare parts and consumable
inventory. After the usual yelling and screaming (and resignations) had taken place,
things began to calm down somewhat. A local state university professor called when
things were at their most public and offered to come, at no charge, with students
and do an analysis of the computerized inventory system that had been installed
many years before. The RTD board responded quickly; clearly the prof and his
troops could do no harm, and the price was right.
With the Computer Jocks and What Happened There
The prof and his merry band hied themselves off to the RTD MIS group and
spent many happy hours learning the computerized inventory stocking and reorder
system. After demonstrating some competence, they casually inquired as to how the
reorder quantities were calculated. They received a classic explanation of the good
old reliable EOQ model and were shown a typical line for a stockkeeping unit that
Chapter 3
looked much like this:

PART # EOQ/ORDER POINT
CT1D4640
28/14
PRICE
$4.44
DEMAND
287
OVER LAST # YEARS

3
Clearly, the item was ordered in lots of 28 whenever the on-hand fell to 14.
The ADP whiz was somewhat unnerved when the prof asked him to find the exact
statement in the program where the EOQ was calculated. A search of the program
(which happened to have been written in FORTRAN) revealed the following statement:
C SET THE ECONOMIC ORDER QUANTITY
102 EOQ= SQRT(2*D*R/C)
Here, (clearly) D is the annual demand in units.
C is the price of unit in dollars.
R is the ratio of ordering cost to holding cost.
As the demand and price are part dependent, we would really like to know what
the devil R is.
A search earlier in the program turned up the statements:
C SET RATIO OF ORDERING COST TO HOLDING COST
18 R = 12
But, if the program thinks that R = 12, Then this implies
R = (Ordering Cost)/(Holding Cost) = 12, which seems to imply that
Ordering Cost = 12 * Holding Cost.
At this point the prof asked what the analyst thought the holding rate really was
and received a most surprising answer. The civil servant said that, as it was government money, it really didnt cost anything to hold something in inventory. The prof
made a note of this and silkily asked him if he might bring over a friend of his from
the local newspaper that was giving them so much trouble (the city editor) so that
the civil servant could repeat that statement for the press. At this point, this persons
boss took this young man outside and screamed at him for a time. One supposes
that the boss explained to this budding civil servant the results of a headline that
said:
LOCAL RTD OFFICIAL SAYS TAXPAYERS MONEY REALLY FREE
This would no doubt be followed by an announcement that this particular civil
Chapter 3
servant had just been sent to Great Sand Dunes National Monument to take inventory of the number of flies found on state issue flypaper, until a more worthy assignment appeared. After this explanation, the offending civil servant, white-faced from
the previous discussion, asked humbly if the prof had any ideas for setting a holding rate.
The professor pointed out that as the RTD issued bonds, one had only to look at
the bond rating and a number could quickly be attached to the cost of money for
the RTD. This was done and found to be 11.4 percent. Plugging this interesting bit
of information into our formula above, we get:
Ordering Cost = 12 * Holding Rate = 12 * 0.114 = $1.37
The prof then asked the assembled multitude if they believed that they could:
Note that they were out of stock.
Do the paperwork for purchasing to launch the order.
Launch the order.
Receive the order.
Restock and update the record.
Pay the vendor.
And do all this for a grand total of $1.37.
At this point, the head warehouseman said that no way could it be done for less
than $20. But, if he thinks that then this implies:
Holding Rate = (Ordering Cost)/12 = 20/12
This implies a holding rate of 166 percent a year. The assembled multitude roundly declared that both the ordering cost of $1.37 and the holding rate of 166 percent
per year were manifestly absurd. We now have a dilemma; if an ordering cost of
$1.37 is absurd or the holding rate of 166 percent a year is absurd, then perhaps we
should have some doubts about R = 12. We have now been told that the ordering cost
must be at least $20, and the holding rate is 11.4 percent. Given these two bits of
information, we are forced to conclude that the FORTRAN statement that reads:
R= 12
Should perhaps really read:
R= 20/(0.114) = 175.43
Could it just be that this change will make a slight difference in our EOQ calculations? Could it also be that a consultant could make a profit here by offering to be
paid a (small) percentage of the savings?
The Long-Awaited Recalculation and What Happened Then
Lets use the above knowledge to save some money. We first find a typical item in
the spare parts list like the one we have seen before, namely:
PART # EOQ/ORDER POINT PRICE DEMAND OVER LAST # YEARS
CT1D4640
28/14
$4.44
287
3
It seems to say that a demand of 287 units was satisfied over the past three years
Chapter 3
by ordering in lots of 28 whenever an order point of 14 was reached. Now find the
average annual cost of inventory for this item, using the present EOQ and the newly
extracted ordering cost and holding rate, using the tried and true formula for total
expected cost:
TEC = CIQ/2 + SD/Q,
where: C is the price, I is the holding rate,

S is the ordering cost, and
D is the annual demand
We then plug in the price, the new holding rate, the new ordering cost, the old
annual demand, and the old optimal order quantity, which gives:
TEC = (4.44)(.114)(28)/2 + (20)(287/3)/28, or
TEC = Holding Cost(= $7.09) + Ordering Cost(= $68.33) = $75.42/year
Recall one of the many amusing assumptions made by the economic order quantity model. At the optimal order quantity, the annual holding cost should equal the
annual ordering cost. Looking at the difference between $7.09 and $68.33, we immediately realize that something is seriously amiss. The reason why this result is so
skewed is simple; the EOQ and order point that they have been using come from cost
data that probably hasnt been updated since the system was installed. Using the wellbeloved formula for the optimal EOQ,
EOQ =
2*S*D
C*I
2(20)(287/3)
(4.44)(.114) = 87 units
Now use this EOQ to get a different total cost:

TEC = (4.44)(.114)(87)/2 + (20)(287/3)/87, or
TEC = 22.02 + 21.99 = $44.01/year
The holding and ordering cost are now almost equal (as they should be.) The difference between doing it right and doing it wrong for this item alone is $31.41/year,
and this item is a relatively cheap one.
Chapter 3
Icing on the Cake Recalculating the Order Point

We recall that the above part had an order point of 14. Order point is usually
defined as
OP= (Annual demand)(Lead time in days)/365
Knowing that the cost data hadnt been updated since the system was put in,
might one just suspect that the lead times presently in the program probably go back to
the same date. Some careful questioning revealed that while they used to get their
bus parts from Peoria, Ill., they were now getting most of them from a bus manufacturer about three hours away. In short, the new order point was now zero for
about 95 percent of their parts. In short, the old order point was EOQ/OP = 28/14,
and the new one is: EOQ/OP = 87/0.
All that now remains is to write a Mickey Mouse program to:
Read in the spare parts history file for each inventory item.
Calculate the correct EOQ and order point.
Find the difference in cost between the new and old EOQ.
Sum up the total expected cost differences for all of the items.
Print the total amount that will be saved with the new EOQs.
This type of analysis at a nameless coal mine in Kentucky showed that over 30
percent of an inventory of 36,000 SKUs (stockkeeping units) would have a new
EOQ/OP of 0/0. In short, over 30 percent of the multi-million dollar inventory
should never have been stocked at all. The application of this method to a nameless
Canadian auto parts firm resulted in a savings of over $2.4 million dollars in the
first year. It is rumored that some nameless consultant was granted (contractually)
a teensy percentage of the savings.
Final Warnings and Suggestions
It is exceedingly important that the casual reader be explicitly warned against
indiscriminate use of the method outlined above. First, in all of my consulting work
in a number of countries, I have yet to see one single example of an EOQ model
being applied where all of the required assumptions for its use were met. In the
above example, we have generated considerable (apparent) savings by simply updating
a model. A much more important question to ask is whether or not the EOQ is the
right model for this inventory system at all (it probably isnt). The best use for the
method here is to generate enough (initial) savings to get managements attention.
If you save them a few million, they might even let you build a system to do it right.
To make this process completely explicit, all that is required is to follow the flowchart given at the end of this chapter, usable in both the pubic and private sector.
Military and/or government employees who try this, while they are not allowed to
Chapter 3
get a piece of the action, can at least get a promotion and/or a medal out of it. In
conclusion, for those of you in both the public and private sectors I can only say,
good luck and good hunting.
References
1. Woolsey, R.E.D., and Swanson, Huntington S., Operations Research For Immediate
Application, A Quick & Dirty Manual, Harper & Row, New York, (1975), pp. 39-41.
The above article originally appeared as:

2. Woolsey, R.E.D., The Never-Fail Spare Parts Reduction Method: An Editorial, Production
and Inventory Management Journal, Vol. 29, No. 4, Fourth Qtr. 1988, pp. 64-66.
Chapter 3
Flowchart of the Woolsey Never-Fail Spare Parts Reduction Method

Step 1.
Find a computerized spare parts inventory system still

using the EOQ.
Step 2.
If cost updated recently, GO TO Step 1. If not, GO TO

Step 3.
Step 3.
Use trapping method to find out holding rate and setup or ordering cost.
Step 4.
If costs are not absurd, GO TO Step 1. If costs are

absurd, GO TO Step 5.
Step 5.
Using real costs, find total annual cost of ordering

spares using present operating method.
Step 6.
Also using real costs, calculate right EOQ and order

point. Then, calculate annual cost of inventory under
right operating conditions.
Step 7.
Calculate difference in annual costs for each spare

part between new and old ordering policies.
Step 8.
Sum up cost differences for total inventory.
Step 9.
Obtain (contractually) fee of 1 percent of above difference before telling them magnitude of saving.
Step 10.
Tell them what they owe you, get money.
Step 11.
Reside in the Bahamas.
Step 12.
If you still have money left, stay in the Bahamas.

If not, return to Step 1 and do it again.
Chapter 3
Inventory Example Problems

A line from the inventory listing of a nameless company looks like:
PART #
CT-4645
PRICE
$35
DEMAND
1000
OVER # YEARS
1
EOQ/OP
47/15
If the holding rate is 1.5 percent a month and the ordering cost is $25, what is the
present total expected cost?
TEC =
What is the correct EOQ? _________
What is the total expected cost with the correct EOQ? _________
TEC =
HOW MUCH DO WE SAVE? ________
A quick check of the lead time shows that it has changed to 18 days.
The new order point is ____________
Another line from another inventory list looks like:

PART #
CT-4748
PRICE
$35
DEMAND
4000
OVER # YEARS
8
EOQ/OP
32/18
If the holding rate is 1.5 percent a month and the ordering cost is $80, what is the
present total expected cost?
TEC =
What is the correct EOQ? _________
What is the total expected cost with the correct EOQ? _________
TEC =
HOW MUCH DO WE SAVE? ________
A quick check of the lead time shows that it has changed to 10 days.
The new order point is ____________
Chapter 4 (POLITICAL)
June 7, 1996 Revision
El Pistolero Del Inventorio

La Problema y Zopilote
One morning as I was sitting at my desk, the phone rang and a cheerful voice
asked, Esta Zopilote aqu? (Is the buzzard there?) I replied, S, que es la problema? (What is the problem?) After working in Mexico for some years, I acquired the
nickname El Zopilote Sabio which means: The Wise Buzzard. I still remember
the first time a Mexican manager addressed me as Zopilote. I immediately asked
why. He smiled and told me that folklore had it that Wherever there was an inventory problem, if you looked up, you would see that bastardo Woolsey circling!
It turned out that the caller was the plant manager of one of the largest machine
shops in Mexico, and he did indeed have a problem. He told me that the tool crib
which held about $300,000 worth of tools, dies and jigs was having a little shrinkage! Now all of us old timers know what is happening here. People are selectively
liberating a certain dollar value of tools, dies and jigs from the inventory. I asked
him how much shrinkage he was looking at per year. He said it was hovering around
$100,000 a year. I replied that this wasnt shrinkage, it was theft! In any case, we
struck a deal, and I was soon winging my way south on Mexicana drinking margaritas and singing El Rey!
Upon my arrival, I was met by the plant manager (in Mexico we call them Las
Cacas Grandes!), and we went directly to the tool crib. As we headed towards the
crib, I asked him what measures had been taken to reduce the shrinkage. He said
that they brought in a consultado who recommended a tool control system costing
a million dollars supplied by Big Blue. He said they installed it. I asked what happened. He told me that then they lost more! The plant manager also told me that
he just couldnt understand why the shrinkage was so bad. After all, the tool crib was
always locked and no one was allowed in but the supervisor.
We arrived at the crib (which approximated a football field with wire mesh to the
ceiling) inside of a building the size of a Graf Zeppelin hanger. The first thing I did
was to open the (locked) door! I then went up to the first person I found inside and
asked if he was a supervisor (he wasnt). I then turned to the plant manager and
asked: Comprende? (He didnt.)
Now anyone that has ever worked in a tool crib knows that:
a) The tool crib door is (almost always) open, and
b) Everybody goes in the crib.
We progressed to the tool crib office, and there we found the supervisor. Now
have you ever noticed how the guys that hand out the tools from tool cribs always
look the same? They are short fat guys humped over from spending their lives leaning on the half door in the mesh, handing out tools. I was introduced to the old fel-
Chapter 4
low and then the fun began. I went over to a nearby bin and picked up a tungsten
carbide drill bit worth about $800. Now it is important to recall that this kind of
inventory is called a consumable! I showed it to him and, facing the wall of Kardex
cards, asked politely: Donde est la Carte? (Where is the card?) It didnt take long
before the plant manger and I realized that he couldnt find it! I put the drill bit back
and chose a Kardex card for a tool at random from the wall of files, showed it to him
and asked: Donde est el implemento? (Where is the tool?) It took an even shorter time to realize that the supervisor hadnt a clue, even though the Kardex card had
an I.D. number on it in red two inches high.
I then noticed that on the wall next to the half-door was a nail; on the nail was a
pad of pull tickets for checking out material from the crib. On top of the pad was a
pencil, on top of the pencil in geologic depth was dust! Any fool can now plainly see
that the supervisor doesnt use the system.
Pointing out the unused pad, I gently inquired of the supervisor as to why he didnt use the system? Sweating visibly, he told me that:
a) He only had this job because he had hurt his back, and
b) was going to retire in six months. He told us the following story.
Venustusiano Oso
On the first morning he had to run the crib by himself, he had been told absolutely that no tools were to be issued without a pull ticket. Unfortunately, the first guy to
show up was Venustusiano Oso (The Bear!). Now this hombre stood some six feet,
six inches in his stocking feet (not that he wore socks) and weighed in the vicinity
of your average sumo wrestler. Venustusiano stood on his side of the half-door
holding a broken drill bit shouting: OTRA! (Another!) The supervisor timidly
pointed to the pad and said softly: Llena el formulario, por favor. (Fill out the
form, please.) The only result was that Venustusiano thrust himself through the
half-door, grabbed the supervisor by the front of his shirt and said (with an increase
in volume): OTRA!!
Needless to say, Venustusiano shortly departed clutching his drill bit, and a badly
shaken supervisor was starting to enter the needed data on a pull ticket.
Unfortunately, another sumo wrestler was standing at the half-door wanting another part. This person made it abundantly clear that if he didnt get the same quick
service (without filling out the $#@*& form) that grave bodily harm would shortly
take place relative to the supervisor.
We can all see what the inevitable result is here. No forms were ever filled out
which meant that the database for the million-dollar Big Blue tool control system
was unmitigated nonsense. The supervisor clearly entered in whatever he either had
time for or could remember.
Chapter 4
Una Pregunta Por Las Gerentes

Now lets ask the following question. What does the management think the tool
crib supervisors job is? They think that he is there to control the inventory. Now lets
ask the right question. What does the tool crib supervisor think his job is? He thinks
his job is to hand out the tools.
Esta differencia en las preguntas? S, differencia mas grande!
I turned to the plant manager and asked: Would you like the shrinkage to stop?
He replied that that was why he had brought me to Mexico. I then asked him:
Would you like the shrinkage to stop tomorrow? He said he would be delighted and
asked me if I needed any programmers. I replied that I didnt need any stinking programmers. I then asked him if he would be satisfied if I came up with a system that
would be guaranteed to cost him less than he was presently losing. He said, No
problemas.
El Nuevo Metodo
I then turned to the supervisor and told him at 1700 hours we were going to close
the crib and that a small army was going to appear shortly and count everything in
his crib and keep counting it until it matched up, perfectamente! I then told him
that tomorrow morning we were going to have a Nuevo Metodo. I told him that
under no circumstances was he to issue any materials without a pull ticket. He went
pasty white and mumbled: Venustusiano? I then told him that the company was
also instituting a new incentive program. For each month that the pull tickets, scrap
tickets and inventory matched up perfectamente, he was to receive in cash one percent of the value of the crib.
Now it is important to realize that we are in Mexico! This man is looking at 1 percent of $300,000, or $3,000 a month for the six months he has to go before retirement. He suddenly realizes that he may retire to Acapulco!
As the plant manager and I walked away, the plant manager asked me: But how
is he going to enforce it? I told him with assurance that the supervisor would think
of something.
El Rey
The next morning it was all over the plant what had happened. Sure enough,
when the super opened up his half-door at 5:30 a.m., there was Venustusiano, with
a broken drill bit, shouting: OTRA! On this occasion, however, something was different. The supervisor was heard telling him (very politely) to: Llena el formulario,
pro favor. Venustusianos reply is not recorded here, but we may safely assert that it
promised death and destruction to the supervisor if he didnt hand over the drill bit,
right now.
There were quite a number of eyewitnesses to what happened next. As
Venustusiano reached through the half-door for the supervisor, he became sudden-
Chapter 4
ly aware of a Colt .44 making an indentation into his overflowing gut. The super
purposefully cocked the single action piece and (politely) repeated: Llena el formulario, por favor. Venustusianos eyes glazed over, and he was heard to say
(respectfully): Porque no? Donde est el?
Needless to say, the form was filled out, Venustusiano got his drill bit, and everybody else filled out their forms. And, indeed the supervisor collected his $18,000
and retired to a better life somewhere. It was rumored that the high point of his
retirement dinner was when he gave his gun to his successor!
Mas Preguntas de Importancia
Now what is the meaning of this morality tale? In Spanish, we could certainly say
that: Por razn si possible, por fuerza si necessario. However let us end by asking
again, two questions.
Pregunta Primero:
What was the relationship of the supervisor to his
company, before I came, in one word starting with
E?
Answer:
He was an employee!
Pregunta Secundo:
What was the relationship of the supervisor to his
company, after I left, in one word starting with O?
Answer:
He was an owner!
Question:
Esta Differencia?
Answer:
S!
Question:
Que es el nombre de la differencia?
Answer:
La nombre es productividad!
Pregunta:
Comprende?
Answer:
S?
Todos los hombres:
Viva Mexico!
El Zopilote Sabio, Roberto Eugenio Donaldo Woolsey Blanco
Reference
Simpson, Lesley Byrd, Many Mexicos, University of California Press, Berkeley & Los Angeles,
1967.
Biographies
Gene Woolsey is the director of the Management Science/Operations Research

Program at the Colorado School of Mines. He is past elected International
President of the Institute of Management Sciences. He is the first recipient of the
Harold Larnder Prize for Distinguished International Achievement in Operations
Research. He was formerly the editor of the Production and Inventory Management
Journal (72,000 circulation in 125 countries). He also holds teaching positions at
seven other universities in four countries. For the past decade, he has worked Pro
Bono for any government agency of any government of sufficiently conservative,
capitalist form with which he politically agrees. For this work he was decorated by
the government of Israel and holds the Distinguished Civilian Service Medal of
the United States.
Ruth Maurer is associate professor of mathematics (Operations
Research/Applied Probability) at the Colorado School of Mines. She is former
mayor of the city of Golden. She was the consulting energy economist for the First
Interstate Bank of Denver and was visiting professor of engineering at the United
States Military Academy at West Point. For her Pro Bono consulting work for the
Department of the Army, she was awarded the Outstanding Civilian Service
Medal and the Commanders Medal. She led the effort to implement emergency
telephone service in Jefferson County.
Lionheart Publishing, Inc.

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INVENTORY CONTROL

(FOR PEOPLE WHO REALLY HAVE TO DO IT)

2000 Lionheart Publishing, Inc.

This book is only an outline. Actual experience is an absolute requirement to flesh

A Requiem for the EOQ

This statement would be followed by a gunshot, the sound of a Winchester being

Lot Sizing Methods of

As before, we note the dimensions of the process as:

We will use the values given above, which are:

Using the formula above for the EOQ we get:

Total Cost = Ordering Cost + Holding Cost = 1,800 + 3,065= $4,865

Total Cost = Ordering Cost + Holding Cost = 1,800 + 2165 = $3,965

If you did it right you get the display below:

Total Cost = Ordering Cost + Holding Cost = 2,100 + 1,385= $3,485

180 250 270 280 0

180 250 270 280 0

Total Cost = Ordering Cost + Holding Cost = 1,800 + 1445= $3,245

The Method of Silver and Meal

A Better Silver and Meal Method

Or, using summation notation, we have:

TEC(T) = 1 * S + CI* (j - 1)*D(j)

Silver and Meal Quick and Dirty Fill-in-the-Blank Inventory Form

First Silver and Meal Nomogram Example

Total Cost = Ordering Cost + Holding Cost = 1,800 + 1,445 = $3,245

Second Silver and Meal Nomogram Example

Plugging this into our Q&D we get:

Silver and Meal Nomograph Example

4. Locate the period you are in on the far right line.

When Do I Use Which Method?

The Woolsey Never-Fail

looked much like this:

OVER LAST # YEARS

where: C is the price, I is the holding rate,

Now use this EOQ to get a different total cost:

Icing on the Cake Recalculating the Order Point

The above article originally appeared as:

Flowchart of the Woolsey Never-Fail Spare Parts Reduction Method

Find a computerized spare parts inventory system still

If cost updated recently, GO TO Step 1. If not, GO TO

If costs are not absurd, GO TO Step 1. If costs are

Using real costs, find total annual cost of ordering

Also using real costs, calculate right EOQ and order

Calculate difference in annual costs for each spare

Sum up cost differences for total inventory.

Tell them what they owe you, get money.

Reside in the Bahamas.

If you still have money left, stay in the Bahamas.

Inventory Example Problems

Another line from another inventory list looks like:

El Pistolero Del Inventorio

Una Pregunta Por Las Gerentes

Gene Woolsey is the director of the Management Science/Operations Research

Lionheart Publishing, Inc.

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