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INE346

Production Systems-I
Instructor:
Dr. Volkan Çakır, Visiting Assist. Prof.
Department of Industrial & Mechanical Engineering
Chapter 4

Inventory Control Subject to Known Demand

INE346 Production Systems-I Assist.Prof.Dr. Volkan CAKIR


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Chapter Overview

Assist.Prof.Dr. Volkan CAKIR


• Purpose
• To consider methods for controlling individual item inventories when product
demand is assumed to follow a known pattern (that is, demand forecast error is
zero).
• Key Points

INE346 Production Systems-I


1. Classification of inventories.
2. Why hold inventory?
3. Characteristics of inventory systems.
4. Relevant costs.
5. The basic EOQ model.
6. The EOQ with finite production rate.
7. Quantity discounts
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8. EOQ models for production planning
4.1 Types Of Inventories

Assist.Prof.Dr. Volkan CAKIR


• The Management of Idle Resources

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A quantity of commodity held for some
time to satisfy some future demand.
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Types of Inventory

Assist.Prof.Dr. Volkan CAKIR


vendor vendor vendor

Raw material and purchased parts (components) inventory


production

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In-process inventory
production

Finished goods inventory

warehouse warehouse warehouse


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customers
More Types of Inventory

Assist.Prof.Dr. Volkan CAKIR


• Raw material
• Materials and supplies needing further processing
• Components that go into the product as is
• Subassemblies

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• Work in process (WIP)
• Inventory in the production system waiting to be processed or
assembled and may include semi-finished products
• Finished goods
• Output of the production process or end items
• Finished goods from one manufacturing plant may be raw material 6
for another
4.2 Motivation For Holding Inventories

Assist.Prof.Dr. Volkan CAKIR


• Why do we need inventory?
• Economies of scale
• economies of batch production
• to amortize fixed setup costs over a larger number of units
• Uncertainties
• safety stock against random demands
• uncertain lead-times

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Unpredictable or unreliable vendors
• Speculation
• to buffer raw material/component price changes
• to buffer possibility of a labor strike
• Transportation
• fill logistics pipeline - resupply time
• Smoothing
• buffer for imbalanced production lines
• buffer for machine downtimes
• Logistics
• economies of distribution 7
• Control costs
• hedge against poor quality
• display goods to potential customers Lead time is defined as the amount of time that elapses from the point
that an order is placed until it arrives
Types of Demands

Assist.Prof.Dr. Volkan CAKIR


• Independent: demand not related to any other
item and primarily influenced by market conditions
• Dependent: demand for an item is influenced by

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the demand of another item

8
Fundamental Questions

Assist.Prof.Dr. Volkan CAKIR


• What to order?
• When to order?
• How much to order?

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• When to review?

9
Conflicting objectives

Assist.Prof.Dr. Volkan CAKIR


• Marketing: I can’t sell from an empty wagon. I can’t
keep our customers if we continue to stockout and
there is not sufficient product variety.
• Production: If I can produce in larger lot sizes, I can
reduce per unit cost and function efficiently.

INE346 Production Systems-I


• Purchasing: I can reduce our per unit cost if I buy
large quantities in bulk.
• Finance: Where I am going to get the funds to pay
for the inventory? The levels should be lower.
• Warehousing: I am out of space. I can’t fit anything 10
else in this building.
More conflicting objectives

Assist.Prof.Dr. Volkan CAKIR


Desired inventory
Area Responsibility Inventory goal
level
Marketing Sell the product Good customer svc High

INE346 Production Systems-I


Production Make the product Efficient lot sizes High
Buy required
Purchasing Low unit cost High
material
Provide working Efficient use of
Finance Low
capital capital
Efficient use of
Warehousing Store the product Low
space 11
Engineering Design the product Avoid obsolescence low
4.3 Characteristic of Inventory Systems

Assist.Prof.Dr. Volkan CAKIR


1. Demand
• Constant vs. Variable We just don’t have that
• Known vs. Random model in stock. It is
backordered but should
2. Lead time () arrive any day now.
• Constant vs. Variable

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3. Review time
• Continuous vs. Periodic
4. Excess demand (Stockouts)
• Backorder
• Lost sales
5. Changing inventory
• Limited shelf life 12
• Obsolete by time
4.4 Relevant Costs

Assist.Prof.Dr. Volkan CAKIR


• Holding costs
• opportunity cost
• storage and handling costs
• taxes and insurance

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• breakdown, pilferage, damage, spoilage, obsolescence, etc.
• Ordering costs
• material cost, unit cost
• fixed cost of preparing and monitoring order
• receiving and handling
• Penalty Cost (shortage cost) 13
• Backorder and lost sales costs
Holding Costs Example

Assist.Prof.Dr. Volkan CAKIR


• Costs proportional to the quantity of inventory held (a.k.a.
carrying cost or the inventory cost). Includes:
a) Cost of Storage (6%)
b) Taxes and Insurance (2 %)
c) Breakage and Spoilage (1%)

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d) Opportunity Cost of Alternative Investment (28%)
(Total: 37%)
holding costs = 37 % x unit cost
An item valued at $180 would have an annual holding cost
h = 0.37 x 180 = $66.60 14
If we held 300 of these items for five years
the total holding cost = 5 x 300 x 66.60 = $99,900
Order Costs

Assist.Prof.Dr. Volkan CAKIR


• These generally consist of two components:
• Fixed: incurred whenever a positive order is placed (or a
production run is initiated)

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• Variable: unit cost paid for each unit ordered or produced.

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Penalty Costs

Assist.Prof.Dr. Volkan CAKIR


• Loss of revenue for lost demand
• Costs of bookkeeping for backordered demands
• Loss of goodwill for being unable to satisfy

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demands when they occur.
• Generally assume cost is proportional to number of
units of excess demand.
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4.5 The EOQ Model

Assist.Prof.Dr. Volkan CAKIR


Assumptions:
• Demand is known and constant (λ units per unit time)
• Shortages are not permitted (no backorders)
• There is no order lead time (instantaneous arrivals)
• The costs include

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a. Setup cost at K per positive order placed.
b. Proportional order cost at c per unit ordered.
c. Holding cost at h per unit held per unit time.
• Additional assumptions:
• order quantity is not restricted to integers
• unit cost does not depend upon the order quantity
• no change in unit cost over time (inflation)
• each item can be treated independently 17
• infinite planning horizon
Notation

Assist.Prof.Dr. Volkan CAKIR


• Decision variables:
Q = order quantity or lot size (units)
r = reorder point (units)
T = time between orders or production runs (cycle time) (yr)
b = maximum backorders per cycle (units)
• Parameters

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 = demand rate (units per yr) (note that other textbooks use D)
P = production rate (units per yr) (P > D)
c = unit purchase or production cost ($/unit)
K = order or set-up cost ($/order)
h = holding cost = Ic ($/unit per yr)
g = backorder cost ($/unit per yr)
g’ = cost per backorder ($/unit)
τ = lead-time (yr) (note that other textbooks use L)
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Basic EOQ Model

Assist.Prof.Dr. Volkan CAKIR


• The objective is to choose Q to minimize the average cost per unit time (average annual
cost)
• Total inventory cost = ordering cost + purchase cost + holding cost
• Fixed ordering/setup cost =K
• size of the order =Q

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• proportional purchase cost = cQ
• average inventory per cycle = Q/2
• holding cost per cycle = (hT) (Q/2)
• length of cycle = T = Q/λ
𝐾+𝑐𝑄 ℎ𝑄
• average annual cost =𝐺 𝑄 = +
𝑇 2
• Q units are consumed each cycle at a rate λ = 𝑇 = 𝑄 Τλ 19
𝐾+𝑐𝑄 ℎ𝑄 𝐾𝜆 ℎ𝑄
• average annual cost =𝐺 𝑄 = + = + 𝜆𝑐 +
𝑄 Τλ 2 𝑄 2
The EOQ Model

INE346 Production Systems-I Assist.Prof.Dr. Volkan CAKIR


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Basic EOQ Model

Assist.Prof.Dr. Volkan CAKIR


• Total inventory cost per year: 𝐺(𝑄) = 𝜆𝐾/𝑄 + 𝑐𝜆 + ℎ (𝑄/2)
𝑑𝐺 𝑄
• Find Q that Minimizes: 𝐺 𝑄 = = − 𝜆𝐾Τ𝑄 2 + ℎ/2 = 0
𝑑𝑄

ℎ 𝜆𝐾
=
2 𝑄2

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𝑄2 = 2𝐾𝜆Τℎ

2𝐾𝜆
𝑄∗ =

𝑇 ∗ = 𝑄 ∗ Τ𝜆 21
Cost Minimization

INE346 Production Systems-I Assist.Prof.Dr. Volkan CAKIR


22
Example 4.1

Assist.Prof.Dr. Volkan CAKIR


• Number-2 pencils at the campus bookstore are sold at a
fairly steady rate of 60 per week. The pencils cost the
bookstore 2 cents each and sell for 15 cents each. It
costs the bookstore $12 to initiate an order, and

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holding costs are based on an annual interest rate of 25
percent.
• Determine the optimal number of pencils for the
bookstore to purchase and the time between
placement of orders.
• What are the yearly holding and setup costs for this 23
item?
Example 4.1

Assist.Prof.Dr. Volkan CAKIR


• 𝜆 = 60 × 52 = 3120
• ℎ = 𝐼𝑐 = 0.25 × 0.02 = 0.005

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∗ 2 12 3120
•𝑄 = = 3870
0.005
• 𝑇 = 𝑄Τ𝜆 = 3870Τ3120 = 1.24 𝑦𝑒𝑎𝑟𝑠
• 𝑇ℎ𝑒 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑛𝑛𝑢𝑎𝑙 ℎ𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = ℎ 𝑄Τ2 =
0.005 3870Τ2 = $9.675 24
R =λ.τ
Inclusion of Order Lead Time - Reorder Point

INE346 Production Systems-I Assist.Prof.Dr. Volkan CAKIR


25
Example 4.1 revisited

Assist.Prof.Dr. Volkan CAKIR


• If we were to place the order exactly four months
before the end of the cycle
• 𝑅 = 𝜆𝜏 = 3120 × 0.3333 = 1040

INE346 Production Systems-I


• Always express all relevant variables in the same
units of time

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Lead Time Exceeds A Cycle

Assist.Prof.Dr. Volkan CAKIR


• Consider an item with an EOQ of 25, a demand rate
of 500 units per year, and a lead time of six weeks.
• 𝑇 = 25Τ500 = 0.05 𝑦𝑒𝑎𝑟~2.6 𝑤𝑒𝑒𝑘𝑠

INE346 Production Systems-I


• 𝑟𝑎𝑡𝑖𝑜 = 𝜏Τ𝑇 = 6Τ2.6 = 2.31 𝑐𝑦𝑐𝑙𝑒𝑠
• 0.31 𝑐𝑦𝑐𝑙𝑒 𝑖𝑠 0.0155 𝑦𝑒𝑎𝑟
• 𝑅 = 0.0155 500 = 7.75
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Lead Time Exceeds A Cycle

INE346 Production Systems-I Assist.Prof.Dr. Volkan CAKIR


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Sensitivity

Assist.Prof.Dr. Volkan CAKIR


Suppose that the bookstore orders pencils in batches of 1000 2𝐾𝜆
𝐾𝜆 ℎ𝑄 𝑄∗ =
𝐺 𝑄 = + ℎ
𝑄 2
𝐺 𝑄 = 12 3120 Τ1000 + 0.005 1000 Τ2 = $39.94
𝐺 𝑄 ∗ = 12 3120 Τ3870 + 0.005 3870 Τ2 = $19.35

INE346 Production Systems-I


𝐺 𝑄 Τ𝐺 𝑄 ∗ = 39.94Τ19.35 = 2.06
2𝐾𝜆
𝐾𝜆 ℎ 2𝐾𝜆 𝐾𝜆 ℎ 2𝐾𝜆

𝐺 𝑄∗ = + = +
2𝐾𝜆 2 ℎ 2𝐾𝜆 2 ℎ
ℎ ℎ

ℎ 2𝐾𝜆 ℎ 2𝐾𝜆
𝐺 𝑄∗ = +
2 ℎ 2 ℎ 29
𝐺 𝑄 ∗ = 2𝐾𝜆ℎ
Sensitivity

Assist.Prof.Dr. Volkan CAKIR


𝐾𝜆 ℎ𝑄
𝐺 𝑄 +
𝑄 2
=
𝐺 𝑄∗ 2𝐾𝜆ℎ

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𝐺 𝑄 1 2𝐾𝜆 𝑄 ℎ

= +
𝐺 2𝑄 ℎ 2 2𝐾𝜆
𝑄∗ 𝑄
= + ∗
2𝑄 2𝑄
1 𝑄∗ 𝑄 30
= + ∗
2 𝑄 𝑄
Example 4.1 revisited

Assist.Prof.Dr. Volkan CAKIR


• 𝑄∗ = 3870
• 𝑄 = 1000
𝐺 𝑄 39.94
• = 19.35 = 2.06 or simply
𝐺 𝑄∗
𝐺 𝑄 1 𝑄∗ 𝑄
• + 𝑄∗ = 0.5 3.87 + 1Τ3.87 = 2.06

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=
𝐺 𝑄∗ 2 𝑄
• Q = 1,000 is 2.06 times the optimal average annual holding and setup cost
although the error on Q is 3.87 times.
• Suppose that Q is half/twice as large as it should be Q* (an error of 100 percent
in the value of Q).
1 𝑄∗ 𝑄
+ = 0.5 2 + 0.5 = 1.25
2 𝑄 𝑄∗
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results in an error of only 25 percent in the annual holding and setup cost.
Example 4.2

Assist.Prof.Dr. Volkan CAKIR


• The Rahway, New Jersey, plant of Metalcase, a manufacturer
of office furniture, produces metal desks at a rate of 200 per
month. Each desk requires 40 Phillips head metal screws
purchased from a supplier in North Carolina. The screws
cost 3 cents each. Fixed delivery charges and costs of

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receiving and storing shipments of the screws amount to
about $100 per shipment, independently of the size of the
shipment. The firm uses a 25 percent interest rate to
determine holding costs. Metalcase would like to establish a
standing order with the supplier and is considering several
alternatives. 32
• What standing order size should they use?
Example 4.2

Assist.Prof.Dr. Volkan CAKIR


• The annual demand for screws is
200 12 40 = 96000
• The annual holding cost per screw is
0.25 0.03 = 0.0075
• the optimal lot size is

INE346 Production Systems-I


2𝐾𝜆 2 1000 96000
𝑄∗ = = = 50597 𝑢𝑛𝑖𝑡
ℎ 0.0075
• The cycle time is
𝑇 = 𝑄Τ𝜆 = 50597Τ96000 = 0.53 𝑦𝑒𝑎𝑟
• JIT → weekly deliveries cost
52 ∗ 100 = $5200
• EOQ → total annual cost
50597 0.0075 ≅ $380
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• For a low-value item such as this with high fixed order costs, small lot sizes in accordance with JIT
are inappropriate.
4.6 Extension To A Finite Production Rate

Assist.Prof.Dr. Volkan CAKIR


• Items are produced at a rate P during a production
run. Assume 𝑃 > 𝜆.

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34

Inventory levels for finite production rate model


Average Annual Cost Function

Assist.Prof.Dr. Volkan CAKIR


• Q : size of each production run
• T : the cycle length, be the time between successive production
startups uptime (production time) downtime

𝑇 = 𝑇1 + 𝑇2

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• 𝑄 = 𝜆𝑇 : The number of units consumed each cycle equals to
number of units produced each cycle
• H : maximum level of on-hand inventory

35
Average Annual Cost Function

Assist.Prof.Dr. Volkan CAKIR


𝑄 = 𝑃𝑇1 𝑜𝑟 𝑇1 = 𝑄Τ𝑃
𝐻 Τ𝑇1 = 𝑃 − 𝜆

INE346 Production Systems-I


𝐻 = 𝑇1 𝑃 − 𝜆 = 𝑄Τ𝑃 𝑃 − 𝜆 = 𝑄 1 − 𝜆Τ𝑃
average annual cost
𝐾 ℎ𝐻 𝐾𝜆 ℎ𝑄
𝐺 𝑄 = + = + 1 − 𝜆 Τ𝑃
𝑇 2 𝑄 2
ℎ′ = ℎ 1 − 𝜆Τ𝑃
36
2𝐾𝜆
𝑄∗ =
ℎ′
Example 4.3

Assist.Prof.Dr. Volkan CAKIR


• A local company produces an erasable programmable read-
only memory (EPROM) for several industrial clients. It has
experienced a relatively flat demand of 2,500 units per year
for the product. The EPROM is produced at a rate of 10,000
units per year. The accounting department has estimated

INE346 Production Systems-I


that it costs $50 to initiate a production run, each unit costs
the company $2 to manufacture, and the cost of holding is
based on a 30 percent annual interest rate. Determine the
optimal size of a production run, the length of each
production run, and the average annual cost of holding and
setup. What is the maximum level of the on-hand inventory 37
of the EPROMs?
Example 4.3

Assist.Prof.Dr. Volkan CAKIR


• ℎ = 𝐼𝑐 = 0.3 2 = 0.6 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
• ℎ′ = ℎ 1 − 𝜆Τ𝑃 = 0.6 1 − 2500Τ10000 = 0.45 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
2𝐾𝜆 2 50 2500
• 𝑄∗ = = = 745 𝐸𝑃𝑅𝑂𝑀
ℎ′ 0.45

INE346 Production Systems-I


2𝐾𝜆 2 50 2500
• 𝑇 = 𝑄Τ𝜆 = 745Τ2500 = 0.298 𝑦𝑒𝑎𝑟 𝑄∗ =

=
0.6
• 𝑇1 = 𝑄Τ𝑃 = 745Τ10000 = 0.0745 𝑦𝑒𝑎𝑟 = 645 ≅ 14%𝑙𝑒𝑠𝑠

• 𝑇2 = 𝑇 − 𝑇1 = 0.298 − 0.0745 = 0.2235 𝑦𝑒𝑎𝑟


𝐾𝜆 ℎ𝑄 50 2500 0.45 745
• 𝐺 𝑄 = + 1 − 𝜆Τ𝑃 = + = $335.41
𝑄 2 745 2
38
• 𝐻= 𝑄∗ 1 − 𝜆Τ𝑃 = 745 1 − 2500Τ10000 = 559 𝐸𝑃𝑅𝑂𝑀
4.7 Quantity Discount Models

Assist.Prof.Dr. Volkan CAKIR


• Assumption of cost c of each unit is independent of
the size of the order. Often, however, the supplier is
willing to charge less per unit for larger orders.

INE346 Production Systems-I


• There are two discount possibilities: either the
discount is applied to all the units in an order (all-
units), or it is applied only to the additional units
beyond the breakpoint (incremental).
39
Example 4.4

Assist.Prof.Dr. Volkan CAKIR


• The Weighty Trash Bag Company has the following price schedule for its large
trash can liners. For orders of less than 500 bags, the company charges 30 cents
per bag; for orders of 500 or more but fewer than 1,000 bags, it charges 29
cents per bag; and for orders of 1,000 or more, it charges 28 cents per bag. In
this case the breakpoints occur at 500 and 1,000. The discount schedule is all-
units because the discount is applied to all of the units in an order. The order

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cost function C(Q) is defined as below. Assume that the company considering
what standing order to place with Weighty uses trash bags at a fairly constant
rate of 600 per year. The accounting department estimates that the fixed cost of
placing an order is $8, and holding costs are based on a 20 percent annual
interest rate.

0.30𝑄 𝑓𝑜𝑟 0 ≤ 𝑄 < 500


𝐶 𝑄 = ൞0.29𝑄 𝑓𝑜𝑟 500 ≤ 𝑄 < 1000
40
0.28𝑄 𝑓𝑜𝑟 1000 ≤ 𝑄
Example 4.4

Assist.Prof.Dr. Volkan CAKIR


0 2𝐾𝜆 2 8 600
•𝑄 = = = 400
𝐼𝑐0 0.2 0.30

2𝐾𝜆 2 8 600

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•𝑄 1 = = = 406
𝐼𝑐1 0.2 0.29

2 2𝐾𝜆 2 8 600
•𝑄 = = = 414
𝐼𝑐2 0.2 0.28
41
Example 4.4

Assist.Prof.Dr. Volkan CAKIR


The average annual cost:
• 𝐺 𝑄 = 𝐾𝜆Τ𝑄 + 𝜆𝑐𝑗 + 𝐼𝑐𝑗 𝑄 Τ2
• 𝐺 400 = 𝐺0 400 = 8 600 Τ400 + 600 0.30 + 0.2 0.30 400 Τ2 = $204
• 𝐺 500 = 𝐺1 500 = 8 600 Τ500 + 600 0.29 + 0.2 0.29 500 Τ2 = $198.1
• 𝐺 1000 = 𝐺2 1000 = 8 600 Τ1000 + 600 0.28 + 0.2 0.28 1000 Τ2 = $200.8

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42
Incremental Quantity Discounts

Assist.Prof.Dr. Volkan CAKIR


• Assume the trash bags cost 30 cents each for quantities of
500 or fewer; for quantities between 500 and 1,000, the first
500 cost 30 cents each and the remaining amount cost 29
cents each; for quantities of 1,000 and over the first 500
cost 30 cents each, the next 500 cost 29 cents each, and the

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remaining amount cost 28 cents each. The order cost
function C(Q) is defined as below.
𝐶 𝑄 = 500 0.3 = $150
𝐶 𝑄 = 150 + 500 0.29 = $295

0.30𝑄 𝑓𝑜𝑟 0 ≤ 𝑄 < 500


43
𝐶 𝑄 = ൞ 150 + 0.29 𝑄 − 500 = 5 + 0.29𝑄 𝑓𝑜𝑟 500 ≤ 𝑄 < 1000
295 + 0.28 𝑄 − 1000 = 15 + 0.28𝑄 𝑓𝑜𝑟 1000 ≤ 𝑄
Incremental Quantity Discounts

Assist.Prof.Dr. Volkan CAKIR


INE346 Production Systems-I
0.30 𝑓𝑜𝑟 0 ≤ 𝑄 < 500
44
𝐶 𝑄 /𝑄 = ൞ 0.29 +5Τ𝑄 𝑓𝑜𝑟 500 ≤ 𝑄 < 1000
0.28 + 15Τ𝑄 𝑓𝑜𝑟 1000 ≤ 𝑄
Example 4.4 IQD

Assist.Prof.Dr. Volkan CAKIR


𝐺 𝑄 = 𝐾𝜆Τ𝑄 + 𝜆 𝐶 𝑄 Τ𝑄 + 𝐼 𝐶 𝑄 Τ𝑄 𝑄Τ2
• 𝐺0 𝑄 = 8 600 Τ𝑄 + 600 0.30 + 0.2 0.30 𝑄Τ2

0 2𝐾𝜆 2 8 600
• 𝑄 = = = 400
𝐼𝑐0 0.2 0.30

• 𝐺1 𝑄 = 8 600 Τ𝑄 + 600 0.29 + 5Τ𝑄 + 0.2 0.29 + 5Τ𝑄 𝑄Τ2

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• 𝐺1 𝑄 = 600 0.29 + 13 600 Τ𝑄 + 0.2 0.29 𝑄Τ2 + 0.2 5 Τ2

1 2𝐾𝜆 2 13 600
• 𝑄 = = = 519
𝐼𝑐1 0.2 0.29

• 𝐺2 𝑄 = 8 600 Τ𝑄 + 600 0.25 + 15Τ𝑄 + 0.2 0.28 + 15Τ𝑄 𝑄 Τ2


• 𝐺2 𝑄 = 600 0.28 + 23 600 Τ𝑄 + 0.2 0.28 𝑄Τ2 + 0.2 15 Τ2

2 2𝐾𝜆 2 23 600
• 𝑄 = = = 702
𝐼𝑐2 0.2 0.28

• 𝐺0 𝑄 0
= 8 600 Τ400 + 600 0.30 + 0.2 0.30 400 Τ2 = $204
45
1
• 𝐺1 𝑄 = 600 0.29 + 13 600 Τ519 + 0.2 0.29 519 Τ2 + 0.2 5 Τ2 = $204.57
4.9 EOQ Models For Production Planning

Assist.Prof.Dr. Volkan CAKIR


• λj :Demand rate for product j,
• Pj :Production rate for product j,
• hj :Holding cost per unit per unit time for product j,
• Kj :Cost of setting up the production facility to produce

INE346 Production Systems-I


product j.

• The goal is to determine the optimal procedure for


producing n products on the machine to minimize the cost
of holding and setups, and to guarantee that no stock-outs
occur during the production cycle. 46
• Assume σ𝑛𝑗=1 𝜆𝑗 Τ𝑃𝑗 ≤ 1
EOQ Models For Production Planning

Assist.Prof.Dr. Volkan CAKIR


2𝐾𝑗 𝜆𝑗
𝑄𝑗 = ′ , ℎ𝑗′ = ℎ𝑗 1 − 𝜆𝑗 Τ𝑃𝑗
ℎ𝑗
lot size: 𝑄𝑗 = 𝜆𝑗 𝑇

INE346 Production Systems-I


• average annual cost associated with product j
𝐺 𝑄 = 𝐾𝑗 𝜆𝑗 ൗ𝑄𝑗 + ℎ𝑗′ 𝑄𝑗 Τ2
• The average annual cost for all products is the sum
𝑛 𝑛

෍ 𝐺 𝑄𝑗 = ෍ 𝐾𝑗 Τ𝑇 + ℎ𝑗′ 𝜆𝑗 𝑇Τ2 47
𝑗=1 𝑗=1
EOQ Models For Production Planning

Assist.Prof.Dr. Volkan CAKIR


• The goal is to find T to minimize G(T). The necessary
condition for an optimal T is
𝑑𝐺 𝑇
=0
𝑑𝑇

INE346 Production Systems-I


𝑛

෍ −𝐾𝑗 Τ𝑇 2 + ℎ𝑗′ 𝜆𝑗 Τ2 = 0
𝑗=1

2 σ𝑛𝑗=1 𝐾𝑗
𝑇∗ = 48
σ𝑛𝑗=1 ℎ𝑗′ 𝜆𝑗
EOQ Models For PP with Setup

Assist.Prof.Dr. Volkan CAKIR


• If setup times are a factor, we must check that
there is enough time each cycle to account for both
setup times and production of the n products. Let sj
be the setup time for product j. Ensuring that the

INE346 Production Systems-I


total time required for setups and production each
cycle does not exceed T leads to the constraint
𝑛

෍ 𝐺 𝑠𝑗 + 𝑄𝑗 Τ𝑃𝑗 ≤ 𝑇
49
𝑗=1
EOQ Models For PP with Setup

Assist.Prof.Dr. Volkan CAKIR


• lot size: 𝑄𝑗 = 𝜆𝑗 𝑇
• σ𝑛𝑗=1 𝐺 𝑠𝑗 + 𝜆𝑗 𝑇Τ𝑃𝑗 ≤ 𝑇
σ𝑛

INE346 Production Systems-I


𝑗=1 𝑠𝑗
•𝑇≥ = 𝑇𝑚𝑖𝑛
1−σ𝑛
𝑗=1 𝜆𝑗 Τ𝑃𝑗
• Because Tmin cannot be exceeded without
compromising feasibility, the optimal solution is to
choose the cycle time T equal to the larger of T* 50
and Tmin.
Example 4.7

Assist.Prof.Dr. Volkan CAKIR


• Bali produces several styles of men’s and women’s shoes at a single facility near
Bergamo, Italy. The leather for both the uppers and the soles of the shoes is cut
on a single machine. This Bergamo plant is responsible for seven styles and
several colors in each style. (The colors are not considered different products for
our purposes, because no setup is required when switching colors.) Bali would
like to schedule cutting for the shoes using a rotation policy that meets all

INE346 Production Systems-I


demand and minimizes setup and holding costs. Setup costs are proportional to
setup times. The firm estimates that setup costs amount to an average of $110
per hour, based on the cost of worker time and the cost of forced machine idle
time during setups. Holding costs are based on a 22 percent annual interest
charge.

51
Example 4.7

Assist.Prof.Dr. Volkan CAKIR


• The first step is to verify that the problem is feasible. To do
so we compute σ 𝜆jΤ𝑃𝑗 =0.69355. Because this is less than
one, there will be a feasible solution.
• Next we compute the value of T*, but to do so we need to

INE346 Production Systems-I


do several intermediate calculations.
• First, we compute setup costs. Setup costs are assumed to
be $110 times setup times.
• Second, we compute modified holding costs (ℎ𝑗′ ). This is
done by multiplying the cost of each product by the annual
interest rate (0.22) times the factor 1 − 𝜆jΤ𝑃𝑗 . These 52
calculations give;
Example 4.7

Assist.Prof.Dr. Volkan CAKIR


Annual Production Setup Variable Setup Annual Average annual
Style Demand Rate Time Cost λj/Pj cost hj' ℎ𝑗’Dj Q setup cost
Women’s pump 4,520 35,800 3.2 $40 0.126257 352 7.69 34754.00 691 0.0016 4959.18
Women’s loafer 6,600 62,600 2.5 26 0.105431 275 5.12 33771.76 1009 0.0013 4380.58
Women’s boot 2,340 41,000 4.4 52 0.057073 484 10.79 25241.77 358 0.0022 5094.94
Women’s sandal 2,600 71,000 1.8 18 0.03662 198 3.81 9918.96 398 0.0009 2053.16

INE346 Production Systems-I


Men’s wingtip 8,800 46,800 5.1 38 0.188034 561 6.79 59734.70 1346 0.0026 8235.97
Men’s loafer 6,200 71,200 3.1 28 0.087079 341 5.62 34866.29 948 0.0016 4895.83
Men’s oxford 5,200 56,000 4.4 31 0.092857 484 6.19 32170.91 795 0.0022 5624.79
0.693351 2695 230458.40 0.0123 $ 35,244.44

2 σ𝑛𝑗=1 𝐾𝑗 2 2695 250𝑑𝑎𝑦𝑠


𝑇∗ = = = 0.1529 𝑦𝑒𝑎𝑟 = 0.1529 ∗ = 38𝑤. 𝑑𝑎𝑦𝑠
σ𝑛𝑗=1 ℎ𝑗′ 𝜆𝑗 230458.40 𝑦𝑒𝑎𝑟
σ𝑛𝑗=1 𝑠𝑗 0.0123 53
𝑇𝑚𝑖𝑛 = = = 0.0399 𝑦𝑒𝑎𝑟 𝑇 ∗ ≥ 𝑇𝑚𝑖𝑛
1− σ𝑛𝑗=1 𝜆𝑗 Τ𝑃𝑗 1 − 0.6933
• 4-8
• Parts:

• 4-10
• 4-11
are excluded

INE346 Production Systems-I Assist.Prof.Dr. Volkan CAKIR


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Review & Questions

INE346 Production Systems-I Assist.Prof.Dr. Volkan CAKIR


55