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EOQ
optimal order quantity that will
minimize total inventory costs
Basic EOQ model
Production quantity model
Assumptions of Basic
EOQ Model
Carrying cost
cost of holding an item in inventory
Ordering cost
cost of replenishing inventory
Shortage cost
temporary or permanent loss of sales
when demand cannot be met
Deriving an EOQ
Reorder point, R
Co D
Annual ordering cost =
Q
CcQ
Annual carrying cost =
2
CoD CcQ
Total cost = +
Q 2
CoD
Ordering Cost = Q
R = dL
where
d = demand rate per period
L = lead time
Reorder Point: Example
Supply Supply
Time
Begins Ends
Production Quantity Model
(cont.)
Inventory
level
Maximum
Q(1-d/p) inventory
level
Average
Q inventory
(1-d/p)
2 level
0
Begin End Time
order order
Order
receipt receipt
receipt period
POQ Model Equations
=Q1- d 2CoD
p
Qopt = d
Q d Cc 1 -
Average inventory level = 1- p
2 p
CoD CcQ d
TC = Q + 2 1 - p
Production Quantity Model:
Example
Cc = $0.75 per yard Co = $150 D = 10,000 yards
d = 10,000/311 = 32.2 yards per day p = 150 yards per day
2CoD 2(150)(10,000)
Qopt = = = 2,256.8 yards
Cc 1 - d 0.75 1 -
32.2
p 150
CoD CcQ d
TC = Q + 2 1 - p = $1,329
Q 2,256.8
Production run = = = 15.05 days per order
p 150
Production Quantity Model:
Example (cont.)
D 10,000
Number of production runs = = = 4.43 runs/year
Q 2,256.8
d 32.2
Maximum inventory level = Q 1 - = 2,256.8 1 -
p 150
= 1,772 yards