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Deterministic Inventory Models: TVC Ordering Cost + Carrying (Holding Cost)

1. Calculate the economic order quantity (EOQ) without considering discounts, which is 193 units 2. This order quantity is less than the range for the 10% discount, so calculate the EOQ and cost at the discounted price 3. The discounted EOQ is 234 units, with a lower total cost, so the optimal order quantity is 234 units to take advantage of the 10% discount.

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Tsegaye Debelo
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340 views15 pages

Deterministic Inventory Models: TVC Ordering Cost + Carrying (Holding Cost)

1. Calculate the economic order quantity (EOQ) without considering discounts, which is 193 units 2. This order quantity is less than the range for the 10% discount, so calculate the EOQ and cost at the discounted price 3. The discounted EOQ is 234 units, with a lower total cost, so the optimal order quantity is 234 units to take advantage of the 10% discount.

Uploaded by

Tsegaye Debelo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Deterministic inventory models

Economic order quantity (EOQ) model with constant rate of demand

 The objectives of this model is to determine an


optimum order quantity (EOQ) denoted by Q* such
that total inventory cost is minimized.
TVC= Ordering cost + carrying (holding
cost)
D Q
TVC = Co  Ch
Q 2
Economic order quantity (EOQ) model with
constant rate of demand( Cont…)
 Since for maximum or minimum value of TVC its
first derivatives should be zero
D 1
 2 Co  Ch  0
Q 2

2 DCo = Economic order quantity (EOQ)


Q* =
Ch
Important formulas
 Optimal length of the inventory replenishment cycles time
(t*), optimal inventory between successive orders.
Q*= Annual demand * Reorder cycle time = D*t

t* = Q * = 1 * 2 DCo
D D Ch
 Optimal No of order quantity to be placed in the given
time period (which is assumed to be one year)
1
D 2 DCo = DCh
N*= D *
Q* Ch 2Co
Important formulas (cont…)
 Optimal (minimum) total variable inventory cost (TVC*)
D Q
TVC = Co  Ch
Q 2
1 Ch 2 DCo
= D.Co * 2 DCo + 2 Ch
Ch
= 2 DCoCh
Optimal total inventory cost is the sum of variable costs
and fixed costs, so
TC = D.C+TVC*
Economic order quantity (EOQ) model
with ware house space constraint
2 DiCoi ; i =1, 2,
Q*= Chi  2fi 3….n

Steps
Step1: for =1, compute EOQ for each item separately
by using the formula

Where fi = the storage space required per unit item i and


 is a non negative Lagrange
multiplier
Economic order quantity (EOQ) model
with ware house space constraint (cont…)
Step 2: if Qi* (i=1, 2, 3…n) is satisfied the condition,
fiQi  W (Total warehouse space available)
then
stops, otherwise go to step three,
Step 3: Increase the value of  if value of left hand
side of fiQi = W is More than available storage space
other wise decrease the value of .
 Continue iteration until the condition is satisfied
Economic order quantity (EOQ) model
with quantity discount

 EOQ model with one price break


 Suppose the following price discount schedule is
quoted by the suppliers in which a price (quantity
discount) occurs at b1 this means,
Quantity Price per unit
0<Q1<b1 C1
b1<Q2 C2
Economic order quantity (EOQ) model
with quantity discount (cont…)
 The optimal purchase quantity can be determined by the
procedure given below
 Step1: consider the lowest price (i.e. C2 ) and
determine Q2* by the basic EOQ formula

2 DCo
Q2*= C * r
2

 If Q2* lies with in the prescribed range b1<Q2*,


then Q2* is EOQ i.e. Q*= Q2*
Economic order quantity (EOQ) model
with quantity discount (cont…)
 And the optimal cost TC* associated with Q2* is
calculated as follows:
D b1
Co  (C 2 * r )
TC* (=TC2*) = D.C2+ b1 2

Step2: If Q2* is not equal to or more than b1, then Calculate Q1*
with C1 and corresponding total cost at Q1*. Compare
TC(b1) and TC (Q1*), If TC(b1)>TC(Q1*),then EOQ is
Q*= Q1*.Otherwise Q*= b1 is the required EOQ
Economic order quantity (EOQ) model
with quantity discount (cont…)
EOQ model with two price break
 Suppose the following price discount schedule
is quoted by the suppliers in which a price
(quantity discount) occurs at b1 this means,
Quantity Price per unit
0<Q1< b1 C1
b1<Q2< b2 C2
b2< Q3 C3
Economic order quantity (EOQ) model
with quantity discount (cont…)
Notice that C3< C2 < C1
The optimal purchase quantity can be determined by the
procedure given below
Step1: a) Consider the lowest price (i.e. C3) and determine Q3*
by the basic EOQ formula
b) If Q3* > b2 , then EOQ (Q*) = Q3* and the optimal cost
TC (Q3*) is the cost associated with Q3*
c) If Q3*< b2, then go to step 2
Economic order quantity (EOQ) model with
quantity discount (cont…)
Step2: a) Calculate Q2* is based on price C2.
b) Compare Q2* with b1 and if b1 < Q2* < b2 then compare TC (Q2*)
and TC (b2). If TC (Q2*)> TC (b2), then EOQ= b2. Otherwise EOQ = (Q2*)
c) If Q3*< b1 as well as b2 then go to step three.
Step3: Calculate Q1* is based on price C1 and compare, TC (b1), TC (b2)
and
TC (Q1*) to find EOQ the quantity with lowest cost will
naturally
be the required EOQ
Example 1
The production department of a company
requires 3600kg of raw materials for
manufacturing of particular item per year. It
has been estimated that cost of placing an
order is 36 birr and the cost of carrying
inventories is 25% of the investment in the
inventories. The price is 10 birr per kg. The
purchase manager whishes to determine an
ordering policy for raw materials.
Example 2
A small shop produces three machines part I,II and III in
lots. The shop has only 650m2 of storage space the
appropriate data for three items are given in the following
table
Item I II III
Demand (unit per year) 5000 2000 10000
Procurement cost per order 100 200 75
Cost per unit 10 15 5
Floor space requirements 0.7 0.8 0.4
The shop uses an inventory charge of 20% of average
inventories valuation per year. If no stock out is allowed,
determine the optimal lot size for each item under a given
storage constraints.
Exercise
A shopkeeper estimates annual requirement of
an item as 2000 units. He buys from
supplier 10 per item and the cost of ordering is
50 birr each time. If the stock holding costs are
25% per year of stock value how frequently
should replenish his stock? Further, suppose
the supplier offer 10% discount on order
between 400 and 699 item, a 20% discount on
order exceeding or equal to 700 can the
shopkeeper reduce his cost by taking
advantages from either of the discount ?

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