Topic 1: Deterministic EOQ Inventory Models 1.

Economic Order Quantity (EOQ) Model Symbols: q = order quantity (units per order, decision variable) TC = total yearly inventory cost ($ per year, objective function) K = cost o placin! an order of any quantity ($ per order) d = yearly demand (units per year) c = unit cost ($ per unit) i = cost o "oldin! one dollar in inventory or one year ($ per dollar per year) = yearly interest rate or yearly cost of capital (% per year) h = unit "oldin! cost or one year ($ per unit per year) n = number of orders in a year/ order frequency per year t = time between order/ order period /order interval r = reorder point (units) L = lead time for each order (a fraction of a year) #elation (1) h = ci #elation ($) n = q #elation (%) t =
d

= $_____per unit per year =_______orders per year

q ! = = !/ year or __ months or ____days d n

Kd hq

E&uation (1) TC = q + " 'cd # when compare w/ $%& ##'( at avera)e inventory level, econ order quantity E&uation ($) $*& q =
" Kd =______units per order h

E&uation (%) TC = " Kdh = hq 'cd # when compare w/ $%& =$______ E&uation ((.1) r = dL + ,f dL q* E&uation ((.$) r = remainder divided by q* + ,f dL - q* $. Economic )roduction Quantity (E)Q) Model p = yearly production (units per year) .ssume p - d EPQ>EOQ M = positive inventory (units , alternative decision variable to q) Kd h(! d p )q + E&uation (*) '( = q " " Kd E&uation (+) $%& q = h(! d p)
E&uation (,) M = q ! p

E&uation (-) TC = " Kdh ! = h ! q = hM 'cd # when compare w/ $*&

d p

d p

%. Quantity Discount Model ! " .ll/unit discount sin)le price for a order ,ncremental discount price/brea0 quantities )e q c iq Kd 2easible3 q#(feasible)/ + j 1cjd#must be included E&uation (.) TC j (q ) = 4 2easible3 price brea0 quantity(min) q "
!

E/ample K = $56 per order, d = 5766 units per year, i = "8% per year 9tep !3 (ase !3 c! = $___ for ! q : 566
" Kd =______units h 9tep ; 9ince ! q! < 566 , $*&! is feasible

9tep " q!# =

9tep 5 '( feasible use q# 4 feasibleuse price brea0 quantity TC j (q ) = 9tep 8 compare '( find'(# (min '() 9tep < 9ummary / =ot si>e ('(# q) /'(# =$_____ /unit cost $___ (. 0"en to 1se EOQ Models irre)ular ? justify apply $*& 9tep ! find d @ (shift " ")/ s (shift " ;) 9tep " find
@ 9tep ; find variability coefficient VC = d
"

Kd c j iq + 1cjd q "

relative variability of demand

9tep 5 $*&3 A( : 6 " $*&3 A( - 6 " ? too lumpy @ = 6 , VC = 6 constant demand assumption is reasonable dj are equal, *. )o2er3o 3T2o Orderin! )olicy E&uation (14),f t " m " , then t = " m (14)

.ns3 'o determine such a m value, we can use 'rial and error by settin) m= 6,!,", %5(5*B in equation (!6), and obtain ! 5!5, " 7"7, 8 <8<, !! ;!", "" <"5, 58 "57B 'hus product !3 order every "C;= 7 days %roduct "3 order every "C5= !< days %roduct ;3 order every "C8= ;" days
"6 "! "" "; "5 " = " ! 5!5 " " 7"7 " 8 <8< " !! ;!" " "" <"5

! day " days 5 days 7 days !<

"8 " "

< E

" 58 "8; " D6 8!6 " !7! 6!D " ;<" 6;D

;" days <5 days !"7 days "8< days

"7

days

"