EOQ WITH GRADUAL REPLENISHMENT

The basic EOQ model was derived under the assumption that there is
instantaneous replenishment. Since the inventory level increases instanta-
neously, the maximum level of inventory is equal to the order quantity Q
Q
and the average inventory level is 2
.
The assumption of instantaneous replenishment may be valid in a pur-
chasing situation but it may not be valid when a fairly large batch needs to
be manufactured. In such a case, the inventory level increases gradually over
a period of time till the full batch has been made. Gradual replenishment
implies that production and consumption takes place simultaneously.
We introduce the following additional parameters:

p = production rate
d = consumption rate

Obviously, p > d. Since we are producing and consuming simultaneously,

the inventory level does not increase to Q. The holding cost is calculated as
follows:

Q
Time required to produce a batch of Q units =
p
Increase in inventory level per unit time = pd
Q
Maximum inventory level = (p d)
p
1Q
Average inventory level = (p d)
2p
HQ d
Holding cost = (1 )
2 p
SD
The setup cost remains Q
. Therefore, the total cost is given by

SD HQ d
TC = + (1 ) (1)
Q 2 p

1
 Minimizing total cost in the usual way, the batch size obtained is given
by

v
u
u 2SD
Q= t (2)
H(1 dp )

Substituting the value of Q from equation 2 back into equation 1 we get:

s
d
TC = 2SDH(1 ) (3)
p