Deterministic

Inventory Models
___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

Basic EOQ Model

___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

Basic Economic Order Quantity Model
(EOQ Model)
How much to order? Optimum quantity
When to order? Optimum reorder point
What is the total cost?
What is the average inventory level?
What is the maximum inventory level?
___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

Basic Economic Order Quantity Model
(EOQ Model)
Assumptions
Single item
Deterministic demand (static)
Deterministic lead time (constant)
Uniform depletion of the inventory
___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

Basic Economic Order Quantity Model
(EOQ Model)
Assumptions
Constant order quantity (OQ)
Purchasing cost is independent of the OQ
Unit holding cost is independent of the OQ
No shortages, no surpluses
___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

Basic Economic Order Quantity Model
(EOQ Model)
Inventory
Depletion Replenishment
Level
q

Maximum
Level

Average
Level

q/2
Order
Arrives
0

Cycle 1
Cycle 2
Cycle 3
Time
___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery

Monthly production of beer = 4 000 hl

Filling into glass bottles = 25% of production
Empty bottles stored in plastic cases (20 pcs.)
Annual holding cost per case = 20 CZK
Ordering cost transportation = 11 000 CZK per order
other = 1 000 CZK per order

Lead time = of month

Objective: minimize total annual cost
___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
Annual demand

Q = 120 000 cases

Annual holding cost

c1 = 20 CZK per case

Ordering cost
Lead time

c2 = 12 000 CZK per order

d = 1/2 of month = 1/24 of year

___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
Total annual cost
TC HC OC
Total annual ORDERING cost
Total annual HOLDING cost
___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Inventory
Level
q
Order
quantity
q/2

Maximum
Level

Average
Level

0
Time
___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
Order quantity - q
Maximum inventory level

q max q
Average inventory level
q
qavg
2
___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
Total annual HOLDING cost
HC c1qavg c1

q
2

Total annual ORDERING cost

Q
OC c 2 n c 2
q
___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
Total annual cost
q
Q
TC (q ) c1 c 2
2
q

___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
Total cost
1 212 000
TC
624 000
HC
OC

244 000
0

10 000

60 000

120 000

___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
Policy I

Policy II

Policy III

Annual demand Q

120 000

120 000

120 000

Order quantity q

10 000

60 000

120 000

Annual unit holding cost c1

20

20

20

Average inventory level q/2

5 000

30 000

60 000

Total annual holding cost HC

100 000

600 000

1 200 000

Unit ordering cost c2

12 000

12 000

12 000

Number of orders Q/q

12

Total annual ordering cost OC

144 000

24 000

12 000

Total annual cost TC

244 000
624 000
1 212 000
___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
Inventory Level

Policy I
10 000
0

12 Time

___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
Inventory
Level

Policy II

60 000

12 Time

___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
Inventory
Level
120 000

Policy III

12 Time

___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
Optimum order quantity
q
*

2Qc 2
c1

2(120 000)(12 000)

q
12 000 cases
20
*

___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
Optimum total annual cost

TC * 2Qc1c 2

TC * 2(120 000)(20)(12 000) 240 000 CZK

___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
cost
TC
240 000

HC

OC
0

12 000

___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

EOQ Model
Example Brewery
Optimum length of inventory cycle
2c 2
1 q*
t *

n
Q
Qc1
*

t * 1/10 of year 36.5 days

___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
*
q max
q*

Inventory
Level

*
q avg

12 000
6 000

73
36.5

146
109.5

219
182.5

292
255.5

365 Time
328.5
(days)

___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
Inventory
Level
q*

Order
Delivery

r*

Time

t*
___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

EOQ Model
Example Brewery
Optimum reorder point
*
dq
r * * dQ
t

1
r 120 000 5 000 cases
24
*

q*

r*

d
t*
___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry

Deterministic Inventory Models

EOQ Model
Example Brewery
Inventory
Level
q*

d > t*
r * dQ mod q *

r*

Time

d
t*

___________________________________________________________________________
Quantitative Methods of Management
Jan Fbry