# 153

**MODEL 2: EOQ without Instantaneous (noninstantaneous) Receipt (Fixed-Order Quantity Model with Usage)
**

This model sometimes called Production Order Quantity Model. In the basic model we have assumed that the entire inventory, which is ordered, arrives simultaneously. In many cases, however, this is not a valid assumption, because the vendor delivers the order in partial shipment or portions ever a period of time. In such cases inventory is being used while new inventory is still being received and the inventory does not build up immediately to its maximum point. Instead, it builds up gradually when inventory is received faster than it is being used; then it declines to its lowest level as incoming shipments stop and the use of inventory continues. This version of the EOQ model is known as “Noninstantaneous Receipt Model” also referred to as the “Gradual Usage Model ” and “Production Lot Size Model”. In this, noninstantaneous receipt model, the order quantity is received gradually over time, and the inventory level is depleted at the same time it is being replenished. This concept is illustrated in Fig.3. We can apply the above stated to an optimum production lot size, where the finished goods are being sold while each lot is produced. In this case, the inventory of finished goods doesn’t build up immediately to its maximum point, as in case of Model1. Instead, it builds up gradually as goods are produced faster than they are being sold; then it declines to its lowest point as production of a particular batch ceases although sales continue (see fig 3). Inventory level Optimal order/lot size (units) Inventory rises as incoming shipments (or production) Exceeds usage/sales Maximum inventory level (Imax), (Incoming Shipments or production stops)X or X0 or Q0

% into C)/R (R-

Production Rate

Inventory declines as use/sales continue inventory New receipts/production begin t1 t2 supply ends t0 Time

Supply begins

Fig. 3 : Inventory with receipt over time.

153

154

Let

R = Daily receipt/production rate in units c = use rate in units daily

EOQ Model

X0 =

{(2 B (1 C )/E - c/R )}

OLS Model

Q0 =

{(2 s)/E C (1 - c/R )}

X0 (MU) =

{(2C )/Z pB (

1 - c/R )}

Q0 (MU)=

{ C .s)/Z (2 p

(1 - c/R )}

Imax = Xo(1 – c/R) t1 = X0 / R t2 = Imax/C t0 = t1 + t2 = X0/C Ke =

Imax = Qo(1 – c/R) t1 = Qo/R t2 = Imax/C t0 = t1 + t2 = Qo/C

{2C E B (1

- c/R )}

Ke =

{ 2 C - cs /E}R ( )1

Example 32: İzmir Wine Co. bottles 5000 cases of a particular rose wine annually. The set-up cost per run is 90 MU. Factory cost is 5 MU per case. Carrying costs on finished goods inventory is 20 %. Production rate is 100 cases per day and sales amount to 14cases/day. How many cases should be bottled per production run? Solution : Q0 =

{(2C p( s)/Z 1 - c/R )}

=

{ (5 0 )(9 2 00

0 (0 0 )/5 .2 )

(1 - 1 /1 0 4 0 )}

= 1023 Cases/Run

154

155

Example 33 : A plastics moulding firm produces and uses 24 000 Teflon bearing inserts annually. The cost of setting up for production is 70 MU and the weekly rate is 1000 units. If the production cost is 5.50 MU per unit and the annual carrying cost is 1.50 MU per unit, how many units should the firm produce during each production run? What is the maximum inventory that the firm will stock? Solution : The demand and the production rates must be in the same units, so we arbitrarily put both into annual terms, assuming a 52-week year. Q0 = {(2Cs)/E(1 - c/R)} = = 2040 Inserts/Run

{2 )(24 (70 0 0 )/(1 0 0 .5 ( 1 - 24 0 /5 0 00 20 0 ))}

t1 = Q0 / R = 2040 / 1000 = 2 weeks so the firm will be producing inserts about every month. Imax = Q0 (1 – c/R) = 2040(1-24000/52000) = 1098.5 Inserts Example 34 : The Ege Creamery Co. produces ice-cream bars for vending machines and has an annual demand for 72000 bars. The Co. has the capacity to produce 400 bars per day. It takes only a few minutes to adjust the production set-up cost estimated at 7.50 MU per set up for the bars, and the firm is reluctant to produce too many at one time because the storage cost (refrigeration) is relatively high at 1.50 MU/bar/year. The firm supplies vending machines with its “ Ege bars “ on 360 days of the year. a) What is the most economical number of bars to produce during any one run? a) What is the optimal length of the production run in days? c) What is the total inventory cost? d) What is the maximum inventory level? Solution : a) Q0 = {(2CS)/E(1 - c/R)} = {2(72000)( 7.5)/(1.5) = 1200 Bars/Run production

/(1 - (7 0 0 6 2 0 /3 0

)/4 0 0 )}

b)

t1 = Qo/R = 1200/400 = 3 Days to = Qo/C = 1200/72000 = 0.017 Year ≈ 6 Days

c)

Ke= 2CsE(1 = 900 MU

- c/R )

=

2 2 0 )(7 (7 0 0

.5 .5 )(1 )[1

- (7 0 0 6 2 0 /3 0

)/4 0 0]

155

156

d)

Imax = Qo(1-c/R) = 1200(0.5) = 600 Bars [ N0 = C/Q0 = 72000/1200 =60 runs /year ]

Example 35 : A contractor has to supply 10 000 bearings per day to an automobile manufacturer. He finds that, when he starts a production run, he can produce 25000 bearings per day. The cost of holding a bearing in stock for one year is 0.02 MU and the set-up cost of a production is 18 MU. How many times should the production runs occur? Solution: Q0 = {2Cs/E(1 - c/R)} = = 105 000 Bearings

(2 1 0 0 1 x00x 8 )/((0.0 / 2 35 6 )(1 - 1 0 0 5 0 0 0 /2 0 0 ))

No = C/Qo = (10000x365)/105000 = 34.76 ≈ 35 Runs Example 36: A firm has a yearly demand for 52000 units of a product, which it produces. The cost of setting up for production is 80 MU and weekly production rate is 1000 units. The carrying cost is 3.50 MU/unit/year. How many units should the firm produce on each production run? Solution : Q0 =

{(2 s)/E C (1 - c/R )}

=

(2 5 0 0 8 x20x

0 .5 (1 )/(3 0

-1 ) /1

=∞

They should have an infinite (continuous) run. Example 37 : Mr. Demir wonders what effect an annual inventory costs will result if he allows his supplier to deliver the # 1713 valve orders gradually rather than all at once. The analyst analyses this request and develops these estimates: C = 10000 valves/year E = 0.40 MU/valve/year B = 5.50 MU/order c = 40 valves per day (10000 values/year) R = 120 valves per day. a) Calculate the EOQ. b) Calculate the total inventory costs. 156

Solution: First we can set the reorder point at R0 = 0.40/120)}
=171.26 valves
.40 each and it costs 4MU to set up the salad line. Finding Q0.50 MU /year Result: The Supplier should be allowed to deliver the # 1713 valves gradually.5x0.c/R )}
=
{2x10000x5
. Example 38 : A large hotel serves banquets and several restaurants from central kitchen in which labour is shifted among various stations and jobs.
s)/(Z Q0 = {(2C p = 1414 Salads )(1 .c/R )}
=
{ x00x (2 3 0 0
4 )/(0. No stock outs are allowed.
4 )(1 . Salad consumption (demand) is virtually constant and known to be 30 000 Salads/year.4 valves Ke = 209.3 /4 )} 0 5
Example 39 :
157
.c/R )}
=
{(2 1 0 x x 00 0
5.27 + 209.76 = 38. when the valves were delivered all at once were EOQ = 524. are estimated to be 90% of the cost of a salad.157
c) Should the supplier be allowed to deliver valves gradually? Solution : a) The EOQ: XO = {(2CB)/E(1 = 624.27 MU
c) The EOQ and total inventory costs from example 23. Salads cost 0. for allowing its supplier to deliver the # 1713 valve gradually are Savings = -171. because labour can be shifted to the salad operation instantaneously.5)/0 (1 . The hotel would like to establish an operating doctrine for salad operation.76 MU
The estimated savings to the Co.4 2 )} 0/1 0
b) The new total inventory costs are: Ke=
{2C E B (1 . and the production rate is greater than the demand rate.4
.9 0 x. Carrying costs of salads.4(1
. Salads can be produced at a rate of 45000/year. high because of spoilage.

c/R )}
=
( ( 2 x 5 0 0 0 x 5 0 4 ) /0(. The relevant cost data.. Solution: X0 = {(2CB)/Zp( = 2000 units
1 .10 MU.158
Azim.
To maintain a smooth flow of materials. carrying cost 20% at unit cost.5 0 /6 5 ) 00 20
}
158
.300/400)}
= 150 MU
Total Cost = Ka + Ke = 10000 × 1. 104 MU.2 (1
. Inc. The firm operates 52 weeks/year and has developed the following pertinent cost data: • • • unit cost of manufactured fixtures set-up cost holding cost/unit/year 7. b) Ke= = ≅ 1 030 MU
{2C (1 sE
. Unit cost 1. obtained from the sales office is: order cost 15 MU/order.5
0(1 . determine the following: a) Optimal lot size (optimal production quantity). a manufacturing concern produces fixtures for use in one of its assemblies. 0. The department producing the fixtures is capable and producing 6250 units/week. Determine the order policy that Azim should use.3 0 0 )} 0 0 /4 0
AZIM should initiate an order policy requiring lot shipments of size 2000 units.50 + 150 = 15150 MU to = (Xo / C) ⋅ 365 = (2000 / 10000)× 365 = 73 days N0 = C/Xo = 10000/2000 = 5 orders / year Example 40: ABC-Lite.c/R )}
=
{2x10000x1
5x0. daily arrivals of units 400 units. anticipated annual demand 10000 units. Solution : a) Q0 =
{(2 s)/E C (1 .c/R )}
=
{ x00x (2 1 0 0
1 )/0 0 5 .50 MU. However.c/R )}
{2 0 x 2 (50 0 5
)(1 4 .1 0 )(0
0 )(1 . c) The reorder point. b) Total annual inventory cost.1 5 0 0 0 /6 2}5 0 ) 2 1 0 1 -
= 52000 fixtures Thus the optimal production lot size (OLS) is 52 000 fixtures per run. management has requested a re-evaluation of its ordering policy. An analysis of the current sales market reveals the following.. Using this information. Corporation is currently purchasing sales units faster than it is able to sell them as a result. daily sales 300 units.50 MU. the production department requires a 4-week lead-time on production requests.5 )(1 .20x1. total current demand is only 5000 fixtures / week. Ke =
{2C B pZ (1 .

Set up cost for a production run of wheels is 45 MU. Carrying cost is 1. The day trunks are assembled uniformly over the entire year. We further assume that the ordering cost. maximum inventory level. given a optimal lot size of 52000 fixtures is 1030 MU/year.200/800)45 } = 1800 MU c) to = Qo/C = 2400/ (4800/240) = 12 days Thus a run of wheels will be made every 12 days.c/R) = {2(48000)( 45)}/{1(1 .75/meter and C= 10000 m/year. Minimum total annual cost of carrying and set up. total inventory cost.00 MU/wheel/year.e. e) Imax = Qo(1-c/R) = 2400(1. Determine each of the following a) b) c) d) e) Optimal run size.200/800) =1800 wheels Example 42: Assume that The Gul Carpet Store in Izmir has its own manufacturing facility in which it produces Demir Carpet. d) t1 = Qo/R = 2400/800 = 3 days Thus each run will require 3 days to complete.e. The firm makes its own wheels. Note: This policy requires 5 production runs per year.
Solution: a) Q0= 2Cs/E(1 . N0 = C/Q0 = (5000 x 52)/520 000 = 5 runs Example 41: A toy manufacturer uses 48. “s” is the cost of setting up the production process to make Demir carpet. The firm operates 240 days per year. Recall that E=0. Cycle time Run time Imax.c/R)} = {2(4800)(1 . 159
. Determine the optimal order size.000 Rubber wheels per year for its popular dumb truck series. i.
The manufacturing facility operator the same days the store is open (i. which it can produce at a rate of 800 per day. c) R0 = clt + tlt = 5000 × 4 = 20 000 fixtures
The reorder point is 20000 fixtures. 311 days) and produces 150 m of the carpet per days.159
The total annual inventory cost.200/800)} = 2400 wheels b) Ko = {2CsE(1 .

The bottling lines fill at a rate of 3000 bottles per hour but take an hour to change over between different drinks.c/R )}
=
{ )(1 (2 0
0 0 5 )} 0 )(1 0
/{ .8 m
This value is substituted into the following formula to determine total minimum inventory cost: Ke= or Ke= (C/Q0). Imax= Qo(1.3 .75 per unit C=10000m c=10000/311 =32.7 (1 0 5
.8/2)(0.43 runs/year The maximum inventory level is. a. and the maximum inventory level.160
the length of the time to receive an order.75)(1-32.8/150 = 15.2/150) = 1 329 MU The length of time to receive an order for this type of manufacturing operation is commonly called the length of the production run. How would that change the ELS? 160
C 10000
2 sE C (1 -c ) /R
=
2 0 0 0 5 )( (1 0 )(1 0
0 5 .2 5 )} 2 /1 0
= 2 256.c/R) = 2256.05 days/order The number of orders per year is actually the number of production runs that will be made No = Q = 2256 . Demand for each type of drink is reasonably constant at 80 000 per month (a month has 160 production hours).3 .2 5 ) 2 /1 0
= 1 329 MU
. The cost of each changeover (cost of labor and lost production capacity) has been calculated at 100 MU/hour.2/150) = 1 772 m Example 43: The manager of a bottling plant which bottles soft drinks needs to decide how long a `run` of each type of drink to ask the lines to process.8 (1-32. Solution s = 150MU/order E=0. the number of orders per year.2m/day Qo=
{(2 s)/E C (1 .s + (Q0/2)E(1-c/R) = (10000/2256. It is computed as follows t1 = Q0/R = 2 256. Stock-holding costs are counted at 0.8)150 + (2 256. How many bottles the companies produce an each run? b.8 = 4. The staffs who operate the lines have devised a method of reducing the changeover time from 1 hour to 30 minutes.1 MU/bottle-month.7 )(1
.

solve for the optimum number of units per order.8 = ~ 283 hubcaps. The minislicer has been one of its most popular items. Given the following values. Jantsan`s forecast for its hubcap is 1000 units next year. and is constant throughout the year. ELS= √2Cs/[E(1-c/R)] = √[2*80000*100]/[0. Example 45: Flemming Accessories producers paper slicers used in offices and art stores.161
Solution: a.1(1-500/3000)] = 13 856 bottles b. Carrying costs are 1 MU/minislicers per yaer. Demand for these slicers during the production process is 30 day. How many minislicers should Flemming manufacture in each batch? Solution: Q0 = √2Cs/[E(1-c/s)] = √(2*6750*150)/[1(1-30/125)] = 1 632 minislicers/run
161
.1(1-50/3000)] = 9 798 bottles Example 44: Jantsan Co. The set-up cost for the equipment necassary to produce the minislicers is 150 MU. An average the firm can manufacture 125 minislicers/day. Solution: Annual demand = C= 1000 units Setup cost = s= 10 MU Holding cost = E= 0. annual demand is 6750 units.50 MU/unit-year Daily production rate = R= 8 units/day Daily demand rate = 4 units/day Q0 = √2Cs/[E(1-c/s)] = √(2*100*10)/[0. with an average daily demand of 4 units/ However. Minislicers are produced in batches.5(1-4/8)] = 282. makes and sells specialty hubcaps for the retail automobile after market. New s = 50 New X0 =√(2*50*80000)/[0. the production process is most efficient at 8 units per day (so the company produces 8 per day but uses only 4 per day).

The objective of the quantity discount model is to identify an order quantity that will represent the lowest total cost for the entire set of curves. K = Carrying Cost + Ordering Cost + Purchasing Cost = (X/2)E + (C/X)B + Cp In the basic EOQ model. there is a separate U-shaped total-cost-curve for each unit price. Each curve has a minimum. When quantity discounts are offered. where the total cost is the sum of carrying cost.3(1 -40/150)] = 2 697 scissors /run
Quantity Discounts
Quantity discounts are price reductions for large orders offered to customers to induce them to buy in large quantities.30 MU to carry one pair of scissors for one year. Carrying costs are constant (e.162
Example 46: Jan Getry is the owner of a small company that produces electric scissors use to cut fabric. ordering cost. price per unit is the same for all order sizes. The buyer’s goal with the quantity that will minimize total cost. those points are not necessarily feasible. There are two general cases of the model. The annual demand is for 8000 scissors and Jan produces the scissors in batches. i. On the average.g. determination of the order size does not involve the purchasing cost. Carrying costs are stated as a percentage of purchase price ( e/g 20 % of unit price) When carrying costs are constant. Jan produces 150 scissors per day and during the production process. the customers must weigh the potential benefits of reduced purchase price and fewer orders that will result from buying in large quantities against the increase in carrying costs caused by higher average inventories. 2 MU/unit) ii. How many scissors should Jan produce in each batch? Solution: Q0 = √2Cs/[E(1-c/R)] = √(2*8000*100)/[0. demand for scissors has been about 40 scissors per day. The rationale for not including unit price is that under the assumption of no quantity discounts. If quantity discounts are offered.
Ka 162
. ordering cost and purchasing. The cost to set up the production process is 100 MU and it costs Jan 0. which is the same for all the cost curves. there will be single EOQ.

Only one of the unit prices will have the EOQ in its feasible range since the range do not overlap/ Identify that range. When carrying costs are specified as a percentage of unit price.
163
. each curve will have a different EOQ. 4: When carrying costs are constant. a) If the feasible EOQ is on the lowest price range. The procedure for determining the overall EOQ differs slightly depending on which of these two cases is relevant. 5: When carrying costs are giving as a percentage of unit prices.163
Kb Kc
x Ea.b. 2. AWhen carrying costs that are constant. the procedure is as follows: 1. that is the optimal order quantity.c 2
C B X
Fig. all curves have the same EOQ. K a Kb Kc
CCa CCb c a rry i n g c o s t E O Q Ea O Q b E O Q
c
Fig.Compute the common EOQ.

Compare the total cost is the optimal order quantity.164
b) If the EOQ is in any other range.e. Compute the common EOQ = Xo =
(2 B C )/E
=
{ (8 6 2 2 1 )(1
)} /4
= 70 cases
2. will be: K70 = (C/X) B + (X/2)E + Cp = (816/70)12 + (70/12)4 + 816⋅ 18 = 14 968 MU Since the cost ranges exist. and the price schedule is as follows:
Range 1 to 49 50 to 79 80 to 99 100 or more
Price 20 MU 18 17 16
Determine the optimal order quantity and the total cost. Example 47: The maintenance department of a large hospital uses about 816 cases of liquid cleanser annually. since 100 cases per order yields the lowest total cost. The 70 cases can be bought at 18 MU/case. compute the total cost for the EOQ and for the price breaks of all lower unit costs. 100 cases is the overall optimal order quantity. When carrying costs are expressed as a percentage of price. Ordering cost is 12MU. The total cost to purchase 816 cases/ a year at a rate of 70 cases/order. carrying costs are 4MU/cases. determine the best purchase quantity with the following procedure: 1. at least 80 cases must be purchased. Beginning with the lowest price. In order to buy at 17MU/case. and the total cost will be K100 = (816/100)12 + (100/2)4 + 816⋅ 16 = 13 354 MU Therefore. B. each must be checked against the minimum cost generated by 70 cases at 18 MU each. compute the EOQ for each price range until a feasible EOQ is found (i. since 70 falls in the range of 50-79 cases. Solution: 1. until an EOQ is found that falls in the quantity range for its price) 164
. at least 100 cases per order are required. The total cost at 80 cases will be K80 = (816/80)12 + (80/2)4 + 816⋅ 17 = 14 154 MU To obtain a cost of 16 MU / case.

. B=2500MU E=190MU C=200 units /year X0 =
2C B/E
=
{2(2500
×200 )}/140
= 72.1. Therefore this price is used to compute total cost as follows: TC=K =(C/X)B + (X/2)E +Cp = (2500/2)200+(72. this total cost of 233784 MU units must be compared with total cost with an order size of 50 and a price of 900 MU. If the EOQ for the lowest price is feasible. the ordering cost is 2500 MU and the annual demand for this particular model is estimated to be 200 units.89.5 in the subsequent computation. If the EOQ is not the lowest price range.5 = ≈ 73 Computers
Although we will use Xo=72. The University Bookstore units to determine if it should take advantage of this discount an order the basic EOQ order size. This order size is eligible for the firs discount of 1100 MU.
165
. as follows. realistically the order size would be 73 computers.49.5/2)190 +1100(200) = 233784 MU Since there is a discount for a large order size than 50.165
2.1 1100 90+ 900 The annual carrying cost for the University for a microcomputer is 190 MU. It has offered the Eastern Mediterranean University Bookstore at Northern Cyprus a quantity discount pricing schedule if they will purchase the microcomputers in volume. K= (2500/2)200 + (90/2)190 + 900(200) = 194105 MU Since this total cost is lower (194105MU<233784MU). Quantity Price 1.1 1400MU 50. as follows. the maximum discount price should be taken and 90 units should be ordered. Solution: First determine the EOQ and total cost with the basic model. Example 48: (A Quantity Discount with Constant Carrying Cost) Comptech Computers wants to reduce a large stock of microcomputers it is discontinuing. it is the optimal order quantity. compare the total cost at the price break for all lower prices with the total cost of the largest feasible EOQ. The quantity that yields the lowest total cost is the optimum.1.

599 600+ Price 65MU 59 56
The manufacturing company uses 700 of the items annually. the economic order is 200 with a total cost of 43662.50 MU This discount results in a lower cost.50MU Example 50: Surge Electric uses 4000 toggle switches a year. compare the current discounted order size with the fixed-price discount for X=600 K= (700/200)275 + (600/2)14 + 56(700)= 43 720. Finally. X0 = Ke=
2C B/E 2C E B
= =
{ (2 5 0 2 7 )(7
0 /1 )} 4
2 ×275 ×700 ×14
= 165. Solution: First.Determine the amount the firm should order.90 MU 0. Solution:
166
. K= (275/200)700+ (14/2)20 +59(700)= 43 662.199 200. Quantity 1.83 MU Since this total cost is higher. and carrying costs are 18% of the purchase price per unit on an annual basis.64 MU
Next compare the order size with the second-level quantity discount with an order size of 200 and a discount price of 59MU. determine the optimal (economic) order size and the total cost with basic EOQ model.83 units = 2 321.82 E= Zp
It costs approximately 18 MU to prepare an order and receive it. Determine the optimal order quantity and the annual cost. the annually carrying cost is 14MU/unit. Switches are priced as follows: Range 1-499 500-999 1000+ Unit Price 0.85 0.166
Example 49: A manufacturing firm has been offered a particular item it uses according to the following discount pricing schedule provided by the supplier. and the ordering cost is 275MU.

2 8 /(4 )
= 67.85 MU ranges of 500-999. Determine the economic order quantity and the total cost. b) K970 = (4000/970) 18 + (970/2) 0. and 32. so that demand for Surgical Packages is fairly uniform.85 =
{2( 40 0 × 8 )} / 0. The hospital estimates that it costs 8MU to process and receive an order.82
E = Zp 0.50 =
(2 B p C )/(Z )
=
{ (1 0 2 20
×8 /(3 ) )} .61 = ≈ 68 units
167
.1530 0.85 per unit.50 if purchased in quantities of 75 or more.) The Izmir Saglik Hospital uses disposable surgical packages for many routine operations rather than sterilising and packaging the necessary bandages and instrument.1476 + 0.167
Range 1-499 500-999 1000+
Unit Price 0. 970 fall in the 0.9
a) Find the EOQ for the each price. starting with the lowest price. Each Surgical Packages costs 35MU in quantities of less than 75. until a feasible EOQ is located.85 MU each rather than 0.12) = 4.90)=0.82 each.90 MU 0.12) = 3.1476
a) Find the EOQ for each price.p__________ 35(0.5(0. 988 is not feasible EOQ. Solution: Range 1-75 75+ Unit Price 35MU 32. X35 =
(2 B p C )/(Z )
=
{ (1 0 2 20
× )} . It uses approximately 100 Surgical Packages unit each month.85)=0.153 + 0. X32. EOQ0.1620 0.2 32.82)=0. Next try 35 MU per unit.9
= ≈ 70 units
This quantity is not feasible.147 6 = 988 switches Since 988 switches will cost 0.18(0.82(4000) = 3 426 MU Thus the minimum-cost order size is 1000 switches.1 0 1 53
= 970 switches
This is feasible. The hospital would not receive the lowest price if it purchased 70 packages each time.82 = 2CB/E = {2(4000 ×18)}/0.85 0. starting with the lowest price. Elective surgery is scheduled for times when the schedule for other surgery is low. Example 51: (Quantity Discount with Carrying cost as a % of price. EOQ0.18(0.50MU E=Z. until a feasible EOQ is located.85(4000) = 3 548 MU K1000 = (4000/1000) 18 + (1000/2) 0.18(0. Next try 0. The cost of holding (carrying) inventory is estimated to the 12% of the purchase per year.

17)(2) + 3400(2) = 7 282 MU Hence. 1500 is the optimal order size. the EOQ for the 2 MU/kg range is no longer feasible.90 + (1200/75)8 + 1200(32. The supplier has just announced that orders of 1000kgs.
2C E B
+ Cp =
2 20 (1 0
× ×4 ) 8 .17)(3) + 3400(3) = 10 789 MU K 1500 = (3400/1500)100 + (1500/2)(0.168
This is a feasible order quantity.97 MU
If the hospital buys the Surgical Packages in quantities of 75 the total annual cost will
Example 52: A small manufacturing firm uses roughly 3400 kg. or more will be filled at a price of 2 MU/kg.17) = 0. Determine the order size that will minimise the total cost. Consequently it becomes necessary to compute the EOQ for 3 MU/kg and compare the total cost for that size with the total cost using the price break quantity (i.34 X 2MU/kg =
2CB /E
=
2 4010 (3 0 x 0
)/0 4 .1 1 0 /(0
7 ×3 )
= 1 155 kgs
K 1155 = (3400/1155)100 + (1155/2)(0.5) = 39 274. Currently the firm purchases 300 kgs per order and pays 3MU/kg. because it would result in a lower total cost. of chemical dye a year.2
+ 1200(35) = 42 283. The manufacturing firm incurs a cost of 100 MU each time it submits an order and assign an annual holding cost of 17% of the purchase price per kg. a. what order size would minimise total cost? Solution: a) C = 3400kg/year p=2 E = Zp = 2(0.25 MU The proper order quantity is 75 surg packs. b) When the discount is offered at 1500 kgs. but another step will determine of it is the best. b. 168
. The hospital will achieve a sizeable saving on the item cost if it purchases 75 units in each order. Lets use Total Cost equation to evaluate this possibility and find the total annual cost if 68 is used as the order quantity. K68 = be K75 = (75/2)3. If the supplier offered the discount at 1500 kg instead of 1000 kg’s. X 3MU/kg =
2C /E B
=
{ (3 0 2 40
× 0 )} .e 1500).3
= 1 414 kgs
Since the quantity is feasible at 2MU/kg it is the optimum.

then 2 hrs. The assumptions 1) Constant demand 2) Constant lead-time are hardly ever true.169
How to Determine the Optimum Safety Stock Level when Out-of-Stock Costs are Known
How much should we buy when it is time to replenish the inventory? This question was answered through Model 1 and 2. -By the weather or . 6: Inventory level with constant demand and constant lead-time. Planned demand of an item can be affected by -Unexpected market acceptance. is the lead-time. Here we want to introduce quantitative techniques that will help us to answer the question: “ When should we replenish the inventory?” This whento-order point is called the “Reorder Point”.
Lead Time If you call for home delivery of pizza and it takes 2 hrs for it to arrive. If you order is going to be delivered 30 calendar days after. then 30 days is the lead-time.By a strike.
169
.
in v e n to r y le v e l
EO Q
re o rd e r l e v e l
ti m e le a d ti m e
o rd e r re c e iv e d o rd e r p l a c e d Fig. Usage of an item during lead-time is known as lead-time demand.

floods.The transportation company may experience delays. Variations in the lead-time or in demand often cause stock-outs. (We are assuming here that the customer waits for delivery and does not cancel the order)
a) Inventory level with constant demand and excessively long lead time. the condition that exists when the inventory on the hand is not sufficient to cover needs. Fig. since unfilled orders have to be filled. o rd e r re c e i v e d
inventory level o r d e r p la c e d
re o rd e r p o i n t le v e l s to c k o u t
n orm al le a d ti m e
b) Inventory level with excessive demand and constant lead-time.A supplier may run into problems (strikes.7: Inventory levels.
inventory level
re o rd e r o rd e r p la c e d p o in t
la t e a r r iv a l
n o r m a l le a d ti m e
o rd e r re c e i v e d
s toc k out
Note that inventory level does not increase to original points.
170
.170
The lead-time varies too . break downs) or .

The cost of stock-out multiplied by the number of stock-outs prevented by the safety stock gives the cost reduction figure. The storage cost is 0. b) The average inventory maintained. Example 53: A nationwide trucking firm has an average demand of 10 new tires per week and receives deliveries from a Izmit tire company about 20 business days (5 days/week) after placing an order. Idle machines and employee ill will are examples of internal costs. Find a) The maximum inventory on hand. Safety-stocks are amounts of inventory held in excess of regular usage quantities in order to provide specified levels of protection against stock-out. Safety-stocks are extra inventory held as a badge. we do not divide it by 2 to get average inventory.in nature because the safety stock is always a part of total inventory. what is the order point? Solution: Order point (OP) = clt +SS = (10 tires/week)(4 weeks) + 15 tires = 55 tires Example 54: A producer of Gül Shampoo uses 400 litres per week of a chemical. Note that this cost addition is continuing -even permanent.171
Stock-outs are undesirable because they can be quiet expensive. Lost sales and disgruntled customers are examples of external costs.
Safety Stock
Safety-stocks constitute one of the major means of dealing with the uncertainties associated with variations in demand and lead-time. Management desire to avoid stock-outs leads to further consideration of when to order and reorder. which is ordered in EOQ of 5000 litres at a quantity discount cost of 3. but increase carrying costs. It is obvious that a safety stock has two effects on a firm’s costs. Note that also because the safety stock does not often define in quantity.01 MU/litre-week. The procurement lead-time is maintained. It will decrease the cost of stock-outs.75 MU/litre. Solution: a) Maximum Inventory = I max = Safety Stock + EOQ
I max = 200 +5000 = 5200 litres
171
. c) The order point in units. or protection against the possibility of a stock-out. If the firm seeks to maintain a safety stock of 15 tires.

To determine an approach level of safety stock.07 3/100=0. a stock-out can be caused only by an increase in demand after the reorder point has been reached.03 1.06 68/100=0. If the increase had occurred before the reorder point was reached.172
b) Average Inventory = Iave= (Imax + Imin)/2 = (5200 + 200)/2 = 2 700 liters c) Order point = OP = c lt + SS = 400 x 2 + 200 = 1 000 litres
The optimum safety stock to carry is determined in the light of two goals. units 150 200 250 300 350 400 450 Solution: Order point = Lead time x Usage/day= 6 days x 50 units/day = 300 units No. No= 5 orders Lead-time = 6 days Inventory record card is given in the following table. we will use the probability approach. -We shall assume a constant lead-time. How much safety stock the firm should carry? Use during reorder Period.03 4/100=0. Under these assumptions.68 9/100=0.09 7/100=0. Example 55: The cost of being out of stock for a particular item = 50 MU/unit Cu . Every approach to this problem has its own limitations. the most satisfactory approach. a purchase order would have been placed at the moment the inventory. The decision of how much safety stock to carry is not an easy one. cost of carrying one item in safety stock = 10 MU / unit. EOQ = 3600 units average daily usage = 50 items/day. which are somewhat hostile to each other: 1) to minimise the cost of stock-outs while also 2) to minimise carrying costs on the safety stock.00
172
. -We shall assume that each lot is delivered all at one time. of times this quantity was used 3 4 6 68 9 7 3 100 Use probability 3/100 =0.04 6/100=0.

Of being out
No.
Safety stock
Prob. EOQ thus affects the reorder point.09 +0.07 +0.07 when we use is 400 0. we could carry some safety stock and pick the one. Cost of stock-outs plus 2. We are concerned over this figure of 19 %.No safety stock . Thus we would consider carrying a safety stock of: i. The company will be safe 81% of the time (0.150 units are shown in the table.03 when we use is
50
100 150
4000
0
4000MU
173
. (0. This would be 0. Carrying costs on the safety stock. The cost of being out of stock for the four courses of action . We would be out of stock only when usage is 450 units. 100 Units This would cover a usage of 350 or 400 units during the reorder point.50 units . 150 Units This would cover a usage of 350. but it will be out of stock 19% of the time (0.04 +0.06 0. We would be out of stock only when usage is 400 or 450 units.07 +0. short
Expected annual cost shortage 50x0. 50 Units This would cover a usage of 350 during the reorder point.03 x50
Total annual cost
Annual carrying cost
Total cost/year (stockout + carrying)
0
0. the firm. be in danger of running out of item 5 times during the year.03 = 0. If the optimal order number is 5 orders per year.07 x50MUx5 =1750 150x0.03).68 + 0.09 x50MUx1 5 =1125 100x0. iii.173
Ordering point is 300 units. To reduce or avoid this shortage.400 or 450 during the reorder point.100 units . which yields the lowest total for 1.03) . therefore.03 of the time. We would never run out of stock with this amount of safety stock.09 when we use is 350 0.10 of the time) ii.

08 0.174
450 50 0.49 0.06 1.00
Cumulative probability totals 0.86 0.03 x50MUx5 =750 50x0.74 0.
Use during reorder period (units) 50 100 150 200 250 300 350
Frequency of use 4 9 12 45 12 8 6 100
Relative frequency of use 4/100 9/100 12/100 49/100 12/100 8/100 6/100 100/100
Probability of use 0.12 0.12 0. Adoption of the safety stock policy would change the reorder point.94 1.03 when we use is 450 0 50 100
MUx5 =1125 50x0.25 0.04 0. Demir Sales manager has kept a record of actual demand during the reorder period.00
174
. The results are shown in Table below. If 100 motors are held as safety stock.09 0. For the past year.07 x50MUx5 =875 100x0.07 when we use is 400 0. then the reorder point is determined as follows.03 x50MUx5 =375
1625
50x10MU =500MU 100 x10MU =1000 150x10M U =1500
2125MU
100 150
50 0
1375MU 1500MU
The appropriate safety stock is 100 units. Reorder point = average daily use x lead time + Safety Stock = 50 x 6 + 100 = 400 units Example 56: Demir Sales has used a fixed-quantity model as a basis for establishing its inventory policy for the past three years. During the time the sales pattern has been fluctuating.13 0. In such a way that demand remains uncertain.04 0.03 when we use is 450 0.

08 0.300. Calculate these potential costs when the reorder point is 200 units and the company orders 6 times per year [Shortage cost is 10 MU/unit] Solution: Reorder pt. If the management of Demir Sales were to institute a safety stock policy that would minimize the total expected annual cost. Suppose Demir Sales wants to know the total annual cost of various safety stock possibilities.06 0.12.175
Current reorder point for Demir Sales is 200 units. a policy.0.
Service Level
As told before when variability is present in demand or lead-time. A safety stock of 150 units yields MU.350 Usage probabilities = 0. and a safety stock of 50 units yields cost of 600 MU and 100 units safety stocks has total cost of 180 MU. If 50 units to 250 units increase the reorder point then the management will be the safe 26 % of the time. Safety stock will reduce the risk of running out of inventory (a stock-out) during lead-time. The reorder point then increases by the amount of safety stock: Order point (OP) = clt + SS
175
. the policy would require a safety stock of 150 units.08. The cost of running out of stock is set at 10 MU/unit.08 0.06 Shortage cost = 10 MU/unit. which involves no stockout 74 % of the time. the possibility that actual demand will exceed expected demand is created. (preset) = 200 units Usage above reorder level = 250. Orders per year = 6 Safety stock Usage Units short
Probabilit y of shortage
Annual Cost
(10Mux6x units short)
Expected Annual Cost 360 480 540 240 360 180 0
Total Expected Annual Cost
0 50 100 150
250 300 350 300 350 350 350
50 100 150 50 100 50 0
0.12 0.0.06 0
3000 6000 9000 3000 6000 3000 0
1380 600 180 0
Safety stock of o units results in a total expected annual cost of 1380 MU.06 0.

the greater the value of Z. Service models can be used when demand variability is present. Service level of 95% implies a probability of 95% that demand will not exceed supply during lead-time.e that the amount of stock on hand will be sufficient to meet demand) Hence. Order cycle service level can be defined as " The probability that demand will not exceed supply during lead time"(i. a manager must carefully weight the cost of carrying safety stock-out against the reduction in stock-out risk it provides. 8: The OP based on a normal distribution of lead-time demand.176
Stock-out protection is needed only during lead-time. stock-out risk is 5%. The risk of stock-out is the complement of service level. An equivalent statement that demand will be satisfied in 95% of such instances does not mean that 95% of demand will be satisfied.Because it costs a lot of money to hold safety stock. The formula is OP = Expected Demand during lead time + Z σ
Clt
The models generally assume that any variability in demand rate or lead-time can be adequately described by a normal distribution. the smaller the risk the manager is willing to accept. The value of Z is obtained from normal distribution table. Example 57: Suppose that the manager of a construction supply house determined from the historical records that the lead-time demand for sand average 50 tons. In addition.
r is k o f s to c k o u t
S e r v i c e le v e l
( p r o b a b ility o f n o s to c k o u t)
Q
e x p e c te d d e m a n d
OP
z s c a le
SAFETY STO C KS
O
Z
Fig. suppose the
176
. The value of “Z” depends on the stock-out risk that the manager is willing to accept generally. The first model can be used if an estimate of expected demand during lead-time and its standard deviation are available. since the service level increases as the risk of stock-out decreases.

* If only demand is variable. The manager is willing to accept no more than a 10% risk of stock out during lead-time.
2 LT ⋅σ c2 + c 2 ⋅σ lt
177
. OP = c lt + Z σ clt = 50 + 9. a.03 = 0.
c = average daily or weekly demand LT= lead time in days or weeks. then OP = c⋅ LT + Z⋅ Example 58: A restaurant use an average of 50 jars a special sauce each week. Weekly usage of sauce has a standard deviation of 3 jars. Assume the distribution of usage is normal. using a service level of 1 . data are generally available on daily or weekly demand.88(5) = 9. b. a manager can determine whether demand and /or lead time variable and if variability exists in one or both.40 tons When data on lead-time demand are not readily available the above formula cannot be used.
* If both demand and lead-time are variable.40 = 59. For those situations the following formulas can be used. a. you obtain a value of Z = + 1. c. Safety Stock = Z σ clt = 1. which is two weeks.
clt
* If only lead-time is variable. From the normal-distribution table. then σ OP = c⋅ LT + Z⋅ c⋅ σ lt
= c⋅ σ
lt
. Answer these questions. c. assuming that the manager is willing to accept a stock-out risk of no more than 3%. Using that data. Solution: Expected lead time demand = 50 tons σ clt = 5 tons Risk = 3% a.97 . and on the length of lead-time. b. Solution: Which are the above formulas is appropriate for this situation? Why? Determine the value of z Determine the reader point.0.177
manager determined that demand during lead-time could be described by a normal distribution that has a mean of 50 tons and a standard deviation of 50 tons. then “σ OP = c ⋅ LT where
clt
What value of "Z " is appropriate? How much safety stock should be held? What reorder point should be used?
=
LT
⋅ σ c “ and the reorder point is. Nevertheless.40 tons c. the related standard deviation(s). the order point is.88 b.

055 3 ⋅ 9 = 1200 + 32. Service Level = 90% a) Because only demand is variable (i.). Find the reorder point. Usage can be approximated by a normal distribution that has a mean of 400 a std.e.43 jars
Example 59: (OP for variable demand and constant lead-time) The housekeeping department of a motel uses approximately 400 washcloths per day. dev.03 = ≈ 1232 washcloths
Safety Stock = ≈ 32 wash cloths Example 60: (OP for constant demand and variable lead time) The motel uses approximately 600 bars of soap each day and this tens to vary more than a few bars either way. what is the minimum number of washcloths that must be on hand at reorder time. and how much of that amount can be considered safety stock? Solution: c = 400 washcloths/day LT = 3 days σ c = 9 washcloths/day Risk = 2% → SL = 98% Z for 98% is about + 2. Formula c⋅ LT + Z⋅ is appropriate. b) SL = 90% c) OP = c⋅ LT + Z⋅ Z = +1. If the motel policy is to maintain a stock-out risk of 2%. Solution: c = 600 bars/day SL = 90% Z = +1.178
c = 50 jars/week σ c = 3 jars/week LT = 2 weeks Risk = 10%.28
LT ⋅ σ
c
LT
⋅σ
c
= 50⋅ 2 + 1.43 = 105. The actual amount tends to vary with the number of guest or any given night.28 LT = 6 days σ lt = 2 days OP = c ⋅ LT + Z ⋅ c (σ lt) = 600(6)+1. has a std. deviation of 9 washcloths per day. A service level of 90% is required.28(600)(2)
SL=90%
3600
5136
178
. Lead-time for soap delivery is normally distributed with a mean of 6 days and a standard deviation of 2 days.055 OP = c⋅ LT + Z⋅ LT ⋅ σ c = 400(3) + 2.28 2 ⋅ 3 = 100 + 5. A linen supply company delivery towels and washes cloths with a lead-time of 3 days.

in certain situations management may find it desirable from a cost point of view to not only allow stock-out but to plan for them.
179
. The supplier was out of stock in that item. The shopkeeper will. we will have the additional “cost of back-ordering”. order exactly what you want if you will wait for delivery. not to find the sofa you want in the fabric you want at your local furniture store. we imply that: 1. the back-order model is not appropriate. Back-ordering cost is composed of two different costs. Lead time is normally distributed with an average of 10 days and a standard deviation of 2 days. 3. however. In the past.65 = 25(10) + 1. The supplier fills the customer’s order when the next shipment arrives If however. this quantity has tended to vary normally and have a standard deviation of 3 glasses/day. However. The customer waits until the next shipment arrives. The customer does not withdraw the order. the customer will withdraw the order when the item is found to be out of stock. The customer placed an order.179
= 5136 bars of soap
Example 61: (OP for variable demand rate and variable lead time) The motel replaces broken glasses at a rate of 25 per day.
Back-orders
The specific type of stock-out we are concerned with here is called a “back-order”. It is quite common. 4.65
10(3)
2
LT = 10 days
σ c = 3 glasses/day
σ lt = 2 days
2 2 2 OP = c⋅ LT + Z⋅ LT ⋅σc + c ⋅σlt = 334 glasses
+(25)
2
(2)
2
MODEL III : Inventory Management with Planned Stock-outs (Back-order Model)
Up to this we have been concerned with methods which prevent stock-outs. for example. 2. Glasses are ordered from İzmir supplier. 5. What reorder point should be used to achieve level of 95%? Solution: c = 25 glasses/day SL =95% z = 1. When we speak of an item being back-ordered. In back-order model.

Mr. Management scientists have determined that the optimum units per economic lot size ( X 0) and number of units back-ordered (S) (owed to customers when a new economic lot arrives) and also Imax. x0 inventory level Im a x
s = n o .e. After having explained the back order model to him. maximum inventory level possible when economic lot arrives. o f u n its b a c k o rd e re d
+ T
c o m p le te in v e n to r y c y c le
T im e S k t1 ts
tim e d u r in g w h ic h th e r e is a s to c k o u t ti m e d u r in g w h ic h i n v e n to r y is a v a ila b le
Fig. Whatever loss of customer goodwill occurs as a result of having to backorder an item. he believes that his situation is one for which the assumptions of this model hold true. 9: Inventory behaviour in back-order situation Formulas: Economic Order Quantity Stock-out Quantity Total Inventory Costs ` : : : : : Stock-out time : Time inventory available : Complete Inventory Cycle Time: Maximum Inventory : : X0 = (2CB/E) ⋅ S = X0 (E/(E+d)) S =
(E +d)/d
or
S = Ke/d
(2C B /d) ⋅
d /(E +d )
Ke = {(X0-S)2/2X0}E +(C/X0)B +(S2/2X0)d Ke = 2CBE ⋅ d/(E +d) tS = S/c (c = daily demand rate t1 = (X0 . i. Any cost of handling the backorder (special handling.180
1. Doğru has come up with these estimates:
180
.S)/c T0 = X0/c Imax= Xo(d/(E+d)) B Imax= (2C /E) ⋅ d/(E +d)
Example 62: Mr. labour) 2. Ahmet Doğru is the Renault dealer in İzmir. follow-up.

19 = ≈ 21 cars as back-order Mr. Complete the total annual cost of inventory system. which also decreases the frequency of exposure to the risk (cost) of the stock-out. Inventory Management With Planned Stock-outs (No Back-orders)
In manufacturing organisations.166 (800/(800+150)) = 21. idling expensive labour and facilities. stock-outs can halt production. arrived.181
C (annual demand) = 400 units E (annual carrying cost for inventory expressed as MU/unit/year) = 800 MU B (cost per order) = 100 MU d (cost to maintain 1 unit on back order status for 1 year) = 150 MU a) b) Complete the optimum XO and S.
Solution: a) X0 =
(2 B ) C /E ⋅ (E +d )/d
=
{ (4 0 0 2 0 )(1
0 /8 0 )} 0
⋅
(8 0 +1 0 5 0 5 )/1 0
= ≈ 25 cars S = 25. the economic lot. other costs of being out of stock include the cost of expediting replacement inventory the cost of a loss of sales and a loss of goodwill and other intangible costs. Doğru would plan to have 21 cars back-ordered at the time each shipment of 25 cars. c) Total annual inventory cost with XO = 25 cars and back-orders = 21 cars Ke =
(2 B ) C /E ⋅ d /(E +d )
=
2 0 )(1 0 (4 0 0
)(8 0 0)
⋅
10 0 5 /(8 0
+1 0 5)
= 3 178. The stock-out costs could be included in the EOQ and this would increase the order quantity.88 MU
MODEL IV. Let d = cost of stock-out EOQ (With stock-out) = XSO =
{C 2 (B +d )}/E
We can use carrying costs to imply something about “d” Implied d/order = (Carrying cost/year)/(orders/year)
181
.

ordering cost of 10MU/order and carrying cost of 10MU/unit–year. = C/X0 = 500/55 = 9 orders Implied SO cost/order = d = [(X0/2)E]/N0 = [(55/2)15]/9 = 46 MU/order b. i. same cost /order can be used as estimate of “d”.
=
[2 5 0 (4 )(5 0
)]/1 5
= 55 units
Orders/yr. How much safety stock is justified by the carrying costs? Solution: XO=
{C 2 (B +D /E )} {C 2 (B +d /E )}
=
{ 00 5 2(5 )(4
+4 )} 5 6 /1
= 78 units
=
{2 0 )(1 (1 00
0 +4 /10 0)}
= 100 units
Orders /yr = C/X0 = 1000/100 = 10 orders/year Stock-out costs = 40MU ⋅ 10 orders = 400MU/year At carrying cost of 10 MU/unit–year.e. EOQ (with SO) = Example 64: A firm has an annual demand of 1000 units. Stock-out costs are estimated to be about 40MU each time when the firm has an exposure to stock-out. Compute revised EOQ with stock out costs.182
d/order = [(X0/2)E]/N0 We assume that the firm is willing to carry inventory up to the point where this carrying cost is just offset by the stock-out cost. Example 63: A glassware manufacturer with an annual demand of 500 unit has ordering costs of 45 MU/order and carrying costs of 15MU/m –year a) b) Solution: a. XO=
2C B/E
Compute the implied stock-out cost. the 400MU will fund (400 MU/year)/(10 MU/unit-year) = 40 units of safety stocks
SOLVED PROBLEMS
Example 1: 182
.

e.10/25)}
=105 000 bearings
t0 = Q0/C = (105 000 bearings/day) / (10 000 bearings/day) = 10.5 days Example 2: A subcontractor undertakes to supply diesel engines to a truck manufacturer at the rate of 25 per day. and there is a clause in the contract penalising him 10 MU/engine /day late for missing the scheduled delivery date.) Solution: In this problem we are concerned with balancing the costs of holding inventory against the costs of delayed deliveries to customer. There is a clause in the contract penalising him 10 MU /engine /day late for missing the scheduled delivery date. immediately after taking into stock the engines made in the previous month and then shipping engines to fill unsatisfied demand from the previous month. that a new run will be started whenever the inventory is zero and that the sole reason for producing for inventory is to obtain lower production costs.02 MU and the set up cost of a production run is 18. and each time anew batch is started there are set-up costs of 10. The cost of holding a bearing in stock for one year is 0. He finds that. He finds that the cost of holding a completed engine in stock is16 MU per month.000 MU. How frequently should batches be started and what should be the initial inventory level at the time each batch is completed? Solution:
183
. and all these engines are available for delivery any time after the end of the month What should his inventory level be at the beginning of each month? (i. Imax = XO(d/(E+d)) = 30(25) [10/((16/10)+10)] = 712 engines Example 3: A contractor undertakes to supply diesel engines to a truck manufacturer at a rate of 25 per day.0
2 /365)(1
.000 bearings per day to an automobile manufacture. he can produce 25.00 MU.c/R )}
=
{2(18)(100
00)}/{(0. he has fixed the size of each batch at 25 x 30 = 750 engines. when he starts a production run.000 bearings per day. The finds that the cost of holding a completed engine in stock is 16 MU/month. Since the subcontractor has already decided to produce a batch of engines every month. Q0 =
(2 s)/{E C (1 . His production process is such that each month (30 days) he starts batches of engines throw the shops. How frequently should production runs be made? Solution: We assume that run sizes are constant.183
A contractor has to supply 10. Production of engines is in batches.

d /(E +d )
=
(2 5 0 )(2 )(1
00 6 0 0 )(1 /3
)
⋅
1 /(1 /3 0 6 0
+0 1)
Solution: a) Qo =
2Cs/E
⋅
(E +d )/d
=
[2 8 (1 0
0 0 0 )] 0 )(1 0
/9
⋅
(9 + 6 6 1 )/1
= 2 500 units
b) Imax= Q0[d/(E+d)] = 2 500 [ 16/(9+16)] =2 500 (0.42 Engines t0 = Xo/C = 993.1MU or Ke = S⋅ d.014 year = ≈ 5 days Example 5:
184
. c) The time between runs.31 Engines
Imax = XO [d/(E+d)] = 993.02632) = 993.73 [ 10/(16. Each run requires an outlay of 100 MU for machine set-up and each unit carried inventory costs 9 MU.184
E = 16/30 MU/day XO =
(2 B ) C /E
d = 10 MU/day
⋅ d /(E +d )
s = 10 000 MU
{ (2 )(1 2 5 0 0 0 /(1 / 0 )} 6
c = 25 engines/day
3) 0
=
⋅
(1 /3 6 0
+0 0 1 )/1
= 968.30 + 10)] = 943. = 50. It is estimated that the cost of permitting a back order is 16 MU/ Unit/yr.73/25 = 39. Determine: a) The optimal size for each production run. b) The maximum level of inventory that the manufacturer can expect to have on hand.73 [16/30/(16/30 + 10)] = 50.73 Engines S = Xo[E/(E+d)] = 993. Thus the cost of inventory will be Ke= 2CBE ⋅ = 503.2458 (1.1 MU Example 4: ABC-Lite.64) 1 600 units c) to = Q0/C = 2 500/180 000 = 0. a manufacturing concern produces electric appliances. Each backorder is filled as soon as the production run is completed.75 = ≈ 40 days It would be better to start a new batch approximately every 40 days. The company expects next years sales to be 180 000 units.31 × 10 = 503.

15 0.20 0. of demand P(C ) Cumulative prob.SOR% SL= 1 – 0.15 0. How many units of this model should Nationwide stock if it seeks to balance the costs of overstocking and understocking? Demand (# of cars) Prob.97 9 0.05 15 (or more) 0.55. We would be inclined to stock less rather than more because the cost of overstocking (12 MU) is >the cost of under stocking (10 MU) SOR = 0.00 Solution: If the Nationwide overstocks the loss/unit for every excess unit at the end of the period will be K0 = Cost/unit – SV/unit = 20 MU/unit – 8 MU/unit = 12 MU/unit If the Nationwide under stocks.12 0.23 0. but did not stock will be Ku = Price/unit . Records of past demand have yielded the empirical probability distribution shown. Naionwide rents the cars to its customers for 30 MU/day.90 10 0.545 is closer o cumulative probability of 0.00 1 7 0.17 14 0.55 12 0.00 0.03 1 8 0.Cost/unit = 30 MU/unit – 20 MU/unit = 10 MU/unit Then the critical probability is P(c ) = K0/ K0 + Ku = 12 / 12+ 10 = 0.545 = 0. the auto leasing firm will give nationwide an 8 MU rebate. Of demand P(C ) 6 (or less) 0.32 13 0.75 11 0.545 We chose to stock 11 cars because our calculated P(C ) value of 0.545 Because the SOR is the complement of service level SL = 100% . If a car is not used.455
185
.185
An Operations Management of Nationwide Car Pentals must decide on the number of vehcles of a certain model to alocate to his agency in the Güzelyurt area on a one-time basis.05 0. The cars are obtained from an auto leasing firm at a cost of 20 MU/day. the opportunity cost for every unit Nationwide could gain.07 0.

30 0. That demand will equal or exceed this level 1 0.10 0.15 0.55 0.95 0.85 MU each.35 MU/unit If the store understocks.35 + 3. The following probability distribution has been estimated for demand for these caps prior to New Year.10 = 0. but any that have not been sold by NEW YEAR will be reduced to 1. the loss per unit for every excess unit at the end of the year will be K0 = Cost/unit – SV/unit = 1. The caps can be sold for 4.101 DEMIR SPORTSWEAR must purchase 9 dozens because 9 dozens of caps has a cumulative probability of 0. That demand will equal this amount 0. Assume that any caps unsold by new year can be sold at the lower price. Caps must be purchased in dozens.80 0.05
186
.95 MU/unit – 1.95 MU during the fall season.Cost/unit = 4.15 0.50 MU.10 MU/unit The critical probability P(c ) = K0/ K0 + Ku = 0.186
Service level would be 45.5% Example 6: DEMIR SPORTSWEAR can purchase a special shipment of wool caps for 1.85 MU/unit – 1.15 which is >critical probability (0.85 MU/unit = 3. How many caps should DEMIR purchase? Demand (Dozens) 4 5 6 7 8 9 10 Solution: If the store overstocks.35 / 0. the opportunity cost for every unit the store could sell but did not stock will be Ku = Price/unit .05 0.101) Example 7: Prob.50 MU/unit = 0.05 Prob.15 0.25 0.25 0.

12 0.
187
.187
Hot cup cafe is faced with the decision of how many cups of coffee to prepare before a football game at the local stadium.00 Prob.21.12 MU/unit – 0.36 and 0.93 0.11 0.15 0. What is the long-run expected loss under the current policy? Demand 27000 28000 29000 30000 31000 32000 33000 34000 35000 Solution: K0 = Cost/unit – SV/unit = 0.01 0.03 + 0. Each cup of coffee costs 0.Cost/unit = 0.03 MU/unit = 0. Unsold coffee is disposed of at a total loss.25.25 0.09 = 0.05 0.00 “X” units Frequency 7 12 20 25 15 10 5 5 1
The critical fractile is 0.61 0.12 MU per cup.20 0.05 0.07 0. these values correspond to inventory levels of 31000 and 32000 respectively. Select as the optimal inventory level of two levels.03 / 0. (at demanded) least 1 0. Past records indicate that 38000 cups are enough to prevent any shortage and this is the number prepared before each game.06 0.09 MU/unit Ku = Price/unit .81 0. How many cups of coffee should be prepared prior to each game? b.21 0. This value is bracketed by 0. The following data summarizes the sales history a.10 0.00 MU/unit = 0.36 0.03 MU/unit – 0.03 MU per cup and sells for 0.01 0.25 Demand 27000 28000 29000 30000 31000 32000 33000 34000 35000 36000 Relative probability 0. The optimal inventory level is 31000 units.03 MU/unit P(c ) = K0/ K0 + Ku = 0.

Example 8: The City Chronicle has a daily newspaper demand that varies from between 20000 and 24000 copies per day.08 + 0.60 Iopt = C min + % SL (inventory) Iopt = 20000 + 0.P( C)] P( C)* = Ko/Ko+Ku Where.40 The 0.
Example 9:
188
. What service level would that optimal level corresponds with? Solution: Ku.6 (24000 – 20000) = 22400 units.20 MU per issue. K0 = Cost/unit – SV/unit= 0.03 = 1140 MU * The cost of the optimal policy = 31000*0.P( C)* = Ko[I . Unsold papers have no value. * The cost of the current policy = 38000*0.12 P( C)* = Ko/Ko+Ku = 0.08 = 0.40 = 0.Cost/unit = 0.08 Ku = Price/unit . Thus the corresponding SERVİCE LEVEL is Service level = 1 – Stock out risk SL = 1-0.08 /0. the difference between this cost and the cost of the optimal policy is the long-run expected loss.20 – 0. The paper costs 0.40 is the equating probability that demand will be exceeded and represents a stock out risk established on the basis of the basis of costs given.188
b) To determine the long-run expected loss under the current policy. What is the optimal level of papers to stock? b.08 – 0 = 0.03 = 930 MU Thus the long-run expected loss = 1140 – 930 = 210 MU. a.12 = 0.08 MU per issue to produce and generates revenue of 0.

15 0.00
a.00
189
. What is the optimal stock level under these conditions? (Use marginal analysis and assume that any unsold unit is held over for one period only) Solution: a.10 0 1.25 0.50 0. there is an additional cost of 15 MU for handling and storage.00 0. Management has projected the following weekly demand pattern:
Weekly demand (units) 35 36 37 38 39 40 41+
Probability of demand 0.57 (critical ratio)
Weekly demand (units) 35 36 37 38 39 40 41+
Probability of demand Cum. Using marginal analysis. Suppose that restocking is a continual process.25 0. Selling price/unit = 100 MU Cost/unit = 70MU Salvage value /unit = 30 MU K0 = Cost/unit – SV/unit= 70 – 30 = 40 MU (marginal loss) Ku = Price/unit .Prob. determine the otimal stock level b.25 0. If the unit is not sold in one period. However.10 0.15 0.10 1.75 0.Cost/unit = 100 – 70 = 30 MU (marginal profit) P( C)* = Ko/Ko+Ku =40 / 40+30 = ~0.25 0.189
BMW Auto sales is offering a special car attachment at the unheard-of-price 100 MU/unit.10 0.90 0. 0.15 0.25 0. Unsold units can be salvaged for 30 MU/unit.10 0 0 1. The attachment costs MNW 70 MU. it is held over the next period.15 0.

Find the annual total inventory cost Solution: a. What is the annual total inventory cost? Solution: a. Has developed the following information: Annual usage = 5400 units Cost of the product = 365 MU/unit Ordering cost = 55 MU/order Carrying cost = 28% /year of inventory value held. K0 = Cost/unit – SV/unit=85– 30 = 55 MU (marginal loss) Ku = Price/unit . The Co. X0 = √2CB/E= √2*(400*12)*120/35 = 181.46 MU/year. Ke= √2CBzp = √2*5400*55*365*0. Find the optimal number of orders/year c.80 MU/year
Example 12: 190
. a Determine the optimal number of units per order b. Example 11: Holding costs are 35 MU/unit/year.Cost/unit = 100 – 70 = 30 MU (marginal profit) P( C)* = Ko/Ko+Ku =55 / 55+30 = ~0. What is the optimal order quantity? b. The ordering cost is 120 MU/order and sales are relatively constant at 400 month. Example 10: The ABC Co.42 units/order b. N0 = C/X0 =5400 / 76 = ~71 orders/year c. a. X0 = √2CB/zp = √2*5400*55/365*0. Ke= √2CBE= √2*(400*12)*120*35 = 6349.65 (critical ratio) So.190
The optimal inventory level equals to 37 units. is planning to stock a new product.28 = ~76 units/order b. b.28 = 7791. the optimal inventory level equals to 37 units.

He has estimated that preparation of an order and other variable costs associated with each order are about 10 MU.18*87 = 125. Furthermore.5 * 10 = 125 MU x/2*zp = 15. the cost of the forms used in placing the order and so on. Mr.28 MU/year e.5 % per month (or 18% per year) to hold items in stock. This cost includes wages. t0 = X0/C * 365 = 16 /200 *365 = 29.18*87 = 15.01 MU. X0 = √2CB/zp = √2*200*10 /0. N0 = C/X0 =200 /16= 12.98/2 * 0. Show and verify that the annual holding cost is equal to the annual ordering cost (due to rounding. Farmerson. one of which is the popular Layback Model TT chair.191
Azim furniture company handles several lines of furniture. How many orders would there be? c. Calculate the minimum total inventory cost e. Leyla. The manager. Mr.98 =~16 chairs/order b. and it costs him about 1. Farmerson has determined from past invoices that he has sold about 200 chair during each of the past five years at a fairly uniform rate and he expects to continue at that rate. has decided to determine by use of the EOQ model the best quantity to obtain in each order. estimates that it costs 10 MU every time when an order is placed. What would the average inventory be? What would the annual holding cost be? Solution: 191
.18*87 = 250. Ke= √2CBzp = √2*200*10*0. a. a. N0 *B = 12. show these costs are approximately equal) Solution: a.5 orders/year c. How many orders per year would be placed? What would the annual ordering cost be? c. Assume that the demand is constant throughout the year. she estimates that the cost of carrying are screw in inventory for a year is one-half of 0. Determine the approximate lenght of a supply order in days? d.1 MU Example 13: A. How many #6 screws should Leyla order at a time to minimize total inventory cost? b. How many layback chairs should be ordered each time? b. Leyla Tas has determined that the annual demand for #6 screws is 100000 screws. His cost for the chair is 87 MU.2 days d.

C.
PROBLEMS 192
.01/2 = 0. what effect would this have on the ROP? Solution: Twice a year = Ke= NB + X/2*E = 2*10 + 50000/2*0. how much more would this cost every year over the ordering policy that she developed. and on the average the store sells 500 screws each day. If Leyla follows her manager`s policy. It takes approximately 8 working days for an order of #6 screws to arrive once the order has been placed. The manager believes that Leyla places too many orders for screws /year.005 = 100 MU Extra cost for manager’s offer = 45 MU No effect on ROP.005 = 50 MU/year B.192
a. Average inventory = x/2 = 20000/2 = 10000 units Total holding cost = x/2*E= 10000 * 0.005 X0 = √2CB/E= √2*100000*10 / 0. if only two orders were placed each year. What is the ROP? Solution: ROP = Ro= use rate * lead time = c*tlt = 500 screws/day * 8 days = 4 000 screws. He believes that an order should be placed only twice/year. The demand is fairly constant. N0 = C/X0 = 100000/20000= 5 orders/year Total ordering cost = N*B = 5*10 = 50 MU/year c. E= 0.005 = 20000 screws/order b.005 = 20 + 125 = 145 5 times a year = Ke= √2CBE = √2*100000*10*0.

Shoe Plaza produces one style at shoe for which demand has averaged 1500 units per month. is 0. (EOQ) b) Determine the optimum time between orders. c) The number of production runs per year. Assuming no shortages are permitted. What is the total annual cost? (k)
4. The firm estimates that inventory holding charges a 0. Holding costs are set at 6% of cost per pair per year. Lead-time for processing an order is one month. Using this data. component HD08 is produced in another department at the rate of 100 units per day. The reorder point. Each pair of these shoes that’s produced costs shoe plaza 20 MU. Ordering cost is 8 MU/order. Set up costs total 50 MU and the average annual holding cost is 0.00 MU valuation per unit – year. a) Determine the optimum order size. d) The time between orders.Carrying charges are set at 22% of unit cost. determine the following. Each component HD08 costs 7 MU and requires a lead-time of 7 days. The unit cost at a screwdriver is 0. Xro The total annual cost of the optimal lot-size policy. OLS.20 MU per 1. For purposes of maintaining an emergency stock. (EOQ) b) What is the total annual cost of optimum order policy. the cost of placing an order is 10 MU. A local maintenance firm uses 500 screwdrivers per month. The Izmir Petrol Co. management insists that the stock level never fall below 50 units. lead-time is two-months and “Replacement-Runs” is instantaneous. One of the components of product X. uses 600 quarts of oil per month. The firm operates 250 days each year.50 MU. Product X is a standard item in Azim’s inventory. Ke.
193
. determine the following a) The optimum production lot. e) The reorder point. a) Determine the economic order quantity. a) b) c) d) The optimal production lot size .? d) What is the annual cost of the total system? (This includes cost to meet demand) 2. For all practical purposes demand is continuous and uniform.size b) The total yearly cost to meet demand.50 MU/unit-year. Each set up requires an outlay of 400mu. Ke? c) If lead-time is one month. what is the re-order pt. c) What is the reorder point? d) What is the total annual cost of this company’s system? 3. Final assembly is performed on an assembly line. The unit cost of a quart of oil to the co. The assembly line uses HD08 at the rate of 40 per day.193
1.40 MU. which is in operation every day.

194
194
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