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IE 505 PRODUCTION PLANNING AND CONTROL

Inventory Control (known demand)

Introduction

\3rd quarter of '91 total US inventories = $1.03 trillion"

1. Types of Inventories

**Raw Material - direct & indirect
**

Components

Work in Process (WIP)

Finished Good

2. Reasons for Inventory Holding

**Set-up costs / Economies of scale
**

Uncertainties - internal & external

Smoothing

Speculation, Quantity discounts, Logistics

Transportation, Control costs

c Rakesh Nagi

University at Bualo - IE

60

IE 505 PRODUCTION PLANNING AND CONTROL

Inventory Control (known demand)

3. Relevant Costs

**Holding (carrying): space, tax/insurance, breakage, interest
**

Order: bookkeeping, receiving, handling

Shortage (stock-out): lost sales, loss-of-goodwill

4. Characteristics of Inventory Systems

**Demand: constant / variable; known / random
**

Lead time

Review time: continuous / periodic

Excess demand

Changing Inventory

c Rakesh Nagi

University at Bualo - IE

61

THE EOQ MODEL

IE 505 PRODUCTION PLANNING AND CONTROL

The EOQ Model

Assumptions

**Demand rate, known, constant = units/time
**

No shortages

Zero Lead Time (will be relaxed later)

Costs include

1. Order Setup cost = K

2. Order per unit cost = c

3. Holding per unit cost per period = h

**Constant Quantity to be ordered = Q
**

Min. average cost per unit time, G(Q): Find Q

c Rakesh Nagi

University at Bualo - IE

63

IE 505 PRODUCTION PLANNING AND CONTROL

The EOQ Model

**Ordering cost for each cycle = K + cQ
**

Ordering cost per unit time = (K + cQ)=T ; T = Q=

Average inventory holding cost = hQ=2

K + cQ hQ K + cQ hQ

+

=

+

T

2

Q=

2

K

hQ

+ c +

=

Q

2

G(Q) =

**To minimize G(Q) set 1st derivative = 0
**

K h

+ =0

G0(Q) =

2

Q

2

v

u

Q = ut 2K

Check G00(Q)

(19)

(20)

h

2K

00

G (Q) = 3 > 0 for Q > 0

Q

c Rakesh Nagi

(18)

University at Bualo - IE

(21)

64

IE 505 PRODUCTION PLANNING AND CONTROL

The EOQ Model

Inclusion of Order Lead Time

**Order Lead time, ; < T
**

Reorder point, R: on-hand inventory at order instant

R =

If > T; subtract from whole cycles: R = remainder

**Suggested Reading: Sensitivity, p. 208.
**

c Rakesh Nagi

University at Bualo - IE

65

EXTENSIONS TO THE EOQ MODEL

IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

Finite Production Rate

**Finite and constant production rate = P units/time
**

Demand rate, known, constant = units/time

P > for feasibility

No shortages

Costs include

1. Order Setup cost = K

2. Ignore per unit cost = c

3. Holding per unit cost per period = h

c Rakesh Nagi

University at Bualo - IE

67

IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

Notation & Relations:

Cycle length = T

T = T1 + T2; T1 is the uptime, T2 is the downtime

Maximal inventory level = H (H =6 Q)

Per cycle: # ordered (Q) = # produced (P T1) = # consumed (T )

T1 = Q=P

H=T1 = P

H = Q(1 =P )

c Rakesh Nagi

University at Bualo - IE

(22)

(23)

(24)

68

IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

Average annual cost function:

K hH

+

T

2

K hQ

=

+

(1 =P )

Q

2

h0 = h(1 =P )

v

u

u

Q = t 2K

h

G(Q) =

(25)

(26)

(27)

0

c Rakesh Nagi

University at Bualo - IE

69

IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

Back-ordering model: shortages permitted

Shortage cost per unit per period = p

Notation & Relations:

**T = T1 + T2; T1 is +ve inv period, T2 is -ve inv period
**

Maximal inventory level = M (M 6= Q)

T1 = M=

T2 = (Q M )=

c Rakesh Nagi

University at Bualo - IE

(28)

(29)

70

IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

**Ordering cost per unit time = (K + cQ!)=T
**

2

M

Average inventory holding cost = h 20 =T

1

2

(

Q

M

)

@

A

2

**Average inventory backlogging cost = p
**

v

u

u

u

t2

=T

v

u

u

u

t

(h+p)

h+p

Q = Khp

= QEOQ

p

v

v

u

u

u

2

Kp

u p

u

t

= QEOQt

M =

h(h+p)

c Rakesh Nagi

University at Bualo - IE

h+p

71

IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

Quantity Discount Models

**Cost per unit c is dependent on order size Q
**

Discount schedules

All-Units

Incremental

Example: all-unit

:30Q for

C (Q) = :29Q for

:28Q for

c Rakesh Nagi

0 Q < 500

500 Q < 1000

1000 Q

University at Bualo - IE

(30)

(31)

(32)

72

IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

EOQ Extensions: Quantity Discounts...

**ALGORITHM: all-unit
**

1. Compute the largest realizable EOQ value.

1.1. compute EOQ for lowest price.

1.2. if feasible: stop

1.3. otherwise: continue with next higher price

2. Compare annual cost at largest EOQ and break-point prices

2.1. for each break-point price, compute annual cost

2.2. select lowest of above and EOQ

3. Optimal Q is the one for which annual cost is minimal.

c Rakesh Nagi

University at Bualo - IE

73

IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

EOQ Extensions: Quantity Discounts...

ALGORITHM: incremental

Example

so that

**:30Q for 0 Q 500
**

C (Q) = 150 + :29(Q 500) for 500 Q 1000

295 + :28(Q 1000) for 1000 Q

(33)

(34)

(35)

:30 for 0 Q 500

C (Q)=Q = :29 + 5=Q for 500 Q 1000

:28 + 15=Q for 1000 Q

(36)

(37)

(38)

Average annual cost function:

G(Q) = C (Q)=Q + K=Q + I [C (Q)=Q]Q=2

c Rakesh Nagi

University at Bualo - IE

(39)

74

IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

ALGORITHM: incremental

1. Determine the expression for C (Q)=Q

2. Dene equation of G(Q) using C (Q)=Q

3. Compute Q for each price interval

**4. From realizable Q 0s above pick EOQ corresponding to the lowest
**

annual cost

c Rakesh Nagi

University at Bualo - IE

75

IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

Resource Constrained Multi-Product Systems

Multiple products

Resource constraints: total $ value, space

Downscaling method:

or space consumed) = constant

Assumption: (per unit cost

holding cost

**Compute unconstrained EOQ's for all products
**

If EOQ's satisfy constraints, stop

Otherwise, compute smallest downscaling ratio (available/required)

Downscale every EOQ by the above ratio

c Rakesh Nagi

University at Bualo - IE

76

IE 505 PRODUCTION PLANNING AND CONTROL

Extensions to the EOQ Model

Resource Constrained Multi-Product Systems

If assumption does not hold:

**Formulate a Lagrangean Function
**

Find partial derivatives of LF and set = 0

v

u

u

Kii

Qi ut h2i+2

wi

Determine Lagrange multiplier by interval bisection

=

**See Appendix 4-A for details
**

c Rakesh Nagi

University at Bualo - IE

77

Ecnomic order quantity

Ecnomic order quantity

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