Independent Demand: Demand for these items is unknown and has to be forecasted (Uncertain).

Inventory turnover is the ratio of average cost of goods sold to average inventory investment.

Purchase lead time - time interval between ordering and receiving the order

A items generally account for about 15–20 percent of the items (SKUs, not counting multiple units of the same
item) in inventory but about 70–80 percent of the annual dollar value (ADV). At the other end of the scale, C items
might account for about 50–60 percent of the SKUs but only about 5–10 percent of the ADV.

EOQ-Only one product is involved. Annual demand requirements known. Demand is even throughout the year.
Lead time does not vary. Each order is received in a single delivery. There are no quantity discounts. Shortage is
not allowed

Q D
2DS 2(Annual Demand) (Order or Setup Cost) TC  H S
EOQ:
QO =
H
=
Annual Holding Cost 2 Q
Orders per year=D/Qo Length of order Cycle=days/(D/Qo)

Assumptions of EPQ: Similar to EOQ, Except orders are received incrementally during production

 Annual   Annual 
     I max  D
TC   Holding   Setup     H    S
 Cost   Cost   2  Q
    2 DS  p 
Q0   
Cycle length  ; Run length  ; I max   p  d 
Q Q Q
d p p H  pd 
Q Q
Cycle length  ; Run length 
d p Cycle length= Every X days Run length=X days per order

EOQ(Discounts): TC=Q/2*H+D/Q*S+RD R= price per unit

Note that because holding cost is a percentage of price, lower prices will mean lower holding cost. Thus,
as price decreases, each curve’s minimum point will be to the right of the previous curve’s minimum
point. Each (R) unit price generates a different order quantity.

The quantity that yields the lowest total cost is optimum.

The EOQ always results in the lowest total cost (False). Demand can be variable for EPQ but not for EOQ
(Not a difference). Order quantity is received all at once (Not an Assumption for EOQ and EPQ)

ROP=d*LT When inventory reaches ROP units, place next order.

Safety Stock - Stock that is held in excess of expected demand due to variablility of demand and/or lead
time. Service Level - Probability that demand will not exceed supply. Lead time service level: probability
that demand will not exceed supply during lead time. Annual service level: percentage of annual
demand filled