chapter 8 Material Inventory Quantitative Analysis

Material Inventory has two isues: Quantitavite Model

1-Need to decide the quantity (how much purchases) EOQ Economic Order Quantity
2-Timing to Purchase (when to Purchase) Safety Stock/Buffer Stock

Two Types Costs incurred

1- Cost Of Carrying Inventory (CC)it is the cost that is incurred to hold inventory in the warehouse
Holding Cost
depends on the size of the order, greater the size of the
order the greater will be CC e.g, Propert Tax, Rent,
Insurance of material , Material Handling , Obseletion, Deteriotation
2- Ordering Cost (OC, CO) the cost that you bear as soon as you place
an order with the supplier/vendor ,Depends on the
frequency of order, higher the frequency higer the cost
e.g, transportaion cost, freight in, Setup cost , stock out cost

Total Inventory Carrying Cost is a sum of OC and CC there exsists an inverse relationship
between two CC high, OC low

Economic Order Quantity is the amonut of inventory to be

ordered at one time for the purpose of minimizing total inventory costs
if purchase are high, higher CC
if the purchase are low, higher OC
EOQ Calculations
1-Table method
2-Formula method

EOQ (2*AD*CO/CC*CU)^1/2
1. EOQ=

AD/AR/RU annual Demand/annual Requirement/ Required Units

CO ordering cost
CC carrying cost
CU cost per unit

Data, 1200
monthly demand 100 annual Demand
CO 10
CC 4%
CU 15 0.6

EOQ 200 units

Number of Orders to be placed= Annual Demand/ EOQ

 6
Annual Ordering Cost= (Annual Demand*Cost of order)/EOQ
60
Annual Carrying Cost = (Cost per unit * Carrying Cost*EOQ)/2
60
Total Inventory Cost 120
Economic Order Quantity
k/Buffer Stock
EOQ Table Method
Data
Estimated Annual Demand 2400 units
Cost per unit 0.75
Cost of Order $20
Carrying Cost 20% of avg Inventory Investment
no of
orders * CO
1 2 3 4 (col 2/2) 5 6 7 8
Avg. Avg Total Total
Investemen Inventory Carrying Total Inventory
Order No. of t (units) Investment Cost ($) Ordering Cost ($)
Size Orders (order ($) (col 4 * (col 5 * Cost ($) (col (col 6+col
S. No (units) (AD/ EOQ) size/2) CU) CC) 3*CO) 7)
1 300 8 150 112.50 22.5 160 182.5
2 400 6 200 150.00 30 120 150
3 800 3 400 300.00 60 60 120 EOQ
4 1200 2 600 450.00 90 40 130
5 2400 1 1200 900.00 180 20 200

prb 8.1
Data
Estmated Annual Demand 5000
OC 250
CC $4 per unit

1 2 3 4 (col 2/2) 5 6 7 8
Avg. Avg Total Total
Investemen Inventory Carrying Total Inventory
Order No. of t (units) Investment Cost ($) Ordering Cost ($)
Size Orders (order ($) (col 4 * (col 5 * Cost ($) (col (col 6+col
S. No (units) (AD/ EOQ) size/2) CU) CC) 3*CO) 7)
1 5000 1 2500 10000.00 10000 250 10250
2 2500 2 1250 5000.00 5000 500 5500
3 1250 4 625 2500.00 2500 1000 3500
4 800 6.25 400 1600.00 1600 1562.5 3162.5 EOQ
5 500 10 250 1000.00 1000 2500 3500
6 250 20 125 500 500 5000 5500
7 100 50 50 200 200 12500 12700

EOQ 790.57 formula method

No. of orders 6.324555
Annual OC 1581.139
Annual CC 1581.139 CU*CC*EOQ/2
Total Cost 3162.278
q4 Quantity Discount

CU $3 / unit
Monthly Usage 1500 units Annual Usage 18000
OC 50/order
CC 40%

1. EOQ 1224.7

2. EOQ 2000 Discount 5% of purchase price

EOQ
1225 2000
Annual Ordering Cost
(AD *CO)/EOQ 734.69 450 unit price after discount
2.85
Annual Carrying Cost
(CU*CC*EOQ)/2 735 1140 pp 3
discount rate 5%
Annual Purchase Cost 0.15
(annual Demand *54000
unit Price) #### discounted price 2.85
2.85
Total 55470 #### 2.857143

1 2 3 4 5 6 7 8 9 10 11 12
Avg. Avg
Investe Invento Total Total
No. of ment ry Carrying Total Total Inventory
Order Orders (units) Investm Cost ($) Ordering Purchase Cost ($)
Size (AD/ Disc Discount (order ent ($) (col 8 * Cost ($) Cost (AD * (col 9+col
S. No (units) EOQ) Price ount ed Price size/2) (Avg CC) (col 3*CO) CU) 10+col 11)
1 300 8 0.75 4% 0.72115 150 108.17 21.63462 160 12980.77 13162.4
2 400 6 0.75 3% 0.72816 200 145.63 29.12621 120 13106.8 13255.92
3 800 3 0.75 5% 0.71429 400 285.71 57.14286 60 12857.14 12974.29
4 1200 2 0.75 4% 0.72115 600 432.69 86.53846 40 12980.77 13107.31
5 2400 1 0.75 4% 0.72115 1200 865.38 173.0769 20 12980.77 13173.85