# Economic Order Quantity and Economic Production Quantity Models for Inventory Management

Europe Site Site for Asia Site for Middle East USA Site This site is a part of the JavaScript E-labs learning objects for decision making. Other JavaScript in this series are categorized under different areas of applications in the MENU section on this page. Professor Hossein Arsham Inventory control is concerned with minimizing the total cost of inventory. In the U.K. the term often used is stock control. The three main factors in inventory control decision making process are: • • • The cost of holding the stock (e.g., based on the interest rate). The cost of placing an order (e.g., for row material stocks) or the set-up cost of production. The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand.

The third element is the most difficult to measure and is often handled by establishing a "service level" policy, e. g, certain percentage of demand will be met from stock without delay. The ABC Classification The ABC classification system is to grouping items according to annual sales volume, in an attempt to identify the small number of items that will account for most of the sales volume and that are the most important ones to control for effective inventory management. Reorder Point: The inventory level R in which an order is placed where R = D.L, D = demand rate (demand rate period (day, week, etc), and L = lead time. Safety Stock: Remaining inventory between the times that an order is placed and when new stock is received. If there are not enough inventories then a shortage may occur. Safety stock is a hedge against running out of inventory. It is an extra inventory to take care on unexpected events. It is often called buffer stock. The absence of inventory is called a shortage. Quantity Discount Model Calculation Steps: • • Compute EOQ for each quantity discount price. Is computed EOQ in the discount range?

EOQ with Shortages and Lead Time 6. Inventory Control with Uncertain Demand Top of Form The Classical Model Demand rate: x Ordering cost: C1 Holding cost: C2 Clear 2 20000 40000 Optimal Ordering Is: Q* Optimal Cycle Is: T* Number of Orders Is: n* Total Cost Is: TC Bottom of Form Top of Form 1. In entering your data to move from cell to cell in the datamatrix use the Tab key not arrow or enter keys. Production and Consumption with Shortages Model 5.4142135623 0. Select quantity with the lowest Total Cost. The Classical Model 2.• • • If not. The following This JavaScript compute the optimal values for the decision variables based on currently available information about the above factors. including the cost of the items purchased.7071067811 2 56568. Production and Consumption Model 4. Compute Total Cost for EOQ or lowest cost quantity in discount range. MENU: 1. and then click the Calculate button. Shortages Permitted Model 3. The ABC Classification 7. Enter the needed information.542494 . use lowest cost quantity in the discount range.

25 0 2 Optimal Ordering Is: Q* Optimal Shortage Is: S* Total Cost Is: TC Shortage Period Is: T2 Period per Cycle Is: T Bottom of Form Top of Form Production and Consumption Model Production rate: K Demand rate: x Holding cost: C2 Set-up cost: C1 Clear 600 200 0.001 100 Optimal Run Size Is: Q* Production Cycle Is: T 1* .Shortages Permitted Model Demand rate: x Ordering cost: C1 Holding cost: C2 Shortage cost: C3 Backorder cost: C4 Clear 600000 100 0.

25 2 Optimal Production Is: q* Optimal Inventory Is: Q* Optimal Shortage Is: P* Total Cost Is: TC Period per Cycle Is: T Bottom of Form EOQ with Shortages and Lead Time T op of F or m B ott o m of F or m .Optimal Cycle Is: T* Cost per Cycle Is: TC Bottom of Form Top of Form Production and Consumption with Shortages Model Production rate: K Demand rate: x Setup cost: C1 Holding cost: C2 Backorder cost: C4 Clear 6000 600 100 0.

Back to: Decision Making in Economics and Finance .I: Base Economic Order Quantity Total Demand Ordering Cost Holding Cost/unit/year Unit Price Clear 500 15 20 250 EOQ Average Periodic Ordering Intervals Total Number of Orders Total Cost II: EOQ with Shortages and Lead Time Estimated Lead Time in Days Shortage Cost/unit/year Clear 15 5 EOQ Level for Reorder Point Maximum Inventory Level Total Cost Longest Delay Time in Days Bottom of Form For Technical Details.

in an attempt to identify the small number of items that will account for most of the sales volume and that are the most important ones to control for effective inventory management. . less to B. with more attention being devoted to category A.outstandingly important. Inventory Control Application: The ABC classification system is to grouping items according to annual sales volume. This following JavaScript constructs an empirical cumulative distribution function (ECDF) as a measuring tool and decision procedure for the ABC inventory classification. and less to C.of average importance. B . Enter the dollar values and demands of up-to-42 distinct items and then click the Calculate button. Other JavaScript in this series are categorized under different areas of applications in the MENU section on this page. Each category can and sometimes should be handled in a different way. such as finished products or customers into three categories: A . Blank boxes are not included in the calculations but zeros are.relatively unimportant as a basis for a control scheme. Professor Hossein Arsham The ABC classification process is an analysis of a range of items.Necessary Tools for the ABC Inventory Classification Europe Mirror Site Site for Asia Site for Asia-Pacific Site for Middle East UK Site USA Site This site is a part of the JavaScript E-labs learning objects for decision making. C .

For extensive edit or to use the JavaScript for a new set of data. you do not have to click on the "clear" button. You may simply add a pair of numbers to any blank cells. including add/change/delete. then use the "clear" button. After editing. and re-enter your data all over again. change a number to another in the same cell. then click the "calculate" button.In entering your data to move from cell to cell in the datamatrix use the Tab key not arrow or enter keys. To edit your data. or delete a number from a cell. Top of Form Item Number \$ Value for Each Item Demand for That Item Item Number \$ Value for Each Item Demand for That Item Item Number \$ Value for Each Item Demand for That Item 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 CLEAR Necessary Tools for the ABC Classifications Bottom of Form .

the term often used is stock control. Safety Stock: Remaining inventory between the times that an order is placed and when new stock is received.g. . g. Other JavaScript in this series are categorized under different areas of applications in the MENU section on this page.e. In the U.K. If there are not enough inventories then a shortage may occur. based on the interest rate).Bottom of Form For Technical Details.L..g. e.. The three main factors in inventory control decision making process are: • • • The cost of holding the stock (e. what is lost if the stock is insufficient to meet all demand. Professor Hossein Arsham Inventory control is concerned with minimizing the total cost of inventory. for row material stocks) or the set-up cost of production. i. Back to: Decision Making in Economics and Finance Economic Order Quantity and Economic Production Quantity Models for Inventory Management Europe Site Site for Asia Site for Middle East USA Site This site is a part of the JavaScript E-labs learning objects for decision making. Reorder Point: The inventory level R in which an order is placed where R = D.. The third element is the most difficult to measure and is often handled by establishing a "service level" policy. in an attempt to identify the small number of items that will account for most of the sales volume and that are the most important ones to control for effective inventory management. certain percentage of demand will be met from stock without delay. D = demand rate (demand rate period (day. and L = lead time. week. The ABC Classification The ABC classification system is to grouping items according to annual sales volume. The cost of shortage. The cost of placing an order (e. etc).

The ABC Classification 7. The Classical Model 2.Safety stock is a hedge against running out of inventory. It is often called buffer stock. Compute Total Cost for EOQ or lowest cost quantity in discount range. Quantity Discount Model Calculation Steps: • • • • • Compute EOQ for each quantity discount price. EOQ with Shortages and Lead Time 6. It is an extra inventory to take care on unexpected events. Inventory Control with Uncertain Demand Top of Form The Classical Model Demand rate: x Ordering cost: C1 Holding cost: C2 Clear 2 20000 40000 Optimal Ordering Is: Q* 1. Production and Consumption Model 4. The absence of inventory is called a shortage. MENU: 1. Enter the needed information. In entering your data to move from cell to cell in the datamatrix use the Tab key not arrow or enter keys.41421356 . Select quantity with the lowest Total Cost. and then click the Calculate button. Shortages Permitted Model 3. Is computed EOQ in the discount range? If not. Production and Consumption with Shortages Model 5. The following This JavaScript compute the optimal values for the decision variables based on currently available information about the above factors. use lowest cost quantity in the discount range. including the cost of the items purchased.

5424 Shortages Permitted Model Demand rate: x Ordering cost: C1 Holding cost: C2 Shortage cost: C3 Backorder cost: C4 Clear 600000 100 0.25 0 2 Optimal Ordering Is: Q* Optimal Shortage Is: S* Total Cost Is: TC Shortage Period Is: T2 Period per Cycle Is: T Bottom of Form Top of Form Production and Consumption Model Production rate: K Demand rate: x Holding cost: C2 Set-up cost: C1 600 200 0.001 100 .Optimal Cycle Is: T* Number of Orders Is: n* Total Cost Is: TC Bottom of Form Top of Form 0.70710678 2 56568.

Clear Optimal Run Size Is: Q* Production Cycle Is: T 1* Optimal Cycle Is: T* Cost per Cycle Is: TC Bottom of Form Top of Form Production and Consumption with Shortages Model Production rate: K Demand rate: x Setup cost: C1 Holding cost: C2 Backorder cost: C4 Clear 6000 600 100 0.25 2 Optimal Production Is: q* Optimal Inventory Is: Q* Optimal Shortage Is: P* Total Cost Is: TC Period per Cycle Is: T Bottom of Form Linear Programs Solvers: Software Installation Information .