Seminar 4 QMT425

Topic 4: Assignment Models

 Supply at each source and demand at each destination limited to one unit.
 In a balanced model supply equals demand.
 In an unbalanced model supply does not equal demand.

Hungarian Method

Example 4.1

Assign the three projects to three workers in a way that will result in the lowest total cost to
the shop. The assignment of workers to projects must be on a one to one basis.

Project
Worker 1 2 3
Ahmad 11 14 6
Borhan 8 10 11
Chee 9 12 7

Solution:

Step 1

a) Subtract the smallest number in each row from every number in that row, than
b) Subtract the smallest number in each column from every number in that column.

a)
1 2 3
A 5 8 0
B 0 2 3
C 2 5 0

b)
1 2 3
A 5 6 0
B 0 0 3
C 2 3 0

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Step 2

Test the table resulting from step 1 to see whether an optimal assignment can be made.

- Drawing the minimum possible lines on columns and/or rows such that all zeros are
covered.
- *Optimal ( No. of lines = No. of rows or columns)

1 2 3
A 5 6 0
B 0 0 3
C 2 3 0

Step 3

Not optimal (No. of lines < No. of rows or columns)

- Subtract the smallest number not covered by a line from itself and every other
uncovered number.
- Add this number at every intersection of any two lines.

1 2 3
A 3 4 0
B 0 0 5
C 0 1 0

1 2 3
A 3 4 0
B 0 0 5
C 0 1 0

Optimal solution:

Worker Project Cost

Ahmad 3 6
Borhan 2 10
Chee 1 9

Total RM25

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Exercise 4.1

The manager of Motivation Training Agency has to assign four different facilitators to handle
four different programs to their course participants. These facilitators would be paid at
different rates per hour according to their experience. The costs of assigning the facilitators
are shown in the following table:

Program STPM SPM UPSR PMR

Facilitator
En. Abu 250 150 100 150
En. Bakar 165 165 90 165
En. Ali 245 95 95 145
En. Musa 155 155 80 105

Advise the manager how to make the optimal assignment.

Maximization Assignment Problem

Example 4.2

Assign each Staff to each Department based on efficiency score.

Department
Staff A B C D
1 20 60 50 55
2 60 30 80 75
3 80 100 90 80
4 65 80 75 70

Department
Staff A B C D
1 80 40 50 45
2 40 70 20 25
3 20 0 10 20
4 35 20 25 30

Department
Staff A B C D
1 40 0 10 5
2 20 50 0 5
3 20 0 10 20
4 15 0 5 10

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Department
Staff A B C D
1 25 0 10 0
2 5 50 0 0
3 5 0 10 15
4 0 0 5 5

Optimal solution:

Staff Department Efficiency

1 D 55
2 C 80
3 B 100
4 A 65
300
Total

Exercise 4.7

In a small job shop department there are three tasks to be assigned to three workers. The
table below indicates the weekly profit (RM’00) achieved by assigning each worker to each
job. Find the assignment that will maximize profit.

Job I II III
Worker
A 5 4 7
B 6 7 3
C 8 11 2

(5 marks)

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Topic 6: Inventory Model

 Inventory is any stored resource that is used to satisfy a current or future demand from
customer. For examples items for sale, extra chairs in classrooms, blood in blood bank,
money in a saving accounts, doctors on standby and etc.

 Usually every company will maintain a level of inventory that will meet anticipated/
expected customer demand.

 However, because demand is usually not known with certainty, additional amounts of
inventory called safety or buffer stocks are often kept on hand to meet unexpected
variations in excess of expected demand.

 Companies also purchase large amounts of inventory to take advantage of price

discounts. This also leads to some level of inventory be kept.

Demand

 This is a major component of inventory model because inventory exists to meet the
demand of customers.
 It is very important to develop an accurate forecast of customer demand in order to
determine appropriate level of inventories to be kept.

Inventory Cost

 There are four basic costs associated with inventory:

a) Holding Cost
b) Ordering Cost
c) Shortage Cost
d) Purchase Cost

 Holding costs are the costs of holding items in storage and these cost vary with level of
inventory. The greater the level of inventory over time, the higher the holding cost.

 Holding cost can include direct storage cost (such as rent, heating, cooling, security
etc.), interest on loans used to purchase inventory, depreciation, obsolescence etc. It is
specified in per unit cost over a time period, for example RM5 per unit per year.

 Ordering costs are the costs associated with replenishing the stock of inventory. These
are normally expressed as a RM amount per order and are independent of the order
size. This cost can include all the cost incurred such as transportation, shipping,
receiving, inspection etc.

 Ordering costs have inverse relationship to holding cost. As the size of order increases,
fewer orders are required, thus reducing annual ordering costs. However, ordering larger
amounts results in higher inventory level and higher holding cost.

 In general, as the order size increases, annual ordering cost decrease and annual
holding cost increase.
 Shortage costs occur when demand cannot be met because of insufficient inventory on
hand.

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 Purchase cost is the actual price of the items.

 The objective of inventory models is to develop an inventory control system that will
indicate how much should be ordered and when orders should take place to minimize
the total inventory costs.

Economic Order Quantity Models (EOQ)

 The function of the EOQ model is to determine the optimal order size that minimizes the
total inventory costs.

 In this chapter we will discuss three variations of EOQ models:

Basic EOQ model

EOQ with quantity discounts
EOQ model with non-instantaneous receipt (EBQ)

A) Basic EOQ Model

This is the simplest form of inventory control models.

The assumptions of this model are:

Demand, D is known with certainty and is relatively constant over time.

No shortages are allowed.
Lead time, L for the receipt of orders is constant.
The order quantity is received all at once.

 The inventory order cycle for basic EOQ model.

units
Order
quantity,
Inventory level

Reorder
Point,
ROP

Lead
Time time
one cycle
Order Order
Placed Receipt

* One inventory cycle is the time between successive reorders.

 From the above figure, we can observe that, an order quantity, Q, is received and is
used up over time at a constant rate.

 When the inventory level decreases to the reorder point, ROP, a new order is placed and
a period of time, referred as lead time, is required for delivery.

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 The order is received all at once just at the moment when the entire stocks of inventory
reaches zero, thus allowing no shortages.

 This cycle is continuously repeated for the same order quantity, reorder point and lead
time.

 Q, the order size, is the order quantity that minimizes the total costs.

Annual Cost

Total Cost

Minimum Holding Cost

total cost

Ordering Cost

Optimal Order quantity

Order Quantity, Q*
(Q*)
 Basic EOQ model: Formula

2DC o
a) Optimal order quantity: Q* 
Ch
b) Total annual cost:
= (annual ordering + annual holding + annual purchasing) costs
D Q
TC = C o  Ch  PD
Q 2
D
c) Number of orders per year: N 
Q
Q
d) Time between orders (cycle time): T  year
D

e) Reorder point: ROP = d x L

demand per day:
D
d=
Number of w orking days in a year

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Example 6.1:

Carpet Discount Store in KL stocks several brands of carpets in its store. However its
biggest selling brand is Super Shag. The cost of Super Shag is RM50 per yard. The store
wants to determine the optimal order size and the total inventory cost for this brand of
carpet. The annual demand for this type of carpet is 10000 yards of carpet, annual holding
cost is RM0.75 per yard and the ordering cost is RM150 per order. The store also wants to
know the number of orders given that the store is open 311 days annually. Lead time 2 days.

Solution:

Optimal order size:

Total annual inventory cost:

Number of orders per year:

Order cycle time:

Reorder point:

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B) EOQ with Quantity Discounts

 The EOQ with quantity discounts model is applicable where a supplier offers a lower
purchase cost when an item is ordered in larger quantities.

 Assumptions:

a) Demand occurs at a constant rate of D items per year.

b) Ordering cost per order is constant at Co per order.

c) Holding cost is Ch =IPi, where I is the holding cost as a percentage of the unit cost
and Pi is the unit price.

d) Purchase cost
P1 per item if the quantity ordered is between 0 and x1
P2 per item if the quantity ordered is between x1 and x2 and etc.

e) Lead time, L is constant.

f) Planned shortages are not permitted.

g) Orders arrive instantaneously.

 Procedure for determining the optimal order quantity (EOQ with quantity discounts
model)

Step 1: For each discount price P, calculate the

EOQ using the formula
2DC o
Q*  .
Ch

Step 2: If EOQ < minimum quantity to qualify for

the discount, adjust the quantity for the
minimum discount.

Step 3: For each EOQ or adjusted EOQ,

determine the total annual
D Q
cost: TC = C o  Ch  PD
Q 2

Step 4: Choose the quantity (EOQ or adjusted

EOQ) with the lowest cost as the optimal
order quantity.

 Other formulas:

D
a) Number of orders per year: N 
Q
Q
b) Time between orders: T  year
D

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Example 6.2:

Brass Department Store stocks toy race cars. Recently the store was given a quantity
discount schedule for the cars.

Quantity Discount Schedule

Discount Number Discount Quantity Discount (%) Discount Cost

(RM)
1 0 to 999 0 5.00
2 1000 to 1999 4 4.80
3 2000 and over 5 4.75

Furthermore the ordering cost is RM49 per order, the annual demand is 5000 cars and the
inventory holding charge as a percentage of cost, I, is 20%. What order quantity will
minimize the total inventory cost?

Solution:

Compute EOQ for each discount price

(2)(5000)( 49)
EOQ1 =  700 cars per order
(0.2)(5.00)

(2)(5000)( 49)
EOQ2 =  714 cars per order → adjust to 1000 cars
(0.2)( 4.80)

(2)(5000)( 49)
EOQ3 =  718 cars per order → adjust to 2000 cars
(0.2)( 4.75)

Compute Total inventory cost for each order quantity (Q).

5000 700
TC1  (49)  (1)  5(5000)  350  350  25000  RM 25700
700 2

5000 1000
TC2  (49)  (0.96)  4.8(5000)  245  480  24000  RM 24725
1000 2

5000 2000
TC3  (49)  (0.95)  4.75(5000)  122.5  950  23750  RM 24822.50
2000 2

Choose the Lowest Cost Quantity.

The lowest cost quantity is when order quantity, Q = 1000 cars.

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Exercise 6.2.1

Kamal Book Store offers the following discount schedule for one of its books.

Order Unit Cost (RM)

9 copies or less 18.00
10 to 50 copies 17.50
More than 50 copies 17.25

The UiTM Co-op Book Store orders the book from Kamal. The ITM Co-op Book Store has an
ordering cost of RM45. The holding cost is 20% of the unit cost, and the annual demand is
100 copies. Which level of the above table do you recommend?

Problems on Topic Inventory:

Pharmacy Mutiara purchases Morinda Juice from Golden Drink Industry (GDI) at RM 30 per
bottle. The ordering cost is estimated to be RM 50 per order, the holding cost is 20% of the
unit cost and the annual demand is 2,100 bottles.

Find:

a) The optimal order quantity.

b) The total inventory cost per year.
c) During the Millennium Campaign period, GDI offers the following discount based on the
quantity ordered.

Find the optimal order quantity and the minimum cost.

d) The manager of Pharmacy Mutiara is reviewing the economic feasibility of manufacturing

Morinda Juice. His friend, Mohd. Alif, an experienced food technologist can help the
pharmacist to set up the production. The daily production capacity is estimated to be 150
bottles. The cost of producing the Morinda Juice per bottle is only RM16, the set up cost
per production run is RM 100 and the demand for the juice is 7 units per day.

Calculate the economic batch quantity, the associated inventory cost and hence
recommend whether the pharmacist should manufacture the Morinda Juice or order from
GDI?

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