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EPL Inv Contrl
EPL Inv Contrl
EPL Model
Learning objective
After this class the students should be
able to:
independent demand,
supplies.
Independent Demand
Independent demand items are those items that we
sell to customers.
Setup costs;
Shortage costs .
Notation
D = Demand rate (in units per year).
c = Unit production cost, not counting setup or
inventory costs (in dollars per unit).
A = Constant setup (ordering) cost to produce
(purchase) a lot (in dollars).
h = Holding cost
Q = Lot size (in units); this is the decision variable
Economic Lot Size Production Model
The maximum
inventory is 3,000
microphones, and
the average
inventory is 3,000/2
= 1,500
microphones. Note
the similarity
between this
problem and the
EOQ problem we
have already shown
Now A, the ordering
cost, designates the
setup cost for
producing a lot of the
microphones. Q
P designates the Q Pt and t
production rate, and t
P
designates the time
needed to produce the
lot.
Average Inventory Level
The maximum inventory is
1 D
P t D t Q
P
The average inventory is
1 D Q Q
or F
P 2 2
where
1 D
F
P
The Factor F
Demand rate (D) must be less
than or equal to the production
rate (P). If D = P, production
just meets the demand. In this
case, the factor is 0, and so is
the inventory. If the production
rate is very large compared to
the demand, D/P is very small.
In such cases, the factor is near
1 and the average inventory is
Q/2, the same as in the EOQ
problem. The straight line
shows how the factor depends
on the value of D/P.
The Costs
Annual holding cost
1 D Q C i
C i F Q
P 2 2
Where C=cost of each microphone and i =interest rate
D
A
Q
The total cost
To carry out the calculations, we need the other parameters of
the problem.
Then,
dY Q d 2Y Q
h D A
Y Q Q 1 P
D 2 Q dQ
0
dQ 2
0
Appling the conditions for optimization, we find the optimal value for
order quantity and Cost
2 D A
Q*
h
1 D
P
Y Q* 2 D A h 1 D P
Conclusion
What-if
A B C D
3 What-If Analysis for Microphones
Economic
Model Formules
4 Production
5 Demand D 12,000 12,000
6 Cost per unit C $6.75 $6.75
7 Percent to hold i 20% 20%
8 Ordering cost O 28 28
9 Production rate P 48,000 48,000
10 Lot size Q* = (2DO/Ci/(1-D/P)^0.5 815 =(2*D5*D8/D12/(1-D5/D9))^0.5
11 Number of orders D/Q 15 =D5/D10
12 Unit holding cost H=C*i $1.35 $1.35
13 Annual holding cost QH/2*(1-D/P) $412 =D10*D12/2*(1-D5/D9)
14 Annual ordering cost NO $412 =D11*D8
15 Combined cost QH/2*(1-D/P)+NO $825 =D13+D14
16 Annual purchase cost DC $81,000 =D5*D6
17 Total cost $81,825 =D15+D16
Reference
Operations Analysis Using Excel. Weida;
Richardson and Vazsony, Duxbury,
2001,Chapter 6.