Economic lot size with finite

replenishment with and without

shortage

Meenal Thosar
Roll No. :- 67
Batch :- D
Seat No. :- TYM631

1
What is ELS

 Economic Lot Size (ELS for short) refers to the

best lot quantity to make the total cost
minimum by considering the balance between
ordering cost and inventory carrying cost, which
are contradictory.

 Economic Lot Size is also called EOQ (standing

for Economic Order Quantity).

2
Cost Curves

3
Types of Replenishment Rates

Finite Replenishment Infinite Replenishment

Rate Rate
 The inventory  Stock is replenished
continuously builds up instantaneously after the
over a period of time order has been placed.
after placing an order.  Lead time is zero.
 Lead time is non-zero.

 Maximum inventory is Q.
 Maximum inventory is
Q (1- λ/P).

4
Finite Replenishment Rate

Infinite Replenishment Rate

5
ELS with Finite Replenishment
Rate

 Assumptions:
1. The quantity ordered is produced at an uniform rate 'P'.
2. The demand also has a constant rate 'λ'.
3. At the beginning, inventory is zero

 This model is also called as Economic Production

Quantity (EPQ) model.

6
Idle Time

 If P < λ, the production should be stopped

before the cycle ends, as more than required
Q units will be produced.

 Therefore, there is some idle time T2 in each

cycle.
T2= Q/λ - Q/P

7
Maximum Inventory

 Unlike EOQ model, the maximum quantity is

not Q as some products are used to meet the
demand before all the order is received.

 Therefore, the rate at which the inventory

increases is (P-λ).

 Therefore, H = T1(P-λ)
H = (Q/λ)x(P-λ)
H = Q (1- λ/P)
8
Downtime

 The downtime demand is met entirely from the

maximum inventory.

 Hence, downtime can be obtained as follows:

T2 = H/λ
T2 = (Q/λ) - (Q/P)

9
Economic Production Quantity (EPQ)

λ = Annual Demand
K = Cost of setting up Production
h = Annual Holding cost per unit.
h' = h(1- λ/P)

Optimal Solution (EPQ) = Sqrt (2Kλ /h')

10
11
11
EPQ with Shortage

 Assumptions:
1. The quantity ordered is produced at an uniform rate 'P'.
2. The demand also has a constant rate 'D'.
3. Each lot purchased / produced contains a known proportion of defectives that
removed prior to storage or use.

 'b' is the maximum shortage observed

 'Imax' is the maximum value of inventory observed.

12
EPQ with Shortage

13
Comparison of EPQ

With Shortage Without Shortage

14
Comparison w.r.t formula

With Shortage Without Shortage

15
 EPQ with shortage

 Deriving an equation for economic lot size

with shortage requires solving tedious
differential equations.

 The main requirement is to find optimum

value of shortage which will not harm the
profit.

 This has to be done by researching the

demand rate as well as the production rate,
also finding the quantity at which new order
has to placed plays a vital role.
16
Examples of EPQ without shortage

 When there is a constant production of units

with a constant demand, this model is very
necessary.

 For e.g. In a chemical plant, there is a

constant production of a primary chemical
which is used for a further process in the plant
itself. Hence, there is a constant demand as
well.

17
Examples of EPQ with shortage

 This model is used where there is a

guarantee that there won't be any loss when
the demand is not met immediately.

 For e.g. If the product is very unique and

can be acquired only at one the company,
there is no need to keep high inventory (and
bear the corresponding holding costs) as
there is no risk of losing the customer and
thus, does not effect the profit.

18
Conclusion

There are many models available, but

every situation demands a unique
solution hence, we should find the model
that best fits the situation and solve the
problem.

19
THANK YOU

20