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Production Order Quantity Model

This document describes the production order quantity model, which is used when inventory is consumed as it is produced over time. It defines key terms like daily production rate, daily demand rate, and length of the production period. The model calculates the maximum inventory during production as the total produced minus total used. It then equates the annual holding cost and annual setup cost formulas to determine the optimal production quantity that minimizes total costs.

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Jo Mon
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412 views7 pages

Production Order Quantity Model

This document describes the production order quantity model, which is used when inventory is consumed as it is produced over time. It defines key terms like daily production rate, daily demand rate, and length of the production period. The model calculates the maximum inventory during production as the total produced minus total used. It then equates the annual holding cost and annual setup cost formulas to determine the optimal production quantity that minimizes total costs.

Uploaded by

Jo Mon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

PRODUCTION ORDER QUANTITY

MODEL
PRODUCTION ORDER QUANTITY
MODEL
 In EOQ Model, We assumed that the entire order was received at
one time.
 However, Some Business Firms may receive their orders over a
period of time
 Such cases require a different inventory model
 Here, we take into account the daily production rate and
daily demand rate.
 Since this model is especially suitable for production
environments,It is called Production Order Quantity Model

 Lets’ define the following :

p: Daily Production rate (units / day)


d: Daily demand rate (units / day)
t:Length of the production in days.
H: Annual holding cost per unit
Average Holding Cost
= (Average Inventory).H
=(Max. Inventory / 2).H
 In the period of production (until the end of each t
period):
Max. Inventory =(Total Produced) – (Total Used) =p.t-
d.t
Here, Q is the total units that are produced.
Therefore, Q = p.t t = Q/p

 If we replace the values of t in the Max. Inventory formula:


Max. Inventory=p (Q/p)-d (Q/p)
=Q-dQ/p
=Q (1 – d/p)
 Annual Holding Cost=(Max. Inventory / 2).H
=Q/2 (1 – d/p).H Annual Setup
Cost
= (D/Q).S

 Now we will set Annual Holding Cost


=Annual Setup Cost Q/2
(1 – d/p).H
=(D/Q).S
 This formula gives us the optimum production quantity for the
Production Order Quantity Model.
 It is used when inventory is consumed as it is produced.

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