Example 1

Weekly demand of a product is 3500 units. The company incurs Tk.50,000 to process 2
orders. Monthly holding cost per unit is Tk. 20. Lead time is 12 days. Determine
economic order quantity and re-order point.
Ans.
Annual demand, D = 3500*52
Ordering/Set-up cost, S = Tk.50,000/2 = Tk.25,000
Annual holding cost per unit, H = 20*12 = 240
Average daily demand, = 3500/7= 500
Economic order quantity, =
Re-order point, R = *L
 Example 2
Weekly demand of a product is 3500 units. The company incurs Tk.50,000 to process 2
orders. Monthly holding cost per unit is 1% of cost per unit. Cost per unit is Tk. 800.
Lead time is 12 days. Determine economic order quantity, re-order point, and total
cost.
Ans.
Annual demand, D = 3500*52
Ordering/Set-up cost, S = Tk.50,000/2 = Tk.25,000
Annual holding cost per unit, H = 0.01*800*12 = 96
Average daily demand, = 3500/7= 500
Economic order quantity, =
Re-order point, R = *L
Total cost, TC = (D*C) +( *S) + *H
 Example 3
Monthly demand of a product is 9000 units. The company incurs Tk.50,000 to process
2 orders. Monthly holding cost per 100 unit is 5% of cost per unit. Cost per unit is Tk.
2000. Lead time is 12 days. Determine economic order quantity, re-order point, and
total cost.
Ans.
Annual demand, D = 9000*12
Ordering/Set-up cost, S = Tk.50,000/2 = Tk.25,000
Annual holding cost per unit, H = *2000*12 = Tk.12
Average daily demand, = 9000/30= 300
Economic order quantity, =
Re-order point, R = *L
Total cost, TC = (D*C) +( *S) + *H
 Example 4
Production/Purchasing cost of a product is Tk. 250. The selling price of the product is
Tk. 280. If the product is not sold within 7 days of production/purchasing, it has to be
sold Tk. 200 per unit. How many units to be produced/purchased for a 7 days time
period. (average weekly demand is 500 units and standard deviation of weekly
demand is 28)
Ans.
= Tk. (250 – 200) = Tk.50
= Tk. (280 – 250) = Tk.30
P = = =0.38, z = -0.305 ( Between -0.30 and -0.31)
Units to be produced/purchased = = 500 + (-0.305)*28
 Example 5
Production/Purchasing cost of a product is Tk. 250. The selling price of the product is
Tk. 320. If the product is not sold within 7 days of production/purchasing, it has to be
sold Tk. 200 per unit. How many units to be produced/purchased for a 7 days time
period. (average daily demand is 100 units and standard deviation of daily demand is
9)
Ans.
= Tk. (250 – 200) = Tk.50
= Tk. (320 – 250) = Tk.70
P = = =0.58, z = 0.205 ( Between 0.20 and 0.21)
Units to be produced/purchased =
= 100*7 =700, = =23.81

Units to be produced/purchased = = 700 + (0.205)*23.81

 Example 6
A company uses once a month ordering/production policy. Average weekly demand
of the product is 6500 units and standard deviation of weekly demand is 236. The
company wants to ensure that it can satisfy 95% of the demand (or 95% time demand
can be met from stock on hand). How many units should be ordered or produced)
Ans.
P =0.95, z = 1.65 ( Between 1.64 and 1.65)
Units to be produced/purchased =
= 6500*4 =26000, = =472

Units to be produced/purchased = = 26000 + (1.645)*472

 Example 7
Demand of a product is variable. Average weekly demand of a product is 9000 units and
standard deviation of weekly demand is 745. The company incurs Tk.50,000 to process 2
orders. Monthly holding cost per 100 unit is 5% of cost per unit. Cost per unit is Tk. 2000.
Lead time is 12 days. The company wants to ensure that 95% time it will be able to
prevent stock out. Determine economic order quantity, re-order point, and total cost.
Ans.
Annual demand, D = 9000*52
Ordering/Set-up cost, S = Tk.50,000/2 = Tk.25,000
Annual holding cost per unit, H = *2000*12 = Tk.12
Average daily demand, = 9000/7 ≈ 1286
P =0.95, z = 1.65; L = 12/7 weeks; =975.43
Economic order quantity, =
Re-order point, R = (*L) + (z*
Total cost, TC = (D*C) +( *S) + *H
 Example 8
The annual demand for an item is 2,000 units, each order
costs £10 and the annual holding cost is 40 per cent of unit
cost. The unit cost depends on the quantity ordered as
follows:
•£1 for order quantities less than 500
•£0.80 for quantities between 500 and 999
•£0.60 for quantities of 1,000 or more.

What is the optimal order size?.

 Solution

Now, we can follow the procedure shown in Figure 4:

 Solution (Cont’d)

= £1,340 a year (point A in the above Figure)

 Solution (Cont’d)

= £1,720 a year (point B)

Taking the next lowest cost curve:

UC = £1.00 valid for Q less than 500
Qo = √(2 × RC × D/HC) =√(2 × 10 × 2,000/0.4 × 1.00) = 316.2
Solution (Cont’d)

= £2,126.49 a year (point C)

 Example 9
At a recent management workshop Douglas Fairforth explained that
demand for an item in his company is Normally distributed with a
mean of 1,000 units a month and standard deviation of 100 units.
They check stock every three months and lead time is constant at
one month. They use an ordering policy that gives a 95% service
level, and wanted to know how much it would cost to raise this to
98% if the holding cost is £20 a unit a month.
 Solution
Listing the variables in consistent units for this periodic review system:
d = 1,000 units a month; σ = 100 units; HC = £20 a unit a month;
T = 3 months; LT = 1 month

For a 95% safety stock Z is 1.64. Then,

safety stock = Z × σ ×√(T + LT) = 1.64 × 100 ×√(3 + 1) = 328 units
target stock level = d × (T + LT) + safety stock = 1,000 × (3 + 1) + 328
= 4,328 units

Every three months, when it is time to place an order, the company examines the stock on hand and places
an order for:

order size = 4,328 − stock on hand

If, for example, there were 1,200 units in stock the order would be for 4,328 − 1,200 = 3,128 units.
The cost of holding the safety stock = SS × HC = 328 × 20 = £6,560 a month
 Solution (Cont’d)
If the service level is increased to 98 per cent, Z = 2.05. Then,

safety stock = 2.05 × 100 ×√4 = 410

target stock level is then 4000+410 = 4,410 units and the cost of the safety stock is 410 ×
20 = £8,200 a month.