Example: SB Ready Mix Concrete Company requires 20000 bags of cement per year for the production of concrete.

Each bag
contains 50 kg. cement and purchase price for kg is Rs. 16. It costs 10 percent for holding the inventory of cement in stock per
year and ordering costs per order is Rs 5000.

The company requires 5 days of lead time to receive the order placed and requires maintaining 10 days consumption in safety
stock.

Determine the EOQ, safety stock, avg, min and maximum inventory and Reorder Point. How frequent do you place an order
(take 360 days in a year) ?.

Also Determine the Total Inventory Cost with and Without S.S1
Solution:
We know that, TIC = N x O + {Ca x P x Q / ( 2x N) Where:
N= No of Order, O = Ordering Cost, Ca= Carrying Cost %,
Q = Total Quantity of material; P is Price of the material
For Cost to be minimum, dTIC/dN = 0
dTIC/dN = O – Ca x Q x P / 2 N^2 = 0

N = SQRT [Ca x Q x P /(2xO)]

And also Economic order quantity(EOQ)=Q/N

1
So,from given question,
N= SQRT [0.1*x 20000x *16*50/(2x5000)] =12.65 times =13
times order per year for 20k bags of cement.
Here we can order 20k bags of cement by two ways for
economic order quantity.
1)Order 20000/12.65=1581.03=1581 bags per order i.e 12
times we can order 1581.03 bags cement and remaining
cement=20000-1581*12=1028 bags order for 13th order.
2)Order=20000/13=1538.46 bags per order
I will choose second one,
EOQ=20000/13=1538.46 number of bag at one order

2
No. of bags per day=20000/360=55.555 bags per day
So,Safety stock(SS)=55.555*10=555.56 bags required for safety storage.
Avg.inventory=SS+EOQ/2=555.555+1538.46/2=1324.785 bags
Min inventory=SS=555.555 bags
Max inventory=SS+EOQ=555.555+1538.46=2094.015 bags
Reorder point=10*55.555+5*55.555=833.325 bags
we order 13 times in a year in terms of EOQ.
Now, Total Inventory Cost without SS=total carrying inventory +total ordering
cost=(0.1*1538.46*50*16/2)+5000*13=Rs.126538.4
Total Inventory Cost with SS=126538.4+10*55.55*50*16=Rs.570978.4

3
(Request:if there is any mistake ,please inform me Sir so that I get to know)
(querry:hamile yo cement ko bags order grda one times ma 1538.46 teslai 1539 liney hola
ni hai sir 1538 taw linnau hola pheri napugey vne ani last ko order ma milaune hola???
Similarly for 55.55 bags ko lai ni 10 days ko nikalera roundoff grne hola ki SS nikalda for
practical case)