2. • The economic order-quantity model considers the
tradeoff between ordering cost and storage cost in
choosing the quantity to use in replenishing item
inventories.
Economic Order Quantity
Model
3. • In p model, inventory situations(records)is reviewed at fixed intervals
of time when the required replenishment orders are placed.
• We have a predetermined time (P) between orders (sales rep comes
by every 10 days) or the average time between orders from EOQ =
Q/r year
• Used for bulk materials and services like refineries, petrol pumps
,etc.
• Also called as fixed time Model because the review of purchase is
done after some fixed time say 5 or 10 days
P model
4. • Stocks at petrol pump is say 120 kl and consumption per
week is 100 kl, thus safety stock is 20kl
• Demand is always variable and in 95% cases it may not
exceed 120 kl, thus it is called 95% service level stocks
Cntd…
5. • There is some lead time (L) to get the supply and thus the
variation in demand during lead time is “σL”
• Due to this variation, the stocks level will also vary and
the stock level variation is denoted by “z”
Therefore:
Safety Stocks = z x σL
Symbols and
explanations
7. Daily demand at a petrol pump os 10 KL and variation in
daily demand is 3 KL. Review period is 30 days and lead
time is 14 days. Opening Inventory is 150 KL and variation
in stock level is 0.21 . Find q?
Example 1
8.
9. • In a chemical company , average demand for product is
10 KL per day and standard variation is 2 Kl per day. The
inventory levels was 20 kl. The review time is 60 days
and lead time is 15 days. Find q so as to maintain 95%
service level stock ( z at 95% is 1.645)
Example-2
10. Given data :
T=60,L=15,
σT+L= 2
d=10 and I = 20
we have
q= (r x (T+L)) + (z x σT+L) – I
q= 10x(60+15)+(1.645x2)-20 = 733 KL
Solution
11. • Consider an item for which
Annual demand= 1000 units
Standard deviation of demand per week = 10 units
Cost per unit = Rs 5
Ordering cost per order = Rs 150
Inventory carrying cost= 30 percent
Average lead time = 4 weeks
Maximum delay in lead time = 3 weeks
Probability of delay = 0.30
Service level= 95%
Example 3
13. • Hema garment Manufacturing Company uses basic cloth,
„two by two‟ , in most of its products. It buys its annual
requirement of 16000 metres of cloth in economic lots of
4000 metres each. The lead time for procurement is
generally taken as 6 weeks . Hema maintains a safety
sticks of 1000 metres. If Hema were to change over to a
fixed order cycle system, maintaining the safety stocks
Example 4
