Economic Order Quantity and Economic

Production Quantity
Models for Inventory Management
Europe Site Site for Asia Site for Middle East USA Site

This site is a part of the JavaScript E-labs learning objects for

decision making. Other JavaScript in this series are
categorized under different areas of applications in the MENU
section on this page.
Professor Hossein Arsham

Inventory control is concerned with minimizing the total cost

of inventory. In the U.K. the term often used is stock control.
The three main factors in inventory control decision making
process are:
• The cost of holding the stock (e.g., based on the
interest rate).
• The cost of placing an order (e.g., for row material
stocks) or the set-up cost of production.
• The cost of shortage, i.e., what is lost if the stock is
insufficient to meet all demand.
The third element is the most difficult to measure and is often
handled by establishing a "service level" policy, e. g, certain
percentage of demand will be met from stock without delay.
The ABC Classification The ABC classification system is to
grouping items according to annual sales volume, in an
attempt to identify the small number of items that will
account for most of the sales volume and that are the most
important ones to control for effective inventory management.
Reorder Point: The inventory level R in which an order is
placed where R = D.L, D = demand rate (demand rate period
(day, week, etc), and L = lead time.
Safety Stock: Remaining inventory between the times that
an order is placed and when new stock is received. If there
are not enough inventories then a shortage may occur.
Safety stock is a hedge against running out of inventory. It is
an extra inventory to take care on unexpected events. It is
often called buffer stock. The absence of inventory is called a
shortage.
Quantity Discount Model Calculation Steps:
• Compute EOQ for each quantity discount price.
• Is computed EOQ in the discount range?
 • If not, use lowest cost quantity in the discount range.
• Compute Total Cost for EOQ or lowest cost quantity in
discount range.
• Select quantity with the lowest Total Cost, including the
cost of the items purchased.
The following This JavaScript compute the optimal values for
the decision variables based on currently available information
about the above factors.
Enter the needed information, and then click the Calculate
button.
In entering your data to move from cell to cell in the data-
matrix use the Tab key not arrow or enter keys.
MENU:
1. The Classical Model
2. Shortages Permitted Model
3. Production and Consumption Model
4. Production and Consumption with Shortages Model
5. EOQ with Shortages and Lead Time
6. The ABC Classification
7. Inventory Control with Uncertain Demand
Top of Form

The Classical Model

2
Demand rate: x
20000
Ordering cost: C1
40000
Holding cost: C2

Clear

1.4142135623
Optimal Ordering Is: Q*
0.7071067811
Optimal Cycle Is: T*
2
Number of Orders Is: n*
56568.542494
Total Cost Is: TC
Bottom of Form
Top of Form
 Shortages Permitted Model
600000
Demand rate: x
100
Ordering cost: C1
0.25
Holding cost: C2
0
Shortage cost: C3
2
Backorder cost: C4

Clear

Optimal Ordering Is: Q*

Optimal Shortage Is: S*

Total Cost Is: TC

Shortage Period Is: T2

Period per Cycle Is: T

Bottom of Form
Top of Form

Production and Consumption Model

600
Production rate: K
200
Demand rate: x
0.001
Holding cost: C2
100
Set-up cost: C1

Clear

Optimal Run Size Is: Q*

Production Cycle Is: T 1*

 Optimal Cycle Is: T*

Cost per Cycle Is: TC

Bottom of Form
Top of Form

Production and Consumption with Shortages Model

6000
Production rate: K
600
Demand rate: x
100
Setup cost: C1
0.25
Holding cost: C2
2
Backorder cost: C4

Clear

Optimal Production Is: q*

Optimal Inventory Is: Q*

Optimal Shortage Is: P*

Total Cost Is: TC

Period per Cycle Is: T

Bottom of Form

EOQ with Shortages and Lead Time

T
op
of
F
or
m
B
ott
o
m
of
F
or
m
 I: Base Economic Order Quantity
500
Total Demand
15
Ordering Cost
20
Holding Cost/unit/year
250
Unit Price

Clear

EOQ

Average Periodic Ordering

Intervals

Total Number of Orders

Total Cost

II: EOQ with Shortages and Lead

Time
15
Estimated Lead Time in Days
5
Shortage Cost/unit/year

Clear

EOQ

Level for Reorder Point

Maximum Inventory Level

Total Cost

Longest Delay Time in Days

Bottom of Form
For Technical Details, Back to:
Decision Making in Economics and Finance
 Necessary Tools for the
ABC Inventory Classification

Europe Mirror Site Site for Asia Site for Asia-Pacific

Site for Middle East UK Site USA Site
This site is a part of the JavaScript E-labs learning objects for
decision making. Other JavaScript in this series are
categorized under different areas of applications in the MENU
section on this page.
Professor Hossein Arsham

The ABC classification process is an analysis of a range of

items, such as finished products or customers into three
categories: A - outstandingly important; B - of average
importance; C - relatively unimportant as a basis for a control
scheme. Each category can and sometimes should be handled
in a different way, with more attention being devoted to
category A, less to B, and less to C.
Inventory Control Application: The ABC classification
system is to grouping items according to annual sales volume,
in an attempt to identify the small number of items that will
account for most of the sales volume and that are the most
important ones to control for effective inventory
management.
This following JavaScript constructs an empirical cumulative
distribution function (ECDF) as a measuring tool and decision
procedure for the ABC inventory classification.
Enter the dollar values and demands of up-to-42 distinct
items and then click the Calculate button. Blank boxes are
not included in the calculations but zeros are.
 In entering your data to move from cell to cell in the data-
matrix use the Tab key not arrow or enter keys.
To edit your data, including add/change/delete, you do not
have to click on the "clear" button, and re-enter your data all
over again. You may simply add a pair of numbers to any
blank cells, change a number to another in the same cell, or
delete a number from a cell. After editing, then click the
"calculate" button.
For extensive edit or to use the JavaScript for a new set of
data, then use the "clear" button.

Top of Form
Item
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Number
$ Value for
Each Item
Demand for
That Item
Item
15 16 17 18 19 20 21 22 23 24 25 26 27 28
Number
$ Value for
Each Item
Demand for
That Item
Item
29 30 31 32 33 34 35 36 37 38 39 40 41 42
Number
$ Value for
Each Item
Demand for
That Item

CLEAR

Necessary Tools for the ABC Classifications

Bottom of Form
 Bottom of Form

For Technical Details, Back to:

Decision Making in Economics and Finance

Economic Order Quantity and Economic

Production Quantity
Models for Inventory Management
Europe Site Site for Asia Site for Middle East USA Site

This site is a part of the JavaScript E-labs learning objects for

decision making. Other JavaScript in this series are
categorized under different areas of applications in the MENU
section on this page.
Professor Hossein Arsham

Inventory control is concerned with minimizing the total cost

of inventory. In the U.K. the term often used is stock control.
The three main factors in inventory control decision making
process are:
• The cost of holding the stock (e.g., based on the
interest rate).
• The cost of placing an order (e.g., for row material
stocks) or the set-up cost of production.
• The cost of shortage, i.e., what is lost if the stock is
insufficient to meet all demand.
The third element is the most difficult to measure and is often
handled by establishing a "service level" policy, e. g, certain
percentage of demand will be met from stock without delay.
The ABC Classification The ABC classification system is to
grouping items according to annual sales volume, in an
attempt to identify the small number of items that will
account for most of the sales volume and that are the most
important ones to control for effective inventory management.
Reorder Point: The inventory level R in which an order is
placed where R = D.L, D = demand rate (demand rate period
(day, week, etc), and L = lead time.
Safety Stock: Remaining inventory between the times that
an order is placed and when new stock is received. If there
are not enough inventories then a shortage may occur.
Safety stock is a hedge against running out of inventory. It is
an extra inventory to take care on unexpected events. It is
often called buffer stock. The absence of inventory is called a
shortage.
Quantity Discount Model Calculation Steps:
• Compute EOQ for each quantity discount price.
• Is computed EOQ in the discount range?
• If not, use lowest cost quantity in the discount range.
• Compute Total Cost for EOQ or lowest cost quantity in
discount range.
• Select quantity with the lowest Total Cost, including the
cost of the items purchased.
The following This JavaScript compute the optimal values for
the decision variables based on currently available information
about the above factors.
Enter the needed information, and then click the Calculate
button.
In entering your data to move from cell to cell in the data-
matrix use the Tab key not arrow or enter keys.
MENU:
1. The Classical Model
2. Shortages Permitted Model
3. Production and Consumption Model
4. Production and Consumption with Shortages Model
5. EOQ with Shortages and Lead Time
6. The ABC Classification
7. Inventory Control with Uncertain Demand
Top of Form

The Classical Model

2
Demand rate: x
20000
Ordering cost: C1
40000
Holding cost: C2

Clear

1.41421356
Optimal Ordering Is: Q*
 0.70710678
Optimal Cycle Is: T*
2
Number of Orders Is: n*
56568.5424
Total Cost Is: TC
Bottom of Form
Top of Form

Shortages Permitted Model

600000
Demand rate: x
100
Ordering cost: C1
0.25
Holding cost: C2
0
Shortage cost: C3
2
Backorder cost: C4

Clear

Optimal Ordering Is: Q*

Optimal Shortage Is: S*

Total Cost Is: TC

Shortage Period Is: T2

Period per Cycle Is: T

Bottom of Form
Top of Form

Production and Consumption Model

600
Production rate: K
200
Demand rate: x
0.001
Holding cost: C2
100
Set-up cost: C1
 Clear

Optimal Run Size Is: Q*

Production Cycle Is: T 1*

Optimal Cycle Is: T*

Cost per Cycle Is: TC

Bottom of Form
Top of Form

Production and Consumption with Shortages Model

6000
Production rate: K
600
Demand rate: x
100
Setup cost: C1
0.25
Holding cost: C2
2
Backorder cost: C4

Clear

Optimal Production Is: q*

Optimal Inventory Is: Q*

Optimal Shortage Is: P*

Total Cost Is: TC

Period per Cycle Is: T

Bottom of Form

Linear Programs Solvers:

Software Installation Information
 Europe Site Site for Asia Site for Middle East UK Site USA Site

This site provides installation information for a free-of-charge software package that solves
Linear Program models by the Simplex Method and/or the Push-and-Pull Method.
Professor Hossein Arsham

The software package which is available to download from SixPap.zip, consists of three files:
1. Source.zip - the source code of the latest version. It has been slightly
modified since the previous version.
2. Exec.zip - SixPap.exe with help and some samples in \Repository dir
(program expects to find samples in that directory, if it doesn't exist, it is
created when the program is started).
3. Setup.zip - the setup package.
Notice: This software can be installed on your own personal computer successfully. The
steps for installation are as follow:
1. Opened up the link and save all three files (exec.zip, setup.zip and
source.zip) in a zip folder, named say LPSolvers in your C-drive (say, in its
Program Files).
2. Extracted all these files inside the zip folder.
3. Open the setup.exe and click on ProjectSixPap to install the software.
4. After installation, software created a folder called ProjectSixPap under the
address, C:\Program Files\ LPSolvers\ProjectSixPap.
5. When you click on the SixPap.exe, the software comes up and ready to
run.
6. Finally, create a short-cut for the software on your Desktop.
NT Installation: You need the user permission from your NT Administrators to change the
Windows\System folder. This is the folder containing various dll-s and ocx-es.
About running the SixPap directly: the file comdlg32.ocx should be located in
Windows\System folder. You may upload support.zip, which among others includes the
comdlg32.ocx file, url:
http://www.inforta.com/~miha/research/Support.zip
Some more information are at:
http://forums.devshed.com/t130455/s.html?
highlight=New+build+turns+on+then+turns+off+10+seconds+later
http://www.nexent.com/tn2/MS98_1600-1699_ReportSimulator/ms_tn_1603.htm "
target=new>http://www.nexent.com/tn2/MS98_1600-
1699_ReportSimulator/ms_tn_1603.htm
http://forums.aspfree.com/t33925/s.html
Basically, the comdlg32.ocx file must exist in Windows\System, and must be re-registered
with the operating system.
All system files needed are the VB6 runtime files, and can be downloaded (again a setup
package) from MicroSoft official web page:
http://www.microsoft.com/downloads/details.aspx?FamilyID=bf9a24f9-b5c5-48f4-8edd-
cdf2d29a79d5&displaylang=en
If there are any security policy issues - that package is digitally signed by MicroSoft.
Note that the VB6 doesn't create special versions of software for NT environment, and should
work properly on all MS Windows (32 bit).