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Inventory Analysis

Deterministic Models

EOQ Model

K = fixed charge for a single order h= holding cost ($/item/unit time) D = constant demand per unit time (unit) Q*= economic order quantity

The EOQ Model with Non-zero Lead Time


Lead Time Less than inventory Cycle Time

C: the length of the inventory cycle L: the deterministic lead time R*: reorder point

C = Q*/D

Each time the inventory level reach R*, an order must be placed so that it arrives when an inventory is depleted

Lead Time Greater than inventory Cycle Time

The order must be placed in a previous inventory cycle in order to satisfy demand at least one order will arrive during the lead time

L/C represents the lead time in terms of a number of inventory cycles fractional part = F(L/C)
Example: C = 0.2 years L = 90 days F(L/C) = F((90/365)/0.2) = F(1.23) = 0.23

Reorder point: R* = (F(L/C)Q*

Example:
A department store carpet division sells 30,000 yards of carpet of of a particular type and color per year. Every time the division places an order to the manufacturer, there is a fixed charge of $1,000 independent of the size of the order. At the same time the estimated costs of holding a yard of carpet in inventory for a year is $2. How many yards of carpet should be ordered each time an order is placed?

Example:
The length of the inventory cycle was approximately 67 days and lead time was 30 days. The order must be placed when the inventory level reach how many yards? If the lead time was 75 days, the order must be placed when the inventory level reach how many yards

The EOQ Model with A Uniform Replenishment Rate


Inventory is received gradually over a period of a time Important for an organization that produces and inventories the same end item EPQ / EMQ Works only if items are being produced at a rate greater than the demand rate The ordering cost is not affected, but the holding cost does change

p = uniform replenishment rate = production rate tp = the production time td = the time that inventory is being depleted and not replenished

Total order cost per unit time = K(D/Q) Length of production run = Q/p Demand during production = (Q/p)D The inventory will be maximized precisely when production stops and when total production reaches the order quantity Q maximum inventory level = Q-(Q/p)D

Economic order quantity:

Total number of production runs (or orders) per year = D/Q The time during which the inventory is being depleted = Q/p Q/d

Example:

year

EOQ? Total annual inventory cost? Total number of production runs (or orders) per year? The length of production run? The time during which the inventory is being depleted? Maximum inventory level?