Inventory

Management-1
▪ Inventory
▪ A stock or store of goods

▪ Independent demand items

▪ Items that are ready to be
sold or used

▪ Inventories are a vital part of

business: (1) necessary for
operations and (2) contribute
to customer satisfaction
▪ A “typical” firm has
roughly 30% of its current
assets and as much as 90%
of its working capital
invested in inventory
▪ Raw materials and purchased parts
▪ Work-in-process (WIP)
▪ Finished goods inventories or
merchandise
▪ Tools and supplies
▪ Maintenance and repairs (MRO)
inventory
▪ Goods-in-transit to warehouses or
customers (pipeline inventory)
▪ Inventories serve a number of functions such
as:
1. To meet anticipated customer demand
2. To smooth production requirements
3. To decouple operations
4. To protect against stockouts
5. To take advantage of order cycles (Order and
Inventory Costs)
6. To hedge against price increases
7. To permit operations (Little’s Law)
8. To take advantage of quantity discounts
 Input flow of materials

Inventory level

Scrap flow

Output flow of materials

Balance the advantages and disadvantages of small and large inventories

Pressures for small inventories Pressures for large inventories

• Inventory holding cost • Customer service

• Cost of capital • Stock out
• Storage and handling costs • Back order
• Taxes, • Ordering cost
• Insurance • Setup cost
• Shrinkage • Labor and equipment utilization
• Pilferage or theft • Transportation cost
• Obsolescence • Payments to suppliers
• Deterioration • Quantity discounts
 Inventory

Process Number Demand

Type Others
stage & Value

Raw Materials A Items

B Items Independent Maintenance
WIP
C Items Dependent Operating
Finished
Goods
Three aggregate categories

• Raw
materials
• Work-in-
process
• Finished
goods
 Cycle inventory

Lot sizing principles

Classified by how it is • The lot size, Q, varies directly
created with the elapsed time (or
Cycle inventory cycle) between orders.

Safety stock inventory • The longer the time between

orders for a given item, the
Anticipation inventory
greater the cycle inventory
Pipeline inventory must be.
Q+0 Q
Average cycle inventory = =
2 2
SAFETY STOCK AND ANTICIPATION INVENTORY
Average demand during lead time = DL
Average demand per period = d
Number of periods in the item’s lead time = L

Pipeline inventory = DL = dL
 Estimating Inventory Levels

A plant makes monthly shipments of electric drills to a

wholesaler in average lot sizes of 280 drills. The wholesaler’s
average demand is 70 drills a week, and the lead time from
the plant is 3 weeks. The wholesaler must pay for the
inventory from the moment the plant makes a shipment. If the
wholesaler is willing to increase its purchase quantity to 350
units, the plant will give priority to the wholesaler and
guarantee a lead time of only 2 weeks. What is the effect on
the wholesaler’s cycle and pipeline inventories?
 SOLUTION
The wholesaler’s current cycle and pipeline inventories are

Q 140 drills
Cycle inventory = =
2

Pipeline inventory = DL =dL = (70 drills/week)(3 weeks)

= 210 drills
Independent vs. Dependent Demand
Independent Demand
(demand for item is independent
of demand for any other item)

Dependent Demand
(demand for item is dependent
upon the demand for some
other item)
Independent vs. Dependent Demand

Materials With Materials With

Item
Independent Demand Dependent Demand

Demand
Company Customers Parent Items
Source
Material
Finished Goods WIP & Raw Materials
Type
Method of
Forecast & Booked Calculated
Estimating
Customer Orders
Demand
Planning
EOQ & ROP MRP
Method
▪ Inventory management has two main concerns:
1. Level of customer service
▪ Having the right goods available in the right quantity in the right place
at the right time
2. Costs of ordering and carrying inventories

▪ The overall objective of inventory management is to achieve

satisfactory levels of customer service while keeping inventory costs
within reasonable bounds
1. Measure of performance
2. Customer satisfaction
▪ Number and quantity of backorders
▪ Customer complaints
3. Inventory turnover
▪ Requires:
1. A system that keeps track of inventory
2. A reliable forecast of demand
3. Knowledge of lead time and lead time
variability
4. Reasonable estimates of
▪ holding costs
▪ ordering costs
▪ shortage costs
5. A classification system for inventory items
▪ Periodic System
▪ Physical count of items in inventory made at
periodic intervals
▪ Perpetual Inventory System
▪ System that keeps track of removals from
inventory continuously, thus monitoring
current levels of each item
▪ An order is placed when inventory drops to a
predetermined minimum level
▪ Two-bin system
▪ Two containers of inventory; reorder
when the first is empty
▪ Universal product code (UPC)
▪ Bar code printed on a label that has
information about the item to which it
is attached
▪ Radio frequency identification
(RFID) tags
▪ A technology that uses radio waves to
identify objects, such as goods, in
supply chains
Purchase The amount paid to buy the inventory
cost

Holding Cost to carry an item in inventory for a length of time,

(carrying) usually a year
costs
Ordering Costs of ordering and receiving inventory
costs

Setup costs The costs involved in preparing equipment for a job

Analogous to ordering costs
Shortage Costs resulting when demand exceeds the supply of
costs inventory; often unrealized profit per unit
▪ A-B-C approach
▪ Classifying inventory according
to some measure of importance,
and allocating control efforts
accordingly
▪ A items (very important)
▪ 10 to 20 percent of the
number of items in inventory
and about 60 to 70 percent of
the annual dollar value
▪ B items (moderately important)
▪ C items (least important)
▪ 50 to 60 percent of the
number
of items in inventory but only
about 10 to 15 percent of the
annual dollar value
▪ Cycle counting
▪ A physical count of items in
inventory
▪ Cycle counting management
▪ How much accuracy is
needed?
▪ A items: ± 0.2 percent
▪ B items: ± 1 percent
▪ C items: ± 5 percent
▪ When should cycle counting
be performed?
▪ Who should do it?
Booker’s Book Bindery divides SKUs into three classes, according to their dollar usage.
Calculate the usage values of the following SKUs and determine which is most likely to
be classified as class A.
Inventory Models-2
TOTAL RELEVANT COSTS (TRC)
▪ The basic EOQ model is used to find a fixed order
quantity that will minimize total annual inventory costs
▪ Assumptions:
1. Only one product is involved
2. Annual demand requirements are known
3. Demand is even throughout the year
4. Lead time does not vary
5. Each order is received in a single delivery
6. There are no quantity discounts
Don’t use • Make-to-order strategy
the EOQ • Order size is constrained

Modify • Quantity discounts

the EOQ • Replenishment not instantaneous

Use the • Make-to-stock

• Carrying and setup costs are
EOQ known and relatively stable
 Demand

Order
Receive

Inventory depletion
(demand rate)
Q
On-hand Average
inventory Q cycle
(units) 2 inventory

1 cycle Time
 On-hand
inventory Q
(units)

T T
CALCULATING EOQ

⚫ Annual holding cost

Annual holding cost = (Average cycle inventory)  (Unit holding cost)

⚫ Annual ordering cost

Annual ordering cost = (Number of orders/Year)  (Ordering or setup costs)

⚫ Total annual cycle-inventory cost

Total costs = Annual holding cost + Annual ordering or setup cost

 COST MINIMIZATION
The Total-Cost Curve is U-Shaped
Annual Cost

Q D
TC = H + S
2 Q

Holding Costs

Ordering Costs

Order Quantity (Q)

QO(optimal order quantity)
Calculating EOQ
⚫ The lot size, Q, that minimizes total annual inventory holding
and ordering costs

⚫ Total annual cycle-inventory and ordering cost

Q D
C= ( H) + Q (S)
where 2
C = total annual cycle-inventory
cost
Q = lot size
H = holding cost per unit per year
D = annual demand
S = ordering or setup costs per lot
Calculating EOQ

✓ Find Q that minimizes total relevant cost

✓ Set derivative w. r. to Q to zero (1st order conditions)
✓ Check that 2nd derivative is > 0 (2nd order conditions)

2DS
⚫ The EOQ formula: EOQ = Q =
H
Q
⚫ Time between orders TBOEOQ = (12 months/year)
D
SENSITIVITY ANALYSIS OF THE EOQ

Parameter EOQ Parameter EOQ Comments

Change Change

Increase in lot size is in proportion to the square

Demand 2DS
H ↑ ↑ root of D.

Order/Setup 2DS Weeks of supply decreases and inventory turnover

Costs H ↓ ↓ increases because the lot size decreases.

Larger lots are justified when holding costs

Holding Costs
2DS
H ↓ ↑ decrease.
Demand, D = 12,000 computers per year.
Holding cost, H = 100 per item per year. Fixed cost, S =
$4,000/order.
Find EOQ, Cycle Inventory, Optimal Reorder Interval
and Optimal Ordering Frequency.

EOQ = 979.79, say 980 computers

Cycle inventory = EOQ/2 = 490 units
Optimal ordering frequency, n=12.24 orders per year.
Optimal Reorder interval, T = 0.0816 year = 0.98 month
EXTENSIONS Finite

OF EOQ:
Replenishment
(EPQ model)
▪ The batch mode is widely used in production. In certain
instances, the capacity to produce a part exceeds its usage
(demand rate)
▪ Assumptions
1. Only one item is involved
2. Annual demand requirements are known
3. Usage rate is constant
4. Usage occurs continually, but production occurs
periodically
5. The production rate is constant
6. Lead time does not vary
7. There are no quantity discounts
 Production
quantity = Qp

Imax =Maximum
Demand during inventory
production interval

On-hand
inventory
(units) p-u u

Producti Only
usage TBO= Production & usage + only usage
on &
usage
▪ Maximum cycle inventory (Imax)
Qp u
I max = ( p − u ) = Q p (1 − )
p p
▪ Total cost = Annual holding cost + Annual ordering cost

I max D Qp u D
C =[  H]+ S = (1 − )  H +  S
2 Q 2 p Q
▪ Economic production quantity(EPQ)

2 DS p
Qp = 
H p −u

Where, p= production or delivery rate

u = usage rate or demand
 Demand, u = 12,000 computers per year.
p=20,000 per year.
Holding cost, H = 100 per item per year.
Fixed cost, S = $4,000/order.
Find EPQ. Qp =
2 DS

p
H p −u

EPQ = EOQ*sqrt(p/(p-u))
=979.79*sqrt(20/8)=1549 computers

42
▪ A plant manager of a chemical plant must determine the lot size for a

particular chemical that has a steady demand of 30 barrels per day. The
production rate is 190 barrels per day, annual demand is 10,500 barrels,
setup cost is $200, annual holding cost is $0.21 per barrel, and the plant
operates 350 days per year.

a) Determine the economic production quantity

b) Determine the total annual setup and inventory holding cost for this
item
c) Determine the time between orders (TBO), or cycle length, for the
EPQ
d) Determine the production time per lot
Solution
a. Solving first for the EPQ, we get
2 DS p 2(10,500 )($200 ) 190
Qp =  = = 4,873.4 barrels
H p −u $0.21 190 − 30

b. The total annual cost with the EPQ is

Qp  p − u 
(H ) + (S )
D
C= 
2  p  Q

4,873.4  190 − 30  10,500

=  ($0.21) + ($200)
2  190  4,873.4

= $430.91+ $430.91 = $861.82

c. Applying the TBO formula to the ELS, we get

ELS 4,873.4
TBOELS = (350 days/year ) = (350 )
D 10,500

= 162.4 or 162 days

d. The production time during each cycle is the lot size divided by the production
rate:
ELS 4,873.4
= = 25.6 or 26 days
p 190
Quantity
discounts
All Units Discount
• Discount applies to all units purchased if total amount exceeds the break point
quantity
• Examples?
Incremental Discount
• Discount applies only to the quantity purchased that exceeds the break point
quantity
• Examples?
One Time Only Discount
• Less common –but not unheard of!
• A one time only discount applies to all units you order right now (no quantity)
Howminimum or limit) discounting strategies impact your lot sizing
will different
decision?
What cost elements are relevant?
Adding PD does not change
EOQ
 TCa
TCb
Total Cost

Decreasing
TCc Price

Annual demand*discount

EOQ Quantity
 Price a > Price b > Price c
Total Cost

a b c

TCa
TCb
TCc

Q*=EOQ Quantity
 Price a > Price b > Price c
Total Cost

a b c

TCa
TCb
TCc

EOQ Q* Quantity
 Price a > Price b > Price c
Total Cost

a b c

TCc
TCa
TCb

EOQ Q* Quantity
 Price a > Price b > Price c

a c
Total Cost

TCc
TCa
TCb

EOQ Q* Quantity
1.Determine the largest realizable EOQ.
The most efficient way to do this is to
compute the EOQ for the lowest price first,
and continue with the next higher price.
Stop when the first EOQ value is realizable
(that is, within the correct interval).

2.Compare the value of the average

annual cost at the largest realizable
EOQ and at all the price breakpoints
that are greater than the largest
realizable EOQ. The optimal Q is the
point at which the average annual
cost is a minimum.
▪ The total-cost curve

with quantity discounts

is composed of a
portion of the total-cost
curve for each price
 Note all the price ranges have the same EOQ.
Stop if EOQ=Q1 is in the lowest cost range
(highest quantity range), otherwise continue
Total Cost

towards quantity break points which give lower

costs
2 DS
Q1 =
1 H
2

Quantity
 A popular shoe store sells 8000 pairs per year. The fixed cost of
ordering shoes from the distribution center is $15 and holding
costs are taken as $12.5 per shoe per year. The per unit
purchase costs from the distribution center is given as
C3=60, if 0 < Q < 50
C2=55, if 50 <= Q < 150
C1=50, if 150 <= Q

where Q is the order size. Determine the

optimal order quantity.

57
▪ There are three ranges for lot sizes in this problem:
▪ (0, q2=50),
▪ (q2=50, q1=150)
▪ (q1=150,infinite).

▪ Holding costs in all there ranges of shoe prices

are given as H=12.5,
▪ EOQ is not feasible in the lowest price range because
2(15)(8000 )
138.6 < 150. EOQ = = 138 .6
12.5
▪ The order quantity q1=150 is a candidate with cost
TC(150)=8000(50)+8000(15)/150+(12.5)(150)/2
=401,900
▪ Let us go to a higher cost level of (q2=50, q1=150).
▪ EOQ=138.6 is in the appropriate range, so it is another
candidate with cost
TC(138.6)=8000(55)+8000(15)/138.6+(12.5)(138.6)/2
=441,732 58

▪ Since TC(150) < TC(132.1), Q=150 is the optimal solution.

A supplier for St. LeRoy Hospital has introduced quantity
discounts to encourage larger order quantities of a special
catheter. The price schedule is
Order Quantity Price per Unit
0 to 299 $60.00
300 to 499 $58.80
500 or more $57.00

The hospital estimates that its annual demand for this item is 936 units, its
ordering cost is $45.00 per order, and its annual holding cost is 25 percent
of the catheter’s unit price. What quantity of this catheter should the
hospital order to minimize total costs? Suppose the price for quantities
between 300 and 499 is reduced to $58.00. Should the order quantity
change?
Step 1: Find the first feasible EOQ, starting with the lowest price
level:
2 DS 2(936 )($45.00 )
EOQ 57.00 = = = 77 units
H 0.25($57.00 )

A 77-unit order actually costs $60.00 per unit, instead of the $57.00 per unit used in the
EOQ calculation, so this EOQ is infeasible. Now try the $58.80 level:

2 DS 2(936 )($45.00 )
EOQ 58.80 = = = 76 units
H 0.25($58.80 )

This quantity also is infeasible because a 76-unit order is too small to qualify for the
$58.80 price. Try the highest price level:
 2 DS 2(936 )($45.00 )
EOQ 60.00 = = = 75 units
H 0 .25 ($60 .00 )

This quantity is feasible because it lies in the range corresponding to its price, P = $60.00

Step 2:The first feasible EOQ of 75 does not correspond to the lowest price level. Hence, we
must compare its total cost with the price break quantities (300 and 500 units) at
the lower price levels ($58.80 and $57.00):
 Q D
C= ( H ) + ( S ) + PD
2 Q
75
C 75 = (0.25 )($60.00 ) + 936 ($45.00 ) + $60.00(936 ) = $57,284
2 75

300
C 300 = (0.25 )($58.80 ) + 936 ($45.00 ) + $58.80(936 ) = $57,382
2 300

500
C 500 = (0.25 )($57.00 ) + 936 ($45.00 ) + $57.00(936 ) = $56,999
2 500

The best purchase quantity is 500 units, which qualifies for the deepest discount
 Inventory Control Systems

Independent
Demand Dependent
Demand

Two important
questions Independent Demand
(demand for item is independent
• How much? of demand for any other item)

• When?
Nature of demand

• Independent
demand Dependent Demand
• Dependent (demand for item is dependent
upon the demand for some
demand other item)
Independent vs. Dependent Demand
Materials With Materials With
Item
Independent Demand Dependent Demand

Demand
Company Customers Parent Items
Source
Material
Finished Goods WIP & Raw Materials
Type
Method of
Forecast & Booked Calculated
Estimating
Customer Orders
Demand

Planning EOQ & ROP MRP

Method
Inventory Models-3
 Review Period

Continuous Periodic Review

Review (Q) (P)

EOQ :
T : Target
Economic R : Reorder P : Time
inventory
Order point interval
level
Quantity
 Inventory Control Systems

Continuous review (Q) system

• Reorder point system (ROP) and fixed order quantity system
• For independent demand items
• Tracks inventory position (IP)
• Includes scheduled receipts (SR), on-hand inventory (OH), and
back orders (BO)

Inventory position = On-hand inventory + Scheduled receipts – Backorders

IP OH SR -
BO
 ▪ Reorder point

▪ When the quantity on hand of an item drops

to this amount, the item is reordered.

▪ Determinants of the reorder point

WHEN TO 1. The rate of demand

REORDER 2. The lead time

3. The extent of demand and/or lead time

variability

4. The degree of stock-out risk acceptable

to management
 Continuous
Review Period
Demand is either Deterministic or Stochastic

Lead Time is either Deterministic or Stochastic

Constant demand rate, constant lead time

Variable demand rate, constant lead time

Constant demand rate, variable lead time

Variable demand rate, variable lead time

 Constant demand rate, Constant lead time
Continuous Review Systems

IP IP IP
Order Order Order Order
received received received received
On-hand inventory

Q Q Q

OH OH OH
R
Order Order Order
placed placed placed

L L L Time
TBO TBO TBO
ROP = d  LT
where
d = Demand rate (units per period, per day, per week)
LT = Lead time (in same time units as d )
 Variable demand rate, Constant lead time
Continuous Review Systems

IP IP IP
Order Order
Order
received received
Order received
received
On-hand inventory

Q Q Q

R
Order Order Order
placed placed placed

0
L1 L2 L3 Time
TBO1 TBO2 TBO3
▪ Demand or lead time uncertainty creates the

possibility that demand will be greater than

available supply

▪ To reduce the likelihood of a stockout, it becomes

necessary to carry safety stock

▪ It’s held in excess

of expected
demand due to
variable demand
and/or lead time
▪ As the amount of safety stock carried increases, the

risk of stockout decreases.

▪ This improves customer service level

▪ Service level

▪ The probability that demand will not exceed supply during

lead time

▪ Service level = 100% - P(Stockout)

▪ The amount of safety stock that is appropriate for a
given situation depends upon:
1. The average demand rate and average lead time
2. Demand and lead time variability
3. The desired service level

Expected demand
ROP = + z dLT
during lead time
where
z = Number of standard deviations
 dLT = The standard deviation of lead time demand
ROP = d  LT + z d LT
where
z = Number of standard deviations
d = Average demand per period (per day, per week)
 d = The stdev. of demand per period (same time units as d )
LT = Lead time (same time units as d )

Note: If only demand is variable, then dLT =  d LT

1. Choose an appropriate service-level policy
1. Select service level or cycle service level (CSL)
2. Protection interval

2. Determine the demand during lead time probability distribution

3. Determine the safety stock and reorder point levels

 DDLT
⚫ Specify mean and standard deviation
⚫ Standard deviation of demand during lead time

σdLT = σd2L = σd L

⚫ Safety stock and reorder point

Safety stock = zσdLT
where
z = number of standard deviations needed to achieve the cycle-service
level
σdLT = stand deviation of demand during lead time
Reorder point = R = dL + safety stock
 σt = 15 σt = 15 σt = 15

75
+ 75
+ 75
=
Demand for week 1 Demand for week 2 Demand for week 3

σt = 25.98

Development of Demand Distribution

for the Lead Time

225
Demand for 3-week lead time
 Cycle-service level = 85%

Probability of stockout
(1.0 – 0.85 = 0.15)
Average
demand
during
lead time R

zσdLT

Finding Safety Stock with a Normal Probability Distribution

for an 85 % Cycle-Service Level
ROP = d  LT + zd LT
where
z = Number of standard deviations
d = Demand per period (per day, per week)
 LT = The stddev. of lead time (same time units as d )
LT = Average lead time (same time units as d )

Note: If only lead time is variable, then

 dLT = d LT
Continuous Review Systems
Variable demand rate, Variable lead time

▪ Often the case that both are variable

▪ The equations are more complicated

Safety stock = zσdLT

R = (Average weekly demand  Average lead time) + Safety stock

= d L + Safety stock

where
d = Average weekly (or daily or monthly) demand
L = Average lead time
σd = Standard deviation of weekly (or daily or monthly) demand
σLT = Standard deviation of the lead time
σdLT = Lσd2 + d2σLT2
▪ Fixed-order-interval (FOI) model
▪ Orders are placed at fixed time intervals

▪ Reasons for using the FOI model

▪ Supplier’s policy may encourage its use

▪ Grouping orders from the same supplier can produce savings in

shipping costs

▪ Some circumstances do not lend themselves to continuously

monitoring inventory position
Fixed Quantity

Target Inventory
Level

Fixed Interval

13-86
 Expected demand
Amount = during protection + Safety − Amount on hand
to Order stock at reorder time
interval
= d (OI + LT) + z d OI + LT − A
where
OI = Order interval (length of time between orders)
A = Amount on hand at reorder time
⚫ Two-Bin system
▪ Visual system

▪ An empty first bin signals the need to place an order

⚫ Calculating total systems costs

Total cost = Annual cycle inventory holding cost + Annual ordering

cost + Annual safety stock holding cost

Q D
C= (H) + (S) + (H) (Safety stock)
2 Q
 ▪ Single-period model
▪ Model for ordering of
perishables and other items
with limited useful lives

SINGLE- Shortage cost Excess cost

PERIOD
• Generally, the • Different between
unrealized profit purchase cost and
per unit salvage value of

MODEL • Cshortage = Cs = items left over at

Revenue per unit – the end of the
Cost per unit period
• Cexcess = Ce = Cost
per unit – Salvage
value per unit
 Two categories of
The goal of the single- problem:
period model is to identify • Demand can be characterized by
the order quantity that will a continuous distribution
minimize the long-run • Demand can be characterized by
excess and shortage costs a discrete distribution
One of many items sold at a museum of natural history is a
Christmas ornament carved from wood. The gift shop makes a
$10 profit per unit sold during the season, but it takes a $5 loss
per unit after the season is over. The following discrete
probability distribution for the season’s demand has been
identified:
Demand 10 20 30 40 50

Demand Probability 0.2 0.3 0.3 0.1 0.1

How many ornaments should the museum’s buyer order?

SOLUTION
Each demand level is a candidate for best order quantity, so the payoff table
should have five rows. For the first row, where Q = 10, demand is at least
as great as the purchase quantity. Thus, all five payoffs in this row are

Payoff = pQ = ($10)(10) = $100

This formula can be used in other rows but only for those quantity–demand
combinations where all units are sold during the season. These combinations lie in
the upper-right portion of the payoff table, where Q ≤ D. For example, the payoff
when Q = 40 and D = 50 is
Payoff = pQ = ($10)(40) = $400
 The payoffs in the lower-left portion of the table represent quantity–demand combinations
where some units must be disposed of after the season (Q > D). For this case, the payoff
must be calculated with the second formula. For example, when Q = 40 and D = 30,

Payoff = pD – l(Q – D) = ($10)(30) – ($5)(40 – 30) = $250

Demand 10 20 30 40 50
Using excel, we obtain Probability 0.2 0.3 0.3 0.1 0.1
the payoff table
Profit 10
Loss 5
DEMAND

10 20 30 40 50
10 100 100 100 100 100
QUANTITY

20 50 200 200 200 200

30 0 150 300 300 300
40 -50 100 250 400 400
50 -100 50 200 350 500
Excel for One-Period Inventory Decisions Showing the Payoff Table
Now we calculate the expected payoff for each Q by multiplying the
payoff for each demand quantity by the probability of that demand
and then adding the results. For example, for Q = 30,
Payoff = 0.2($0) + 0.3($150) + 0.3($300) + 0.1($300) + 0.1($300)= $195
Demand 10 20 30 40 50
Probability 0.2 0.3 0.3 0.1 0.1

Profit 10
Loss 5
DEMAND

10 20 30 40 50
10 100 100 100 100 100 100
QUANTITY

20 50 200 200 200 200 170

30 0 150 300 300 300 195
40 -50 100 250 400 400 175
50 -100 50 200 350 500 140

Excel Showing the Expected Payoffs

 Cs
Service level =
C s + Ce
where
Cs = shortage cost per unit
Ce = excess cost per unit
Ce Cs

Service level

Quantity
So So =Optimum
Balance Point Stocking Quantity