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Inventory Model

Inventory models help businesses determine optimal inventory levels to balance costs and meet customer demand. There are several types of inventory models: [1] Economic order quantity model calculates optimal order size to minimize total yearly costs. [2] Production order quantity model applies to production orders. [3] Back order model plans for planned shortages. [4] Quantity discount model selects order quantity to minimize costs when suppliers offer quantity discounts. Queuing theory determines optimal number of service units to minimize customer wait times and service costs where lines occur.

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705 views8 pages

Inventory Model

Inventory models help businesses determine optimal inventory levels to balance costs and meet customer demand. There are several types of inventory models: [1] Economic order quantity model calculates optimal order size to minimize total yearly costs. [2] Production order quantity model applies to production orders. [3] Back order model plans for planned shortages. [4] Quantity discount model selects order quantity to minimize costs when suppliers offer quantity discounts. Queuing theory determines optimal number of service units to minimize customer wait times and service costs where lines occur.

Uploaded by

Charlyn Flores
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1.

Inventory models 

It is a mathematical model that helps business in determining the


optimum level of inventories that should be maintained in a production process,
managing frequency of ordering, deciding on quantity of goods or raw materials
and goods to provide uninterrupted service to costumers without delay in
delivery.

The engineer manager make decisions regarding inventory consists of


several types all designed to help. They are as follows:

a. Economic order quantity model

b. Production order quantity model

c. Back order inventory model

d. Quantity discount model

A. Economic Order Quantity Model

This one is used to calculate the number of items that should be ordered
at one time to minimize the total yearly cost of placing orders and carrying the
items in inventory.

Formula:

Annual Total Cost

= Annual Ordering + Annual Holding Cost

Economic Order Quantity

= H=iC
Where:
D= Annual Quantity Demanded
Q= Volume per Order
S= Ordering Cost
C=Unit Cost
H= Holding Cost
i= Carrying Cost
Example # 1:
Demand at Child Cycle at Best Buy is 500 units per month. Best Buy incurs a
fixed order placement, transportation, and receiving cost of Php4,000 each time
an order is placed. Each cycle costs Php500 and the retailer has a holding cost of
20 percent. Evaluate the number of computers that the store manager should
order in each replenish lot?
Given:
D = 500 units/month = 6000 units/year
S = Php4000.00
C = Php500.00
i = 20%
Find:
Q=?
Solution:
2 SD 2 x 4000 x( 6000)
Q=
√ H
=
√ ( 0.20 ) (500)

Q= 693 units

B. Production Order Quantity Model


This is an economic order quantity technique applied to production
orders.It answers how much to produce in a given situation and when ordering a
specific quantity.
Formula:
Q=

Where:
k= ordering cost per production run
D= yearly demand rate
H= yearly holding cost per product
P= yearly production rate
Q= order quantity (EPQ)
Example # 2:

A local company produces a programmable EPROM (Erasable


Programmable Read-Only Memory) for several industry clients. They have
experienced a relatively flat demand of 2500 units per year for the product. The
EPROM is produced at a rate of 10000 units per year. The accounting department
has estimated that it costs $50 to initiate a production run, each unit costs the
company $2 to manufacture, and the cost of holding is base on a 30% annual
interest rate. Determine the optimal size of a production run.
Given:
D = 2500 units/year
P = 10000 units/year
K = $50
i = 30%
C = $2
Find:
EPQ = ?
Solution:
2 ( 50 ) ( 2500)
EPQ =
√ 2 KD
H (1−x)

EPQ = 745 units


=
√ 0.30 ( 2 ) (1−
2500
10000
)
C. Back Order Inventory Model
This is an inventory model used for planned shortages.Back order
represents any of stock a company’s customers have ordered but have not yet
received because it currently isn’t available in stock.

D. Quantity Discount Model


An inventory model used to minimize the total cost when quantity
discounts are offered by suppliers. The buyer’s goal in this case is to select the
order quantity that will minimize the total cost.

Example # 3:
GSB Department Store stocks toy cars. Recently, the store was given a
quantity discount schedule for the cars.
Discount No. Discount Discount Discount Cost
Quantity
1 0 to 999 0% $5.00
2 1000 to 1999 4% $4.80
3 2000 and over 5% $4.75

Thus, the normal cost for the cars is $5.00. For orders between 1000 and
1999 units, the unit cost is $4.80, and for orders of 2000 or more units, the unit
cost is $4.75.

Furthermore, the ordering cost is $49 per order, the annual demand is 5000
race cars, and the inventory carrying charge as a percentage of cost, I, is 20%.
What order quantity will minimize the total cost?
Given:
D = 5000 units
S = $49
I = 20%
Analyzing a Quantity Discount
1. For each discount, calculate Q.
2 SD
Q=
√ H

2 ( 49 ) (5000)
Q1=
√ 0.20 (5)
= 700 units

2 ( 49 ) (5000)
Q2 =
√ 0.20( 4.80)
= 714 units

2 ( 49 ) (5000)
Q3 =
√ 0.20( 4.75)
= 718 units

2. If Q for a discount doesn’t qualify, choose the smallest possible order size
to get the discount.
Q2 = 1000 units
Q3 = 2000 units
3. Compute the total cost for each Q or adjusted value from step 2.
Total Cost = Annual Product Cost + Annual Ordering Cost + Annual Handling cost
 Annual Product Cost = C x D
AP1 = 5 x 5000 = 25000
AP2 = 4.8 x 5000 = 24000
AP3 = 4.75 x 5000 = 23750
D
 Annual Ordering Cost = Q x S
5000
AO1 = 700 x 49 = 350
5000
AO2 = 1000 x 49 = 245
5000
AO3 = 2000 x 49 = 122.5
Q
 Annual Handling Cost = 2 x H
700
AH1 = 2 x 0.20 ( 5 ) =350
100 0
AH2 = x 0.20 ( 4.80 )=480
2
2000
AH3 = 2 x 0.20 ( 4.75 )=9 50

Discoun Unit Order Annual Annual Annual Total Cost


t Price Quantity Product Orderin Holding
Number Cost g Cost Cost
1 $5.00 700 $25,000 $350.00 $350 $25,750.00
2 $4.80 1000 $24,000 $245.00 $480 $24,725.00
3 $4.75 2000 $23,750 $122.50 $950 $24,822.50

4. Select the Q that gives the lowest total cost.


Ans : Discount no. 2 = $24,725.00

2. Queuing Theory
Is one that describes how to determine the number of service units that
will minimize both customer waiting time and cost of service. The queuing theory
is applicable to companies where waiting lines are a common situations. 
In short, it deals with the problems which involves waiting.

Single Server Formula:


a. Probability

b. Average no. in the queue

c. Average no. in the system

d. Average time in the queue

e. Average time in the system

Where:
ʎ= arrival rate
ɥ= service rate
Example # 4:
Customers arrive at a fast food restaurant at a rate of 5 per minute and
wait to receive their order for an average of 5 minutes. Customers eat in the
restaurant with probability 0.5 and carry out their order without eating with
probability of 0.5. A meal requires an average of 20 minutes. What is the average
number of customers in the restaurant?
Given:
ʎ = 5/minute
Poin = 0.5
Poout = 0.5
W1 = 5 min W2 = 20 mimutes
Find :
Lave =?
Solution:
1 1 26
W1 = ɥ−ʎ ; 5= ɥ−5
; ɥ= 5
1 1 51
W2 = ɥ−ʎ ; 20 = ɥ−2.5
; ɥ= 20

ʎ 5
L1 = ɥ−ʎ ¿
(26 /5)−5
= 25
ʎ 2.5
L1 = ɥ−ʎ = (51/20)−2.5 = 50

L average = 25 + 50
L average = 75 customerss

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