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Economic Production Lot

The economic production lot (EPL) model determines the optimal production quantity when production rate exceeds demand rate to avoid stockouts. It assumes inventory builds up linearly during production time T1 at a rate of P-D until reaching quantity Q, then decreases at a rate of -D during time T2 until next production starts. The holding cost is hH/2, where H is the leftover inventory Q - (D*T1). The total relevant costs (TRC) of the EPL is given by TRC = A*D + hH/2 + (A*D)/Q, where the optimal production quantity Q* = √(2*A*D/h)*(1 - D/P

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319 views2 pages

Economic Production Lot

The economic production lot (EPL) model determines the optimal production quantity when production rate exceeds demand rate to avoid stockouts. It assumes inventory builds up linearly during production time T1 at a rate of P-D until reaching quantity Q, then decreases at a rate of -D during time T2 until next production starts. The holding cost is hH/2, where H is the leftover inventory Q - (D*T1). The total relevant costs (TRC) of the EPL is given by TRC = A*D + hH/2 + (A*D)/Q, where the optimal production quantity Q* = √(2*A*D/h)*(1 - D/P

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gurgurgurgur
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Economic Production Lot (EPL)

The economic production lot (EPL) is similar to the EOQ in which it determines to
optimal production quantity. The model assumes that there is a finite production rate, and it is
assumed that the production (P) > Demand (D). Otherwise, the stock out or backorder will go to
infinite. Thus, we need to determine the optimal production quantity because if the production is
not stopped, the inventory will keep growing at a rate of P –D (Figure 6.1).
T1 = Production time
H = The inventory built during T1
T2 = Period of time the inventory H will cover the demand without production.

Slope=P-D
Inv Slope=-D

Time
Start T2
Stop Start
Prod. Prod.
Prod.

Figure 6.1 EPL


The inventory build up (H) is the leftover inventory during the production time T1, which
is given by
Q  PT1


H  Q  DT1  Q 1  D
P 
Therefore, your holding costs are hH/2. Substituting the holding costs in the total relevant
costs of the EOQ and the EPL are given by

TRC ( EPL)   
D


hH AD h 1  P Q AD  (
(6.5)
2 Q 2 Q

2 AD
EPL  Q*  (6.6)
h  1 D / P

Example 6.2 A firm can load and package their own brand of 35-mm slide firm, or buy
prepacked rolls of discount brand film. If they load their own film, there is a production set up
cost of $20. The finished product is valued at $1.23 a roll, and the production is rate is 500 rolls
per day. The discount film rate costs $1.26 per roll, and it an ordering cost $3 to place a
purchasing order. The annual demand is 10,000 rolls and the firm use a holding cost of
$0.24/$/year. What should the firm do, order or produce the rolls?
Discount brand film Produce own brand
Ordering cost A $ 3.00 Set up cost A 20.00
Yearly demand D 10000 Yearly demand D 10,000.00
unit variable cost c 1.26 unit variable cost c 1.23
carrying cost i 0.24 carrying cost i 0.24
Production rate* P 182,500
units EOQ 445 units EPL 1197
Purchase/prodn cost 12600 12300
Total Ordering cost $ 67.35 $ 167.04
Holding cost $ 67.35 $ 167.04
Total cost $ 12,734.70 $ 12,634.08

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