624 INDUSTRIAL ENGINEERING AND NMANAGEMENT

E.O.Q C2AP
where, A = 10, 000 units/year

P =Rs. 150
C Rs. 2 per unit per year

2x10,000x150
E.O.Q 2.00
1225 units Ans.
Total cost per year = (cost of material consumed) + (Procurement cost + Inventory carrying
cost)

(10,000x
(10,000 x1)+|1995x150+2x
1225
150+2x
1225
2
= 10,000+1225+ 1225

Rs. 12450. Ans.

Here, Procurement cost = Noof orders x ordering cost and

Inventory carrying cost = Holding cost/unit/year x Average inventory.

26.13.2. Instantaneous Replenishment Model with Shortages:

In this type of model shortages are allowed, some times the temporary stock out positions are
allowed, if the customer/luser is willing to wait until it is replenished. In such situations, extra
expenditure is incurred on expediting and extra communiecation. In some cases it is economicalto
wait rather than keeping in stock, e.g., in high value irregularly required items. The stock out
situations become serious when sales are lost. Therefore, as a policy and on economical reasons
management can allow shortages in limited items and for limited periods.

Inventory
Level

Time

Fig. 26.6. E.O.Q model with shortage allowed.

In the cases when shortages are allowed, Economic Ordering Quantity.

Q C2AP C+S
S
and Maximum Inventory, M =
C+S
where, S =
Shortage cost and M =Maximum inventory all other terms remain sau
 N T O R YM A N A G E M E N T

625
l e 26.13. In a factory having annual demand of 10,000 units of a particular item,
gxantis Rs. 100 per order, cost of item is Rs. 10.00 per unit, inventory carrying cost is
is Rs.
cost

dernecost
rdering ofprodue
product for an year, and shortage cost is Rs. 20 per unit per year.
the cost of
of
%Determnine
15%
ine Econom
Economic Ordering Quantity and Maximum inventory.
tion. Since, Economic Ordering Quantity,

2AP C+S
QQ =
C S
Where
A = 10,000 units
P Rs. 100 per order
C = 15% of 10 = Rs. 1.5.

S Rs. 20.

2x10000 x1001.5+20
1.5 V 20
1155 = x
1.037 1197.5
Say 1250 (with 8 orders per year) Ans.

Q.S 1197.5 x 20
Maximum Inventory, M C+S 1.5+20 = 1114 Ans.

26.14. REPLENISHMENT OF STOCK WITH FINITE RATE

26.14.1. Shortages not alloweda
When a particular item of supply is manufactured on order rather than purchasing them from
narket in lots, these models are applicable. In this case items are despatched
Deing manufactured. Therefore, during replenishment periods, the items are continuously
as
received, as well
a8 Consumed, but when maximum inmventory level is reached, production is stopped
temporarily.
his inventory is then used. Such a model is shown in Fig. 26.7.This shows that in the
ventory increases at a constant rate of (K-A) during replenishment period, until beginning,
it reaches
aximum level. During no replenishment it decreases ata constant rate of A.In this case, Economic
Ordering Quantity,

K -A

Maximum
Inventory level
Q
Reorder level

o Replenishment Interval Time

Period Between Runs
Fig. 26.7.
626 INDUSTRIAL ENGINEERING AND MANAGEMENT
Where,
K Nunmber of items produced in a unit time.
P= Set-up cost per run.
Rest all other abbreviations remain same.
Example 26.14. A manufacturing company has a demand of 12000 unuts of a particular item
in a year, and can manufacture this item at the rate of 2000 units per month. f cost of each set.
up is Rs. 400, holding cost per unit per month is Re. 0.15. Determine
(a) Optimum lot size
(6) Total cost per year, assuming cost ofeach unit as Rs.4.
c) Maximum inventory
(d) Manufacturing time
(e) Number of cycles in a year
Total cycle time
Solution, (a) Since,

2AP K
E.0.Q, C K- A
where,
A= 12000 units per year
P Rs. 400/set up
C 0.15 x 12 Re. 1.8/ unit/year.
K 2000 x 12= 24000 unit/year.
2x 12000 x 400 24000
1.8 24000 12000
3265 units Ans.
(6) Since, Total cost per year =
cost of items consumed + cost of set
carrying cost. up/yeart inventory

For Optimum value of Q,

Set up cost/year =
Inventory carrying cost.
Total cost = 12000 x 4+2 x 12000
x 400
3265
48000 +2940 Rs. 50940
per year Ans.
(C) Maximum inventory = xo
K

24000-12000
x 3265
24000
1632 Units Ans.
Manufacturing time = Maximum inventory
K- A
1632
12000U.136 year Ans.
 MMENTO MANAGEMENT

of cycles/year 627
te) Number

12000
3265 3.675 Ans.
Total eycle time

E 1 =0.272 year Ans.

a 14.2. Replenishment of stock with finite

rate-shortages allowed:

Maximum
Inventory level
Q

Shortages
Fig.26.8
Similar to previous model
this model shortages are also
replenishment is done at finite rate in this model, except that in
permitted. In this model, Economic Ordering Quantity,
2AP K
VK-A
with abreviations as mentioned in earlier formulae.
Example 26.15. Let us take data of example 26. 14,
except that shortage
Rs. 25 per
year.
cost of one unit is
Solution.
(a)Since, economic ordering quantity
2AP K C+S

2x 12000 x 400 24000

1.8+25
=
1.8
3880 units Ans.
24000-12000 25

(6) Maximum Inventory

2 x 12000 x 400
x 12000 25
1.8 V24000 ^

V26.8
= 1577 units Ans.

3380
Manufacturing time 24O000.1408 year Ans,
 628
INDUSTRIAL ENGINEERING AND MANAGEMENT
12000
(d) Number of Cycles in a year =
3380
= 3.55 Ans.
Total cycle time =EF 0.2817 year Ans.
(e) 3.55
12000
Total cost per year = 12000 x 4 + 2 o x400x
x3380
26.8
=
48000+2840 x 2* 25
= 48000 +2079
= Rs. 50079 per year Ans.
26.15. QUANTITY DISCOUNT MODELSS
(MODELS WITH PRICE BREAKS)
cost per unit was assumed as
far, production or purchase
In the inventory models described
so
manufactured or purchased. Usually
constant. Some times the cost depends
upon the quantity
This price discount factor is being
the purchase of large quantities.
suppliers offer discount for
considered in this model.
Total Stocking
Cost
Order Quantity
Fig. 26.9.
it is confirmea
the normal model, then
a r e calculated considering This wu
In these models, quantities the maximum discounted price.
This process starts with
whether it is really optimum.
following example month working Tor "9
be clear from the c o n s u m e s 200 items per
Example 26.16. A
manufacturing c o n c e r n
For a lot of m o r e than 50,
the price is I50. F
Rs.
1000.
The cost of item is s . handling charges
are
1
days in a month. quantity, if ordering
cost is Rs. 10,000 and
outoptimum purchase
u n i t cost/month. rate of Rs. 950.
first step, let us calculate quantity considering
Solution. As a
2AP
Q C
2x 200 x 10,000
950x 1
ORYMANAGEMENT
G4.9= 65
=
|629
items the say.
Sneefor 6 5 , price i8 least, hence this is
optimal quantity. E.0.Q. =
65 Ans.
QUESTIONS
What is A-B-C control policy?
1 Describe it in detail.
What is material handling? Suggest some
aseribe the procedure for disposing steps to reduce the material
the surplus and handling cost.
What is Inventory control? obsolete items.
Explain its
importance in an industrial undertaking.
Describe various functons of Inventory control.
e What are the quantity standards and how they can be used
control? as a tool to Inventory
1. What is the purpose of
stock-taking? How stock taking of a large concern is done?
A. Discuss any difference in inventory
9. Explain how the standard order
planning for jobing and mass production industries.
inventory control? quantity is détermined and point out how it
helps in.
10. Write short notes on:
Economic lot size,
() ABC analysis in inventory control and
(ii) Perpetual inventory control.
11. Describe briefly the different elements of
12. The rate of use of a inventory carrying costs.
particular raw material from
placing and receiving an order is Rs. 40. The coststores is 20 units per year. The
of each unit is Rs. 100. The
cost of
carrying inventory in per cent per year in 0.16 and it
cost of
Determine the economic order depends upon the average stock.
point.
quantity. If the lead time is 3 months, calculate the reorder
13. Find economic order [10.5 units]
quantity from the following data:
Average annual demand 30,000
Inventory carrying cost =
12% of the unit value per
year 7.
Cost of placing an order = Rs. 70
Cost/unit = Rs.2
4. A
factory uses two pieces per of a rod 6 mm dia and
[4,834,500 (Rounded of)]
150 mm
manufacturing processes. The rod costs Rs. 3 each and the totallength in one of their
expenses involved
purchasing and in
receiving them Rs. 50
per order. The annual
are
inventory
COst per item is
Re. 1. The carrying
procurement period is 3 days and minimum stock kept
pieces. Find out: is 8
) Standard ordering quantity
i) Reorder point and
i) Maximum stock I) 243, 200, (i) 14. (ii)
15, D 280]
ermine the economie order quantity from the following data
Average annual demand = 10,000 units.
Ventory carrying cost = 20% per rupee value/year
Cost of placing order =
Rs. 100
COst per unit =
Rs. 5