ECONOMIC ORDER QUANTITY

Inputs
Demand/year, D = 12,000 (i)
Fixed cost per order, S= $ 4,000 (ii)
Cost per unit, C = $ 500 (iii)
Holding cost, h= 20% (iv)

Order Size Increment = 30

(v)

Lot AnnualOrder Cost Annual Holding Cost Total Cost

200 $ 240,000 $ 10,000 $ 250,000
230 $ 208,696 $ 11,500 $ 220,196
260 $ 184,615 $ 13,000 $ 197,615
290 $ 165,517 $ 14,500 $ 180,017
320 $ 150,000 $ 16,000 $ 166,000
350 $ 137,143 $ 17,500 $ 154,643
380 $ 126,316 $ 19,000 $ 145,316
410 $ 117,073 $ 20,500 $ 137,573
440 $ 109,091 $ 22,000 $ 131,091
470 $ 102,128 $ 23,500 $ 125,628
500 $ 96,000 $ 25,000 $ 121,000
530 $ 90,566 $ 26,500 $ 117,066
560 $ 85,714 $ 28,000 $ 113,714
590 $ 81,356 $ 29,500 $ 110,856
620 $ 77,419 $ 31,000 $ 108,419
650 $ 73,846 $ 32,500 $ 106,346
680 $ 70,588 $ 34,000 $ 104,588
710 $ 67,606 $ 35,500 $ 103,106
740 $ 64,865 $ 37,000 $ 101,865
770 $ 62,338 $ 38,500 $ 100,838
800 $ 60,000 $ 40,000 $ 100,000
830 $ 57,831 $ 41,500 $ 99,331
860 $ 55,814 $ 43,000 $ 98,814
890 $ 53,933 $ 44,500 $ 98,433
920 $ 52,174 $ 46,000 $ 98,174
950 $ 50,526 $ 47,500 $ 98,026
980 $ 48,980 $ 49,000 $ 97,980
1010 $ 47,525 $ 50,500 $ 98,025
1040 $ 46,154 $ 52,000 $ 98,154
1070 $ 44,860 $ 53,500 $ 98,360
1100 $ 43,636 $ 55,000 $ 98,636
1130 $ 42,478 $ 56,500 $ 98,978
1160 $ 41,379 $ 58,000 $ 99,379
1190 $ 40,336 $ 59,500 $ 99,836
1220 $ 39,344 $ 61,000 $ 100,344
1250 $ 38,400 $ 62,500 $ 100,900
1280 $ 37,500 $ 64,000 $ 101,500
1310 $ 36,641 $ 65,500 $ 102,141
1340 $ 35,821 $ 67,000 $ 102,821
1370 $ 35,036 $ 68,500 $ 103,536
1400 $ 34,286 $ 70,000 $ 104,286
1430 $ 33,566 $ 71,500 $ 105,066
1460 $ 32,877 $ 73,000 $ 105,877
1490 $ 32,215 $ 74,500 $ 106,715
1520 $ 31,579 $ 76,000 $ 107,579
1550 $ 30,968 $ 77,500 $ 108,468
1580 $ 30,380 $ 79,000 $ 109,380
1610 $ 29,814 $ 80,500 $ 110,314
1640 $ 29,268 $ 82,000 $ 111,268
1670 $ 28,743 $ 83,500 $ 112,243
1700 $ 28,235 $ 85,000 $ 113,235
1730 $ 27,746 $ 86,500 $ 114,246
1760 $ 27,273 $ 88,000 $ 115,273
1790 $ 26,816 $ 89,500 $ 116,316
1820 $ 26,374 $ 91,000 $ 117,374
1850 $ 25,946 $ 92,500 $ 118,446
1880 $ 25,532 $ 94,000 $ 119,532
1910 $ 25,131 $ 95,500 $ 120,631
1940 $ 24,742 $ 97,000 $ 121,742
1970 $ 24,365 $ 98,500 $ 122,865
2000 $ 24,000 $ 100,000 $ 124,000
2030 $ 23,645 $ 101,500 $ 125,145
2060 $ 23,301 $ 103,000 $ 126,301
2090 $ 22,967 $ 104,500 $ 127,467
2120 $ 22,642 $ 106,000 $ 128,642
2150 $ 22,326 $ 107,500 $ 129,826
2180 $ 22,018 $ 109,000 $ 131,018
2210 $ 21,719 $ 110,500 $ 132,219
2240 $ 21,429 $ 112,000 $ 133,429
2270 $ 21,145 $ 113,500 $ 134,645
2300 $ 20,870 $ 115,000 $ 135,870
2330 $ 20,601 $ 116,500 $ 137,101
2360 $ 20,339 $ 118,000 $ 138,339
2390 $ 20,084 $ 119,500 $ 139,584
2420 $ 19,835 $ 121,000 $ 140,835
2450 $ 19,592 $ 122,500 $ 142,092
2480 $ 19,355 $ 124,000 $ 143,355
2510 $ 19,124 $ 125,500 $ 144,624
2540 $ 18,898 $ 127,000 $ 145,898
2570 $ 18,677 $ 128,500 $ 147,177
2600 $ 18,462 $ 130,000 $ 148,462
2630 $ 18,251 $ 131,500 $ 149,751
2660 $ 18,045 $ 133,000 $ 151,045
2690 $ 17,844 $ 134,500 $ 152,344
2720 $ 17,647 $ 136,000 $ 153,647
Solutions

EOQ 980
Cycle Inventory 490
Number of orders 12
Annual Ordering cost
Annual Holding cost
Total cost

Chart Title
$300,000

$250,000

$200,000

$150,000

$100,000

$50,000

$-
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
20 32 44 56 68 80 92 104 116 128 140 152 164 176 188 200 212 224 236 248 260 272

Inventory

AnnualOrder Cost Annual Holding Cost Total Cost

60 480 600 720
2 2 2

ost
Lot Sizing with Multiple Products Ordered and Delivered Seperately
Annual demand for Litepro, DL = 12,000
Annual demand for Medpro, DM = 1,200
Annual demand for Heavypro, DH = 120
Product specific ordering cost, sL = $ 1,000
Product specific ordering cost, sM = $ 1,000
Product specific ordering cost, sH = $ 1,000
Unit Cost, CL = ₹ 500.00
Unit Cost, CM = ₹ 500.00
Unit Cost, CH = ₹ 500.00
Common order cost, S = $ 4,000
Holding cost, h = 20%

Order each product independently Started from here

EOQ Cycle Inventory orders/year Order Cost
Litepro 1,095 548 11.0 $ 54,772
Medpro 346 173 3.5 $ 17,321
Heavypro 110 55 1.1 $ 5,477
$ 77,570

EOQ Cycle Inventory orders/year Order Cost

Litepro
Medpro
Heavypro
 2 Di ( S  si )
(Qi )* 
hCi

hCi Di
( ni )* 
2( S  s i ) 2 possibilities are here.

Holding Cost Total cost

$ 54,772 $ 109,545
$ 17,321 $ 34,641
$ 5,477 $ 10,954
$ 77,570 $ 155,140

Holding Cost Total cost

Lot Sizing with Multiple Products Ordered and Delivered Together
Annual demand for Litepro, DL = 12,000
Annual demand for Medpro, DM = 1,200
Annual demand for Heavypro, DH = 120
Product specific ordering cost, sL = $ 1,000 𝑛^∗=√((𝐷_𝐿 ℎ𝐶_𝐿+𝐷_𝑀 ℎ𝐶_𝑀+𝐷_𝐻
Product specific ordering cost, sM = $ 1,000 ℎ𝐶_𝐻)/(2𝑆^∗ ))
Product specific ordering cost, sH = $ 1,000
Unit Cost, CL = $ 500
Unit Cost, CM = $ 500
Unit Cost, CH = $ 500
Common order cost, S = $ 4,000
Joint order cost, S* = $ 7,000
Holding cost, h = 20%

Order all products simultaneously

# orders/year Order Size Cycle Inventory Order Cost
Litepro 9.75 1,230 615.12
Medpro 9.75 123 61.51
Heavypro 9.75 12 6.15
68,279
√((𝐷_𝐿 ℎ𝐶_𝐿+𝐷_𝑀 ℎ𝐶_𝑀+𝐷_𝐻
/(2𝑆^∗ ))

Holding Cost Total cost

$ 61,512
$ 6,151
$ 615
$ 68,279 $ 136,558
Lot Sizing with Multiple Products (Tailored Aggregation)
Annual demand for Litepro, DL = 12,000
Annual demand for Medpro, DM = 1,200
Annual demand for Heavypro, DH = 120
Product specific ordering cost, sL = $ 1,000
Product specific ordering cost, sM = $ 1,000
Product specific ordering cost, sH = $ 1,000
Unit Cost, CL = $ 500
Unit Cost, CM = $ 500
Unit Cost, CH = $ 500
Common order cost, S = $ 4,000
Holding cost, h = 20%

Solution Using 5-step Procedure

Step 1 Step 2 Step 3 Step 4, 5
ni ni mi ni
Litepro ni 11.0 ni 24.5 1.00 11.47
Medpro ni 3.5 ni 7.7 2.00 5.74
Heavypro ni 1.1 ni 2.4 5.00 2.29

Table 11-3
Cycle Inventory Order Cost
# orders /year Order Size
n Q
Litepro 11.47 1,046 523.07 $ 57,354
Medpro 5.74 209 104.61 $ 28,677
Heavypro 2.29 52 26.15 $ 11,471
$ 97,502
 hCi Di
ni 
2( S  si )

mi  n ni 
Medpro
Heavypro

Holding Cost Total cost

.
………………
 hCi Di
2( S  si )


l
hCi mi Di
i 1
n 
2  si / mi 
l
S  
 i 1 

l l
 D 
TC  nS   ni si    i  hCi
i 1 i 1  2ni 
All Unit Discount

Fixed cost per order = ₹ 100.00 per order

Monthly demand = 10,000 bottles
Holding percentage = 0.2

Pricing:
Min Qty Price per sq. ft.
q0 0 3 C0
q1 5,000 2.96 C1
q2 10,000 2.92 C2

Price
Range Q paid per Material
i Adjust to q unit Ordering cost Holding cost cost
1 1,838
2 1,851
Total Cost
Marginal Unit Quantity Discount

Fixed cost per order, S ₹ 100.00 per order

Monthly demand = 10,000 bottles
Holding percentage, h 20

Pricing:
Min Qty Price per sq. ft.
q0 0 ₹ 3.00 C0
q1 5,000 ₹ 2.96 C1
q2 10,000 ₹ 2.92 C2

Q Adjust to Q
V Holding Material Total Cost
Range Ordering cost cost cost
0
1
2
Demand for vitamins per month 10,000 120,000
DO (Retailer)'s order placement, transportation cost per order(Sr) 100
DO (Retailer)'s holding cost(hr) 0.2
DO (Retailer)'s bottle procurement cost(Cr) 3
Manufacturer's ordering cost (Sm) 250
Manufacturer's holding cost(hm) 0.2
Manufacturer's production cost per bottle(Cm) 2

Analysis from DO's (only retailer) Perspective

Optimal order size 6,325
Annual Cost of DO 3,795
Annual Cost of Manufacturer 6,008
Annual cost 9,803
Analysis from overall supply
chain (Both retailer and
manufacturer Perspective
Optimal order size 9,165 2,841 THIS IS BETTER
Annual Cost of DO 4,059 264
Annual Cost of Manufacturer 5,106 (902)
Annual cost 9,165 (638)
Contract Manufacturing : Manu
act Manufacturing : Manufacturer + Retailer comes together.
Trade Promotions

No PROMOTION
Monthly Demand 10,000
Fixed Order Cost $ 100
Holding Cost 20%
Trade promotion discount
Manufacturer's Sale Price to DO $ 3.00
Optimal Lot Size w/o promotion 6,325
Optimal Lot Size w/ promotion
Cycle Inventory 3,162

Forward Buy
With PROMOTION
10,000
$ 100
20%
5%
$ 2.85

38,236 38236
19,118

31,912

d discount
C cost 3
Q* EOQ 6325 Given
Mean Demand 2500
Standard deviation of the demand 500
Replenishment lead time 2
Reorder Point 6000

Demmand during lead time 5000

Standard deviation of the demand during
lead time ###
CSL ###

92% PROBABILITY THAT I WONT STOCK OUT

Mean Demand 2500
Standard deviation of the demand 500
Replenishment lead time 2
CSL 0.9

Demmand during lead time 5000

Standard deviation of the demand
during lead time ###
Safety Inventory (Better APPRAOCH) ###
Second Approach ###
Weekly demand of
phones 2500
Standard deviation of
demands 800
Lead time 9
Cycle service level 0.95

Part-1
Safety stock ###

Part-2 ( lead time

reduces to 1 week-
other thing remains
same)
Lead time 1
Safety stock ###

Part-3 ( Standard
deviation reduces to
400-other thing
remains same)
Standard deviation of
demand 400
Safety stock ###
Average demand per
period 2500
Standard deviation of
demand per period 500
Average lead time for
replenishment 7
Standard deviation of lead
time(sL) 7
CSL 0.9
Part 1
Mean demand during lead
time 17500
Standard deviation of
demand during lead time 17550
Safety Stock (in units) 22491
Safety Stock (in days) 8.9964 Safety stock (Units)/Demand
Part 2
Standard deviation
Standard deviation of lead of demand during Safety stock Safety stock
time lead time (Units) (Days) 25000
7 17550 22491 9
6 15058 19298 7.72 20000

5 12570 16109 6.44

Safety stock
15000
4 10087 12927 5.17
3 7616 9760 3.9 10000
2 5172 6628 2.65
1 2828 3624 1.45 5000
0 1323 1695 0.68
0
7 6
 Safety stock (Units)
25000

20000
Safety stock

15000

10000

5000

0
7 6 5 4 3 2 1 0
Lead time
Number of outlets(k) 4
Standard deviation of the weekly demand 5
(in weeks)(sigma D)
Replenishment Lead time (in weeks) 2
Customer service level 0.9

Standard deviation Total required safety

of the weekly inventory
Decentralized option demand (in weeks)
5 36.25

Centralized option
Standard deviation Total required safety
of the weekly inventory
Correlation coeeficient demand (in weeks) Savings
0 10 18.12 18.13
0.1 11.4017542509914 20.66 15.59
0.2 12.6491106406735 22.93 13.32
0.3 13.7840487520902 24.98 11.27
0.4 14.8323969741913 26.88 9.37
0.5 15.8113883008419 28.66 7.59
0.6 16.7332005306815 30.33 5.92
0.7 17.606816861659 31.91 4.34
0.8 18.4390889145858 33.42 2.83
0.9 19.2353840616713 34.86 1.39
1 20 36.25 0
correlation correlation coefficient is high, one region will eat the demand of other region.

Good for Slow Moving goods

Transporation Costs would be higher
Number of regions 4
Standard deviation of 300
weekly demand
Supply Lead time (in 4
weeks)
Customer service level 0.95
Correlation among the 0
demand of distribution
centres
Weekly Demand 1000

Standard Total required safety Total required

deviation of the inventory safety inventory
weekly demand (rounded off)
(in weeks)
Decentralized option
300 3947.649

Centralized option
Standard Total required safety Total required
deviation of the inventory safety inventory
weekly demand (rounded off)
(in weeks)
Correlation coeeficient
0 600 1973.82435234177

Cost Information
Cost of each product 1000
Holding cost 0.2
Ground Transportation 10
Expensive mode of 13
transportation

Cost Calculation
Decrease in annual 394765
inventory holding cost on
aggregation
150000
Decrease in annual facility
costs on aggregation
Increase in annual 624000
transportation costs on
aggregation
Decrease in the cost of -79235
annual retailer
Average demand per 2500
period,D
Standard deviation of 500
demand per
period,Sigma D
Average lead time for 2
replenishment (in
weeks),L
Review interval (in 4
weeks),T
CSL 0.9

Mean demand during 15000

lead time and review
interval
1225
Standard deviation of
the demand during
lead time and review
interval
Safety stock 1570
Order upto level(Mean 16570
Demand +Safety
Stock)