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
230
260
290
320
350
380
410
440
470
500
530
560
590
620
650
680
710
740
770
800
830
860
890
920
950
980
1010
1040
1070
1100
1130
1160
1190
1220
1250
1280
1310
1340
1370
1400
1430
1460
1490
1520
1550
1580
1610
1640
1670
1700
1730
1760
1790
1820
1850
1880
1910
1940
1970
2000
2030
2060
2090
2120
2150
2180
2210
2240
2270
2300
2330
2360
2390
2420
2450
2480
2510
2540
2570
2600
2630
2660
2690
2720
Solutions

EOQ
Cycle Inventory
Number of orders
Annual Ordering cost
Annual Holding cost
Total cost

Chart Title
$12

$10

$8

$6

$4

$2

$-
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

0 80 00 20
24 26 27

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

EOQ Cycle Inventory orders/year Order Cost
Litepro
Medpro
Heavypro
 2 Di ( S  si )
(Qi )* 
hCi

hCi Di
( ni )* 
2( S  s i )

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
Medpro
Heavypro
√((𝐷_𝐿 ℎ𝐶_𝐿+𝐷_𝑀 ℎ𝐶_𝑀+𝐷_𝐻
/(2𝑆^∗ ))

Holding Cost Total cost

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
Medpro
Heavypro

Table 11-3
# Cycle Inventory Order Cost Holding Cost
orders
/year Order Size
n Q
Litepro
Medpro
Heavypro
 hCi Di
ni 
2( S  si )

mi  n ni 


l
Total cost hC
i 1
n 
2 
l
S 
 i

l l
 Di 
TC  nS   ni si    
i 1 i 1  2ni 
.
………………
 
l
hCi mi Di
i 1

2  si / mi 
l
S  
 i 1 

l
 Di 
1 ni si     hCi
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 6,367 6,367 2.96 ₹ 1,884.68 1884.6750383024 355200
2 6,411 10,000 2.92 ₹ 1,200.00 2920 350400
 Total Cost

₹ 358,969.35
₹ 354,520.00
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

V Q Adjust to Q Holding Material Total Cost

Range Ordering cost cost cost
0 0 6,325 4,999 2,400
1 15,000 11,028 9,999 1,200
2 29,800 16,961 16,961 708
Demand for vitamins per month 10,000
DO (Retailer)'s order placement, transportation cost 100
DO (Retailer)'s holding cost 0.2
DO (Retailer)'s bottle procurement cost 3
Manufacturer's ordering cost 250
Manufacturer's holding cost 0.2
Manufacturer's production cost per bottle 2

Analysis from DO's (only retailer) Perspective

Optimal order size
Annual Cost of DO
Annual Cost of Manufacturer
Annual cost
Analysis from overall
supply chain (Both retailer
and manufacturer
Perspective
Optimal order size
Annual Cost of DO
Annual Cost of Manufacturer
Annual cost
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

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

17,152
Mean Demand 2500
Standard deviation of the dema 500
Replenishment lead time 2
Reorder Point 6000

Demmand during lead time

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

Demmand during lead time

Standard deviation of the
demand during lead time
Safety Inventory
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
Safety stock

Part-3 ( Standard
deviation reduces to
400-other thing
remains same)
Standard deviation of
demand
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 7
CSL 0.9
Part 1
Mean demand during lead
time
Standard deviation of
demand during lead time
Safety Stock (in units)
Safety Stock (in days)
Part 2

Standard deviation
Standard deviation of lead of demand during Safety stock Safety stock
time lead time (Units) (Days) 12

7 10
6
5 8

Safety stock
4 6
3
4
2
1 2
0
0
7 6
 Safety stock (Units)
12

10

8
Safety stock

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

Standard deviation Total required safety

of the weekly inventory
demand (in weeks)
Decentralized option

Centralized option
Standard deviation Total required safety
of the weekly inventory
demand (in weeks)
Correlation coeeficient
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Number of regions 4
Standard deviation of 300
weekly demand
Supply Lead time (in 4
weeks)
Customer service level 0.95
0
Correlation among the
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

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

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

Cost Calculation

Decrease in annual
inventory holding cost on
aggregation
Decrease in annual facility
costs on aggregation
Increase in annual
transportation costs on
aggregation
Decrease in the cost of
annual retailer
Average demand per 2500
period
Standard deviation of 500
demand per period
2
Average lead time for
replenishment (in
weeks)
Review interval (in 4
weeks)
CSL 0.9

Mean demand during

lead time and review
interval
Standard deviation of
the demand during
lead time and review
interval
Safety stock
Order upto level