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Chapter 7: Supplement B

Chapter 7: Supplement B. The Economic Order Quantity. The Economic Order Quantity Model (EOQ). EOQ model applier to items that are: Replenished in batches or orders Not produced and delivered instantaneously Only two costs are considered: Carrying costs Ordering costs Will decide

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Chapter 7: Supplement B

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  1. Chapter 7: Supplement B The Economic Order Quantity

  2. The Economic Order Quantity Model (EOQ) • EOQ model applier to items that are: • Replenished in batches or orders • Not produced and delivered instantaneously • Only two costs are considered: • Carrying costs • Ordering costs • Will decide • When to order • How many to order

  3. Assumptions • Constant rate of demand • Shortages not allowed • Stock replenishment can be scheduled to arrive exactly when inventory drops to zero • Purchase price, ordering cost, and per unit holding cost are independent of quantity ordered • Items are ordered independently of each other

  4. Notation Q Order quantity U Annual usage CO Order cost per order CH Annual holding cost per unit

  5. Water Distributor’s Inventory Pattern Figure 7SB.1

  6. Water Distributor’s Inventory Graph Figure 7SB.2

  7. Cost Equations

  8. Graph of Annual Inventory Costs Figure 7SB.3

  9. Finding an Optimal Policy

  10. EOQ Example • Sells 1,000 bottles a month • Lead time is six days • Cost of placing an order is $60 • Cost of holding one bottle in inventory is $10

  11. Cautions Regarding EOQ • Garbage in, garbage out (GIGO) • Exclude “sunk” costs • Very small EOQ values my not be valid

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