Page 193 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Production and Operations Management

Notes into two categories (1) Competent retailer (2) Incompetent retailer. Thus R1 is a competent
retailer and R2 is an incompetent retailer. The firm wishes to award a performance bonus (as a
part of trade promotion) to encourage good retailership. Assume that two actions A1 and A2
would represent whether the bonus or trade incentive is given and not given. This is shown as
follows:
Action (R1) Competent retailer (R2) Incompetent retailer
A 1 performance bonus is awarded Correct decision Incorrect decision error ()
A 2 performance bonus is not awarded Incorrect decision error () Correct decision

When the firm has failed to reward a competent retailer, it has committed type-2 error. On the
other hand, when it was rewarded to an incompetent retailer, it has committed type-1 Error.

9.4.4 The Economic Batch Quantity (EBQ)

The Economic Batch Quantity model, or production lot-size model, is alike to the EOQ model in
that we are attempting to work out an optimum for the batch quantity we have to produce.
Economic batch quantity (EBQ), as well called “optimal batch quantity” or economic production
quantity, is a measure employed to determine the quantity of units that can be produced at
minimum average costs in a specified batch or production run.

Economic Production Quantity model (also recognized as the EPQ model) is an extension of the
Economic Order Quantity model. The Economic Batch Quantity model, or else production lot-
size model, is alike to the EOQ model in that we are attempting to calculate an optimum for the
batch quantity we have to produce.

In working with this EBQ model, we also put together use of a number of assumptions.
These principal assumptions are:
 The demand (D) is identified and constant within a certain period of time

 The unit cost of the inventory item (U) is stable
 The annual holding-cost per unit (C ) is stable
h
 The setup-cost per batch (C) is stable
 The production time (t ) is known and stable
p
 We are dealing with single kind of product
 There is no interface with other products
 The aspect of time does not play a role, just the setup time does

 The setup cost is stable and does not act upon the batch quantity.

Task Hindustan Lever is a manufacturer of the Surf detergent powder. A 100-g pack of its
detergent powder is priced at ` 30 for its suppliers. One of its suppliers purchases 16,000
packs per annum. The supplier incurs an ordering cost of ` 350.00 per order and has a
carrying cost of 12% of the inventory value. Hindustan Lever offers discounts for the
following ranges of bulk purchases to its suppliers: 0.5% for 3,000 – 6,999 units, 0.75% for
7000 – 9,999 units and 1% for 10,000 and more units. Which discount option should the
supplier choose? What is the EOQ in this case?

188 LOVELY PROFESSIONAL UNIVERSITY