Page 246 - DMGT501_OPERATIONS_MANAGEMENT

Operations Management

Notes basic approach to determining fixed order sizes are shown by the Economic Order Quantity

(EOQ) models. The basic EOQ model is concerned primarily with the cost of ordering and the
cost of holding inventory.
A Fixed-Order Quantity system is shown in Figure 10.1.
Figure 10.1: Fixed Order Quantity System

The notations that will be used in the models for this system are given below:

‘D’ – Annual demand
‘v’ – Unit purchase cost or unit cost of production ( /unit)
‘A’ – Ordering or Set up cost ( /year)
‘r’ – Holding cost per per year ( / /year) (Inventory carrying charges Factor)
‘b’ – Shortage cost per short per unit time ( / /year)

‘Q’ – Order quantity (to be determined)

The basic assumptions in the model are as follows:
1. The rate of demand for the item is deterministic and is a constant ‘D’ units per annum
independent of time.

2. Production rate is infinite, i.e., production is instantaneous.

3. Shortages are not allowed.
4. Lead time is zero or constant and it is independent of both demand as well as the quantity
ordered.
5. The entire quantity is delivered as a single package (or produced in a single run).

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