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Unit 8: Inventory Management
Q = 2 520 10/80 0.3 Notes
= 20.8 or 21 cases per order
How often is the coffee ordered?
520/21 = 25 orders per year or every 15 days (365/25 = 15)
8.2.2 EOQ Model with Purchase Discount
Because the per-unit price of the items purchased changes as the quantity changes, the purchase
price must be included in the calculation of total annual inventory management cost. As the
purchase price changes, the inventory-holding cost also may change since the investment in
inventory is different. Because each discount category may represent a different inventory
holding cost, we must calculate the EOQ for each discount category.
Steps for calculating EOQ with purchase discount are:
Step 1: Calculate the EOQ using the lowest price. If this EOQ is feasible, this is the best order
quantity, so stop.
Step 2: Solve the EOQ for the next higher price. If this EOQ is feasible, go to Step 4.
Step 3: If the EOQ found in Step 2. is not feasible, repeat Step 2. for the next higher price until a
feasible EOQ is found.
Step 4: Calculate the total annual inventory management cost for the (first) feasible EOQ (found
in Step 2.) and for the minimum quantity in all discount categories that are larger than the
feasible EOQ.
Select the order quantity with the lowest total annual inventory management cost.
Self Assessment
Fill in the blanks:
7. The problem of ‘when to order’ is solved by fixing the appropriate …………… level of
each type of inventory.
8. Re-order level is equal to average usage times the ………………… .
9. The re-order level is the level of inventory at which the order for ………….. stock should
be placed.
10. ………………. is an important technique of inventory management.
11. The …………… refers to the optimal order size that will result in the lowest total of order
and carrying cost for an item of inventory given its expected usage, carrying cost and
ordering cost.
8.3 Fixed Order Period Model
Fixed order period model is also known as P-system. In P-System, order period is fixed but
Order quantity varies and is equal to replenishment level minus the inventory on hand and on
order. Replenishment level is equal to the average demand over Lead time and review period
plus safety stock.
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