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    Backorder Inventory Model

    Uploaded by

    Jatinder Gill
    This document describes two inventory models: a backorder model and a quantity discount model. The backorder model allows for stock outs and assumes demand will not be lost due to stock outs, with backorders fulfilled when the next order arrives. It calculates total annual cost considering setup, holding, and backordering costs to determine optimal order and backorder quantities. The quantity discount model considers that item price decreases with larger order quantities due to discounts. It outlines a typical discount schedule and calculates total cost considering setup, holding, and product costs. It then describes a four step process to determine the discount alternative with the minimum total cost, selecting the optimal order quantity.

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    Backorder Inventory Model

    Uploaded by

    Jatinder Gill
    9K views5 pages
    This document describes two inventory models: a backorder model and a quantity discount model. The backorder model allows for stock outs and assumes demand will not be lost due to stock outs, with backorders fulfilled when the next order arrives. It calculates total annual cost considering setup, holding, and backordering costs to determine optimal order and backorder quantities. The quantity discount model considers that item price decreases with larger order quantities due to discounts. It outlines a typical discount schedule and calculates total cost considering setup, holding, and product costs. It then describes a four step process to determine the discount alternative with the minimum total cost, selecting the optimal order quantity.

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    This document describes two inventory models: a backorder model and a quantity discount model. The backorder model allows for stock outs and assumes demand will not be lost due to stock outs, with backorders fulfilled when the next order arrives. It calculates total annual cost considering setup, holding, and backordering costs to determine optimal order and backorder quantities. The quantity discount model considers that item price decreases with larger order quantities due to discounts. It outlines a typical discount schedule and calculates total cost considering setup, holding, and product costs. It then describes a four step process to determine the discount alternative with the minimum total cost, selecting the optimal order quantity.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    9K views5 pages

    Backorder Inventory Model

    Uploaded by

    Jatinder Gill
    This document describes two inventory models: a backorder model and a quantity discount model. The backorder model allows for stock outs and assumes demand will not be lost due to stock outs, with backorders fulfilled when the next order arrives. It calculates total annual cost considering setup, holding, and backordering costs to determine optimal order and backorder quantities. The quantity discount model considers that item price decreases with larger order quantities due to discounts. It outlines a typical discount schedule and calculates total cost considering setup, holding, and product costs. It then describes a four step process to determine the discount alternative with the minimum total cost, selecting the optimal order quantity.

    Copyright:

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    Download as DOC, PDF, TXT or read online from Scribd
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    The passage discusses the backorder inventory model and the quantity discount model for determining optimal order quantities.

    The backorder inventory model assumes that stock outs are allowed and that sales will not be lost due to stock outs since backorders will be placed to fulfill demand. Backordering has an associated cost per unit.

    The steps to determine the optimal order quantity under quantity discounts are: 1) Calculate Q* for each discount tier, 2) Adjust Q* upwards if it is below the discount tier minimum, 3) Calculate the total cost for each adjusted Q*, 4) Select the discount tier with the minimum total cost.

    Backorder Inventory Model

    In this model, we assume that stock outs (and


    backordering) are allowed.
    In addition to previous assumptions, we assume that
    sales will not be lost due to a stock out.
    Because, we will back order any demand that can
    not be fulfilled
    B: Backordering cost per unit per year
    b: The amount backordered at the time the next
    order arrives
    Q – b: Remaining units after the backorder is
    satisfied

    Total Annual Cost = Annual Setup Cost + Annual


    Holding Cost + Annual Backordering Cost
     Annual Setup (Ordering) Cost = (D/Q) . S
    Annual Holding Cost = (Average Inventory Level) . H
    By using the graphical ratios, we know that:

    T1 / T = (Q – b) / Q Therefore, if we replace
    T1/T in the above equation we get

     Average Inventory Level = (Q – b)2 / 2Q
    By using the graphical ratios, we know that:
    T2 / T = b / Q Therefore, if we replace T2/T in
    the above equation we get
    Average Backordering = b2 / 2Q and
    We find optimum order quantity (Q*) and optimum
    backordering quantity (b*) by taking the derivatives
    of dTC/dQ = 0 and dTC / db = 0 and then putting
    the values in their places.
    Quantity Discount Model
    A quantity discount is simply a reduced price (P) for
    an item when it is purchased in LARGER quantities.
    A typical quantity discount schedule is as follows:
    Since the unit cost for the Third discount is the
    lowest, We might be tempted to order 2000 or more
    units.
    However, this quantity might not be the one that
    minimizes the Total Cost.
    Remember that, As the quantity goes up, the
    holding cost increasesHere, there is a trade off
    between reduced product price (P) and increased
    holding cost (H).
    Total Cost = Setup Cost + Holding Cost + Product
    Price (Cost)
    Total Cost = DS / Q + QH / 2 + PD where P
    is the price per unit
    To determine the minimum Total Cost, we perform
    the following process which includes 4 steps:
    Step 1: Assume that
    I: is a percentage value, and
    I . P represents the holding cost as a percentage of
    price per unit (P).
    For each discount alternative, calculate a value of
    Q* = [2DS / IP]1/2
    Here, instead of using a value of H, the holding cost
    is equal to I . P
    That is, If the item is expensive (such as a Class A
    Item), Its holding cost will be higher.
    Since the price of item (P) is a factor in Annual
    Holding Cost, we can no longer assume that the
    holding cost is constant (such as H) when price
    changes.
    Step 2: For any discount alternative,
    If the calculated optimum order quantity (Q*) is too
    low to qualify for the discount range,
    Then, Adjust the order quantity upward to the
    lowest quantity that will qualify for the particular
    discount alternative.
    Step 3: Using the total cost (TC) equation above,
    compute a total cost for every order quantity (Q).
    Use the adjusted Q values.
    Step 4: Select the discount alternative which has the
    minimum Total Cost (TC).

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