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    EOQ Vs EPQ

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    Aarti Soun
    The document discusses economic order quantity and economic production quantity models. It defines economic order quantity as the order size that minimizes total annual ordering and holding costs given constant demand, ordering costs, and holding costs. It provides the notation and assumptions used in the EOQ model. Similarly, it defines economic production quantity as the lot size that minimizes total annual setup and holding costs given constant demand and production rates, setup costs, and holding costs. It explains how and when to apply the EOQ and EPQ models.

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    EOQ Vs EPQ

    Uploaded by

    Aarti Soun
    718 views17 pages
    The document discusses economic order quantity and economic production quantity models. It defines economic order quantity as the order size that minimizes total annual ordering and holding costs given constant demand, ordering costs, and holding costs. It provides the notation and assumptions used in the EOQ model. Similarly, it defines economic production quantity as the lot size that minimizes total annual setup and holding costs given constant demand and production rates, setup costs, and holding costs. It explains how and when to apply the EOQ and EPQ models.

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    EOQ vs EPQ

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    The document discusses economic order quantity and economic production quantity models. It defines economic order quantity as the order size that minimizes total annual ordering and holding costs given constant demand, ordering costs, and holding costs. It provides the notation and assumptions used in the EOQ model. Similarly, it defines economic production quantity as the lot size that minimizes total annual setup and holding costs given constant demand and production rates, setup costs, and holding costs. It explains how and when to apply the EOQ and EPQ models.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    718 views17 pages

    EOQ Vs EPQ

    Uploaded by

    Aarti Soun
    The document discusses economic order quantity and economic production quantity models. It defines economic order quantity as the order size that minimizes total annual ordering and holding costs given constant demand, ordering costs, and holding costs. It provides the notation and assumptions used in the EOQ model. Similarly, it defines economic production quantity as the lot size that minimizes total annual setup and holding costs given constant demand and production rates, setup costs, and holding costs. It explains how and when to apply the EOQ and EPQ models.

    Copyright:

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    Economic Order Quantity

    The economic order quantity (EOQ) is


    the fixed order quantity (Q) that
    minimizes the total annual costs of
    placing orders and holding inventory
    (TC).
    Economic Order Quantity
    Assumptions
    Demand (D) is known and constant
    H is known and constant
    Order costs (S) are constant
    The order quantity arrives in a single
    shipment
    No quantity discounts are available
    All demand will be met (no shortages)

    We want to minimize TC
    D, S, and H are constant. TC is a function of Q.
    1
    2 2
    D Q H
    TC S H DS Q
    Q Q
    = + = +
    Economic Order Quantity (3)
    *
    2DS
    Q
    H
    =
    *
    *
    2
    D Q
    TC S H
    Q
    = +
    Let Q
    *
    be the economic order quantity. Then
    For Q
    *
    , annual order cost = annual inventory cost
    *
    *
    2
    D Q
    S H
    Q
    =
    Simple Reorder Point
    Use this method when daily demand is
    constant.
    R = reorder point
    d = daily demand (may have to compute
    this)
    L = lead time (Caution: if lead time is given
    in weeks, convert this to days).
    R = dL
    Reorder Point with Safety Stock (2)
    How much safety stock (SS) ?

    Reorder point with safety stock:
    Service level is the probability of having enough
    inventory to meet demand during lead time
    The probability of a stockout is (1 - service level)
    Demand during lead time is normally distributed
    with mean and standard deviation o
    dL

    SS L d R + =
    demand daily average = d
    L d
    Reorder Point with Safety Stock (2)
    How much safety stock (SS) ?
    z is the number of standard deviations required to
    meet the desired service level
    SS = zo
    dL

    Reorder point with safety stock: R = + zo
    dL


    L d
    Reorder Point with Safety Stock
    Example
    Given
    D = annual demand = 10,000
    N = number of business days per year = 250
    The company operates 5 days per week
    = average daily demand
    o
    dL
    = standard deviation of demand during lead time = 20
    L = lead time = 1 week
    Service level = 96%
    Find: reorder point with safety stock: R = + zo
    dL

    L d
    d
    Computing Reorder Point
    with Safety Stock
    1. If average daily demand ( ) is not given,
    compute it.
    Note: = D/N and D =
    = 10,000/250 = 40
    2. If the lead time is given in weeks or
    months, compute lead time in days.
    L = 1 week = 1(5) = 5 days
    Note: 1 week is the number of days per week that
    the company operates. This may be 5, 6, or 7.

    d
    d
    d d N
    Computing Reorder Point
    with Safety Stock (2)
    3. Find the z value for the service level
    (96%)
    Probability of
    a stockout =
    1 service
    level = 4%
    z
    50% 46%
    L d
    Appendix B gives
    this area.
    Computing Reorder Point
    with Safety Stock (3)
    3. Find the z value for the service level (96%) (cont.)
    (a) Write the service level as a decimal
    96% = 0.9600
    (b) Subtract 0.5000 from the service level
    0.9600 0.5000 = 0.4600
    (c) Use the table in Appendix B, page 652, to find
    the area that is closest to 0.4600
    The closest area in the table is 0.4599, which
    occurs when z = 1.75
    Use z = 1.75
    Computing Reorder Point
    with Safety Stock (4)
    4. Compute R
    R = L+ zo
    dL

    = 40(5) + 1.75(20) = 200 + 35
    = 235
    Note: If the computation gives a fractional
    value, round up to nearest integer.
    Example: Computed R = 210.2 R = 211

    d
    Economic Production Quantity
    Key question: How many units of a part or
    product should be made at one time?
    The economic production quantity (EPQ) is
    the production quantity (lot size) that
    minimizes the total annual cost of setups
    and holding inventory.


    Economic Production Quantity (2)
    Notation
    Q = Amount to make (lot size)
    D = annual demand for the item
    d = daily demand for the item
    p = daily production rate
    S = cost of one setup
    H = inventory holding cost per unit per year
    (commonly called holding cost)
    TC = annual cost of setups
    + annual cost of holding inventory
    The EPQ is the quantity that minimizes TC
    Economic Production Quantity (3)
    Assumption: Daily demand < daily production.
    When the item is being made, some is sold or used to
    make a product. The remainder goes into inventory.
    When production stops, the inventory is used until
    there is no inventory left. Then production resumes.
    Ending inventory
    = beginning
    inventory
    + production
    - sales or usage
    Economic Production Quantity (4)
    Length of production run = Q/p
    During production, d units are sold or used each day. (p d)
    units go into inventory.
    |
    |
    .
    |

    \
    |
    = =
    p
    d
    Q d p 1 ) (
    p
    Q
    I
    MAX
    Maximum inventory:
    Total cost: |
    .
    |

    \
    |
    + |
    .
    |

    \
    |
    = H
    2
    I
    S
    Q
    D
    TC
    MAX
    EPQ
    Economic production
    quantity (EPQ):
    |
    |
    .
    |

    \
    |

    =
    p
    d
    1 H
    2DS
    EPQ
    EOQ vs. EPQ
    When to use economic order quantity (EOQ):
    Demand is independent
    Compute how much to order (order quantity)
    When to use economic production quantity
    (EPQ):
    Parts or products will be produced: demand is
    dependent
    Compute how much to make at one time
    (production lot size)

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