eoq_model_S_07

eoq_model_S_07 - The Economic Order Quantity (EOQ) Model...

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The EOQ Model 1 1 The Economic Order Quantity (EOQ) Model Professor Ashok Srinivasan 2 Outline • Assumptions • EOQ Model • Example and Tradeoffs • Robustness of the model • Set-up reduction and the EOQ model • Economies of scale
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The EOQ Model 2 3 Assumptions • Demand is known and constant ( λ ) • no seasonality, no randomness • Cost per item (c) constant • no quantity discounts • Entire lot delivered at the same time • Setup (Order processing) costs are known and constant ( K ) • Holding costs are known and constant ( h ) • Lead time is zero Lead time is know well enough in advance that an order can be timed to arrive when inventory is exhausted 4 EOQ Model Figure 1: EOQ inventory over time h K Q l 2 * = Annual Inventory Cost = Cost/order*# of orders + Holding cost/unit*Avg Inventory (Or Annual Inventory Cost = Cost/setup*# of setups + Holding cost/unit*Avg Inventory ) Annual Inventory Cost = C(Q) = K ( l /Q)+ h ( Q/2) Minimizing C(Q), we get (by taking the derivative of C(Q) w.r.t. Q, setting it equal to zero, and solving for Q*) Optimal EOQ = Time Inventory Q Q/2 Q/ l 2Q / l 3Q / l 4Q / l 0
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The EOQ Model 3 5 Note that the EOQ trades off holding cost with ordering (or set-up) cost. The EOQ turns out to be at the quantity where
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This note was uploaded on 07/21/2009 for the course BUAD 311T taught by Professor Vaitsos during the Fall '07 term at USC.

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eoq_model_S_07 - The Economic Order Quantity (EOQ) Model...

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