MGT3320 11

MGT3320 11 - 10/27/2009 MGT 3320 DistributionManagement...

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10/27/2009 1 Distribution Management MGT 3320 Dan C. Parris PhD Fall 2009 – Baylor University How Much to Order: EOQ Models The basic economic order quantity model The quantity discount model 12-2 Basic EOQ Model The basic EOQ model is used to find a fixed order quantity that will minimize total annual inventory costs Assumptions Only one product is involved Annual demand requirements are known Demand is even throughout the year Lead time does not vary Each order is received in a single delivery There are no quantity discounts 12-3
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10/27/2009 2 The Inventory Cycle Profile of Inventory Level Over Time Quantity on hand Q Usage rate Receive order Place order Receive order Place order Receive order Lead time Reorder point Time 12-4 Total Annual Cost unit in quantity Order where 2 Cost Ordering Annual Cost Holding Annual Cost Total Q S Q D H Q cost Ordering year per unit in usually Demand, unit per cost (carrying) Holding units in quantity Order S D H 12-5 Goal: Total Cost Minimization The Total-Cost Curve is U-Shaped Annual Cost Hld i C t S Q D H Q TC 2 Order Quantity (Q) Ordering Costs Q * (optimal order quantity) Holding Costs 12-6
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10/27/2009 3 Deriving EOQ Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.
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MGT3320 11 - 10/27/2009 MGT 3320 DistributionManagement...

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