Operations Management Review

Operations Management Review - Economic Order Quantity...

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Economic Order Quantity Notation D demand rate (units per year) C total annual cycle-inventory cost , not including purchase cost c unit production cost , not counting setup or inventory costs (dollars per unit) S (or A) fixed or setup cost to place an order (dollars) h holding cost (dollars per year); if the holding cost is consists entirely of interest on money tied up in inventory, then h = ic where i is an annual interest rate. Q the unknown size of the order or lot size Costs Average inventory level = Q/2 Holding cost = h(Q/2) Number of orders = D/Q Order cost = S(D/Q) Price per unit = c Purchase cost = Dc Total Cost = h(Q/2) + S(Q/D) + Dc Since Q is our choice, the relevant cost C = h(Q/2) + A(Q/D) Periodic Review System (P) ~Order is placed to bring the inventory position up to the target inventory level, T, when the predetermined time, P, has elapsed. ~ Review an item’s inventory position every P time periods. At that time, place and order to replenish to T units ~The up-to order level(T) is
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Operations Management Review - Economic Order Quantity...

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