L19_EOQ - Lecture 19 Economic Order Quantity Model Slide 1...

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Slide 1 Lecture 19 Economic Order Quantity Model
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Slide 2 Learning Objectives Understand the cost trade-offs in a batch process Apply EOQ/EPQ models 
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Slide 3 Setup Cost Can Be Important  Examples  When changing over a machine to process a certain part, the first 10 parts  may be scraped (e.g., tuning the machine, pace). Material costs of those  parts constitute a setup.  If we are charged a per-time unit usage fee for a resource. In this case,  time is money  and the setup time translates directly into setup costs. When receiving a shipment from a supplier, the fixed shipment cost (e.g.,  truck-load) is often independent of the purchased quantity.  Also, order processing and inspection of incoming materials often involve  costs that does not depend on the batch size (order quantity).
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Slide 4 Two Cases EOQ:  all units in the batch arrive at the same time Order from an outside supplier or another plant Too costly to move unit by unit in between two operations inside the  company EPQ: units in the batch arrives one by one as they finish the previous  process Units from the previous step of the assembly line
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Slide 5 Economic Order Quantity
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Slide 6 Basic Economic Order Quantity Model (EOQ) Assumptions   standard products 1. Ordering in batch  and a single delivery for each order. 2. Only one item  is involved. 3. Constant flow rate Usage/demand of the item is spread evenly for a  long enough time. 4. Orders arrive instantaneously 5.  There is a setup cost per order  that is independent of the batch size. 6. A single flat unit price   Price per unit from the supplier. Cost per unit after the previous operations.
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Slide 7 The Inventory Cycle Order/batch size  Q Receive order Receive  order Receive  order Flow rate R Time Order cycle time=Q/R  Average  inventory  I = ? Demand rate! Flow rate = R Inventory = Q/2 Flow time = Inventory/Flow rate      = Q / (2R) What is the average flow  time for each unit?
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Slide 8 Trade-off: Inventory vs. Setup Large  order Small  order Low average  inventory High average  inventory Less setups More setups
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Slide 9 The Cost Optimal Order Quantity Economic order quantity (EOQ) : The order size Q that minimizes total costs  per unit time .   Fixed ordering cost K   dollars / order Unit ordering cost P   dollars / unit P  = unit price, assuming no other unit ordering cost component) Unit carrying cost dollars / time H  = carrying cost for one unit of inventory/time) a percentage of unit price     H = h P   (h is a percentage) a dollar amount per unit      H does not depend on P
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Slide 10 Computing Cost Components with a Batch Size of Q
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This note was uploaded on 10/16/2011 for the course OM 335 taught by Professor Jonnalagedda during the Fall '08 term at University of Texas.

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L19_EOQ - Lecture 19 Economic Order Quantity Model Slide 1...

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