Inventory Control - 6 EOQ etc with different rates of demand
Operations Research (OR)
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Inventory Control Models - Basics
Deterministic Models
Single-item static (EOQ) model
Model I(b): EOQ Model with Different Rates of Demand
This is the best known and most fundamental inventory model, which is applicable when the demand for an item has constant or nearly constant, rate and when the entire quantity ordered arrives in inventory at one point in time (instantaneous replenishment). It assumes no shortage in this inventory model.
Different reference books may use different notations for the inventory cost parameters. We will use the following:
D = demand rate for an item (quantity/unit time)
Q* = the order quantity = maximum inventory level
C0 = the ordering cost every time an order is placed
Ch = the holding cost per item per unit time
C = the cost of inventory per unit
TVC* = the total variable cost
TC = the total cost per unit time
List of Important Formulae:
EOQ Model with Different Rates of Demand
List of Important Formulae:
(1) The optimal/economic order quantity
= EOQ = Q* = √2D C0 / Ch
Where D = D1+ D2+….+ Dt for ‘t’ number of periods in a year
(2) The optimal order cycle time or the gap between two consecutive orders is: t0* = Q*/D
(3) Optimal number of orders in one year = N* = D / Q*
(4) The optimal / minimal total variable inventory cost is:
TVC* = √2D C0 Ch=Q* (Ch)
(5) The optimal total inventory cost is: TC = TVC* + DC
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