Lecture 2
Inventory Modelling
This is a quantitative approach for deriving the minimum cost model for the inventory problem in hand.
Economic Order Quantity (EOQ) Model
This model is applied when objective is to minimize the total annual cost of inventory in the organization. Economic order quantity is that size of the order which helps in attaining the above set objective. EOQ model is applicable under the following conditions.
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Demand per year is deterministic in nature
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Planning period is one year
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Lead time is zero or constant and deterministic in nature
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Replenishment of items is instantaneous
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Demand/consumption rate is uniform and known in advance
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No stockout condition exist in the organization
The total annual cost of the inventory (TC) is given by the following equation in EOQ model.
The graphical representation of the EOQ model is shown in Figure 2 .
A numeric illustration of the EOQ model is given in example 1.
Economic Production Quantity (EPQ) Model
In EOQ model supply was instantaneous, which may not be the case in all industrial applications. If supply of items is gradual to satisfy a continuous demand, then supply line will be depicted by a slanted line (Figure 3 ).
In this situation, when the order is placed, the supplier begins producing the units and supplies them continuously. While new units are added to inventory, other units are being used. Thus, if delivery rate (P) > demand rate (D), the net result will be a net increase in the inventory level. The slope of replenishment line will thus be (P-D). Simillarly the slope of demand line will be (-D). The average inventory carried per year is
A numeric illstration of the EPQ model is given in example 2.