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Chapter 12
280
Average cycle inventory = Q
2
= 2
= 140 drills
100 Class C
Class B
90
Percentage of dollar value Class A
80
70
60
50
40
30
20
10
0
10 20 30 40 50 60 70 80 90 100
2007 Pearson Education Percentage of items
Economic Order Quantity
Q Average
cycle
2
inventory
1 cycle
Time
2007 Pearson Education
Total Annual
Cycle-Inventory Costs
Q = lot size; C = total annual cycle-inventory cost
H = holding cost per unit; D = annual demand
S = ordering or setup costs per lot
Annual cost (dollars)
Q D
Total cost = (H) + (S)
2 Q
Q
Holding cost = (H)
2
D
Ordering cost = (S)
Q
Q D 390 936
C= (H) + (S) = (15) + (45)
2 Q 2 390
Q == 390
D = 936 units; H = $15; S = $45; Q 468 units;
units; C = ?
$3033
Total cost
2000
Holding cost
1000
D = 936 units
2(936)45 = 74.94 or 75 units
H = $15 EOQ =
15
S = $45
Q D 75 936
C= (H) + (S) C= (15) + (45)
2 Q 2 75
C = $1,124.10
2007 Pearson Education
Time Between Orders
IP IP IP
Q Q Q
OH OH OH
R
Order Order Order
placed placed placed
L L L Time
TBO TBO TBO
2007 Pearson Education
Continuous Review
Q systems when demand & lead time are constant and
certain.
In this case,
the reorder point, R, equals the demand during
lead time, with no added allowance for safety
stocks.
The time between orders (TBO) is the same for
each cycle.
received
Q
Q Q
OH
R
Order Order Order
placed placed placed
L1 L2 L3 Time
TBO1 TBO2 TBO3
2007 Pearson Education
Continuous Review
Q system when demand is uncertain.
Probability of stockout
(1.0 0.85 = 0.15)
Average
demand
during
lead time R
zsL
+ + =
75 75 75
Demand for week 1 Demand for week 2 Demand for week 3
st = 26
225
2007 Pearson Education Demand for 3-week lead time
Calculating Total Q costs
sL = st L =5 2 = 7.1
Q3
Q1
OH Q2 OH
IP1
IP3
Order Order
placed placed
IP2
L L L Time
P P
Protection interval
2007 Pearson Education
Periodic Review (P) System
Qt = T IPt
IP = OH + SR BO T = 400
IP = 0 + 0 5 = 5 sets BO =5
OH =0
SR =0
Qt = T IPt
Q = 400 (5) = 405 sets
2007 Pearson Education
Application 12.6
Q = dP
dP D
Total cost = (H) + (S) + Hz P+L
2 dP
Q Systems
Review frequencies can be tailored to each item
Possible quantity discounts
Lower, less-expensive safety stocks
2007 Pearson Education
Hybrid Systems