EOQ and Fixed Time Period Models

Inventory management

Inventory control questions

• When to order ?

• How much to order ?

• When to supply ?

• How much to supply ?

Multi period Inventory Models

Fixed Order Quantity model (FOQ) - Q model

Place order when inventory reaches a specified level, called Reorder Level

Fixed Time Period Model (FTP) - P model

Place order at the end of a predetermined Time Period

Comparison of Q and P models

Inventory Cost

Inventory Cost

Fixed order or Quantity Model (EOQ)

• Purchasing cost is the cost of purchasing inventory. If we assume total
demand is met, then Amount purchased = ?
• Purchasing Cost = ?
• Amount purchased = Demand (D)
• Purchasing Cost = D C
• Holding cost = Purchasing cost Interest rate

Fixed-Order Quantity Model

(D) Annual Demand is 1000 units per year (S) Each Order costs € 10 to place.
(H) Annual Cost to carry inventory is € 2 per unit
(C) Cost per unit is € 12 Assume optimal order quantity is Q.
=> Holding Cost is the annual holding and storage cost per unit of average inventory.
• Average Inventory = ?
• Holding Cost = ?

• Holding Cost is the annual holding and storage cost per unit of average inventory.
• Average Inventory = Q/2
• Holding Cost = Q/2 H
• Ordering Cost is the annual cost incurred in placing orders.
• If annual demand is D and each Order placed is for quantity Q, then # of orders placed annually is = ?
• Order Cost = ?
• Each Order placed is for quantity Q, then # of orders placed annually is = D/Q
• Order Cost = D/Q S

Q model, Assume order quantity is Q

The simplest EOQ model assumes:

• Constant and uniform Demand

• Constant Cost per unit

• Constant Holding Cost

• Constant Ordering Cost

• Constant Lead time (time between placing order and receiving goods - All demand is satisfied

EOQ model

Optimal order quantity

Reorder point calculation

Comparison of Q and p models

Fixed Time Inventory Model