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EOQ Model With Shortages

The document discusses an EOQ model that allows for shortages. It defines relevant terms like shortage cost and carrying cost. It provides the equations to calculate optimal order quantity, maximum inventory level, cycle time and total cost. An example problem is also included to demonstrate calculating maximum inventory level.

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Bharat Bhushan
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475 views3 pages

EOQ Model With Shortages

The document discusses an EOQ model that allows for shortages. It defines relevant terms like shortage cost and carrying cost. It provides the equations to calculate optimal order quantity, maximum inventory level, cycle time and total cost. An example problem is also included to demonstrate calculating maximum inventory level.

Uploaded by

Bharat Bhushan
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
  • EOQ Model with Shortages
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EOQ Model with Shortages

In this case, shortages are permitted which implies that shortage cost is nite or it is not
large. The cost of a shortage is assumed to be directly proportional to the mean number of
units short.

Further, all the assumptions of model I hold good here also.

The economic order quantity EOQ Model with Shortages is graphed in the following gure.

where
S = Back order quantity.
M = Maximum inventory level.
t1 = Time during which stock is available.
t2 = Time during which there is a shortage.
t = Time between receipt of orders.

The cycle time t is the sum of t1 and t2.

2DCo (Ch + Co)


Q* = --------- X ------------
Ch Cs

(2DCo) Cs
M* = ----------- X -----------
(Ch) (Ch + Cs)

*
t* = 2Co X (Cs + Ch)
-------- ------------
DCh Cs

Cs
TC* = 2DCo Ch X -----------
(Cs + Ch)

Example
The Wartsila Diesel Company has to supply diesel engines to a truck manufacturer at a rate
of 10 engines per day. The ordering cost is Rs. 150 per order. The penalty in the contract is
Rs. 90 per engine per day late for missing the scheduled delivery date. The cost of holding
an engine in stock for one month is Rs. 140. His production process is such that each month
(30 days) he starts procuring a batch of engines through the agencies and all are available
for supply after the end of the month. Determine the maximum inventory level at the
beginning of each month.

Solution.

Given
Demand (D) = 10 engines per day
Shortage cost (Cs) = Rs. 90 per day per engine
Carrying cost (Ch) = 140/30 = 14/3 per engine per day
Ordering cost (Co) = Rs. 150 per order

2 X 10 X 150 90
M* = ----------- X ----------- X 30
14/3 14/3 + 90

= 741.65 = 742 engines (approx.)

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EOQ Model with Shortages In this case, shortages are permitted which implies that shortage cost is Únite or it is not large.
Operations Research SimpliÚed Back (http://www.universalteacherpublications.com/univ/ebooks/or/Ch11/model1.htm) Next (http:
Transportation Problem (http://www.universalteacherpublications.com/univ/ebooks/or/Ch5/tpintro.htm) Linear programming (http

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