CHAPTER 9

INVENTORY
MANAGEMENT
Professor Ernest Solé Udina, PhD.
 OM, in a Company…
STRATEGIC DECISIONS

LOCATION GOODS/SERVICES HUMAN RESOURCES

LAYOUT DESIGN

PROCESS

SUPPLY CHAIN

TACTICAL DECISIONS

PROCESS ANALYSIS

QUALITY CAPACITY ANALYSIS SOURCING

AGGREGATE PLANNING

MATERIAL REQUIREMENTS DISTRIBUTION

MAINTENANCE QUEUING

STOCKS LOGISTICS

SCHEDULING
 CHAPTER 9. INVENTORY MANAGEMENT

DEFINITION OF INVENTORY:
The raw materials, work-in-process goods and completely
finished goods that are considered to be the portion of a
business's assets that are ready or will be ready for sale.

Inventory represents one of the most important assets

that most businesses possess, because the turnover of
inventory represents one of the primary sources of revenue
generation and subsequent earnings for the company's
shareholders/owners.
 CHAPTER 9. INVENTORY MANAGEMENT

INVENTORY MANAGEMENT (or Inventory System) is the

set of policies and controls that monitor levels of inventory
and determine what levels should be maintained, when
stock should be replenished, and how large orders should
be.
 CHAPTER 9. INVENTORY MANAGEMENT

INVENTORY MANAGEMENT (or Inventory System) is the

set of policies and controls that monitor levels of inventory
and determine what levels should be maintained, when
stock should be replenished, and how large orders should
be.
 CHAPTER 9. INVENTORY MANAGEMENT

PURPOSES OF INVENTORY:

To maintain independence of operations. A supply of

materials at a work center allows that center flexibility in
operations. (For example, by reducing the number of
setups).
It is desirable to have a cushion of several parts within
the workstation so that shorter performance times can
compensate for longer performance times. This way the
average output can be fairly stable.
 CHAPTER 9. INVENTORY MANAGEMENT

PURPOSES OF INVENTORY:

To maintain independence of operations. A supply of

materials at a work center allows that center flexibility in
operations. (For example, by reducing the number of
setups).
It is desirable to have a cushion of several parts within
the workstation so that shorter performance times can
compensate for longer performance times. This way the
average output can be fairly stable. (Mould the bricks / fire
de bricks)
 CHAPTER 9. INVENTORY MANAGEMENT

PURPOSES OF INVENTORY:

To meet variation in product demand. If the demand of the

product is known precisely, it may be possible to produce
the product to exactly meet the demand. But usually,
demand is not completely known, and a safety stock must
be maintained to absorb variation.
 CHAPTER 9. INVENTORY MANAGEMENT

PURPOSES OF INVENTORY:

To meet variation in product demand. If the demand of the

product is known precisely, it may be possible to produce
the product to exactly meet the demand. But usually,
demand is not completely known, and a safety stock must
be maintained to absorb variation.
 CHAPTER 9. INVENTORY MANAGEMENT

PURPOSES OF INVENTORY:

To allow flexibility in production scheduling. A stock of

inventory relieves the pressure on the production system
to get the goods out. This causes longer lead times, which
permit production planning for smoother flow an lower-
cost operation through larger lot-size production. High
setup costs, for example, favor producing a larger number
of units once the setup has been made.
 CHAPTER 9. INVENTORY MANAGEMENT

PURPOSES OF INVENTORY:

To allow flexibility in production scheduling. A stock of

inventory relieves the pressure on the production system
to get the goods out. This causes longer lead times, which
permit production planning for smoother flow an lower-
cost operation through larger lot-size production. High
setup costs, for example, favor producing a larger number
of units once the setup has been made.
 CHAPTER 9. INVENTORY MANAGEMENT

PURPOSES OF INVENTORY:

To provide a safeguard for variation in raw material

delivery time. When material is ordered from a vendor,
delays can occur for a variety of reasons: a normal
variation in shipping time, a shortage of material at the
vendor’s plant causing backlogs, an unexpected strike at
the vendor´s plant or at one of the shipping companies, a
lost order, or a shipment of incorrect or defective material.
 CHAPTER 9. INVENTORY MANAGEMENT

PURPOSES OF INVENTORY:

To provide a safeguard for variation in raw material

delivery time. When material is ordered from a vendor,
delays can occur for a variety of reasons: a normal
variation in shipping time, a shortage of material at the
vendor’s plant causing backlogs, an unexpected strike at
the vendor´s plant or at one of the shipping companies, a
lost order, or a shipment of incorrect or defective material.
 CHAPTER 9. INVENTORY MANAGEMENT

PURPOSES OF INVENTORY:

To take advantage of economic purchase order size. There

are costs to place an order: labor, phone calls, typing, and
so on. Therefore, the larger each order is, the fewer the
orders that need to be written. Also, shipping costs favor
larger orders; the larger the shipment, the lower the per-
unit cost.
 CHAPTER 9. INVENTORY MANAGEMENT

PURPOSES OF INVENTORY:

To take advantage of economic purchase order size. There

are costs to place an order: labor, phone calls, typing, and
so on. Therefore, the larger each order is, the fewer the
orders that need to be written. Also, shipping costs favor
larger orders; the larger the shipment, the lower the per-
unit cost.
 CHAPTER 9. INVENTORY MANAGEMENT

PURPOSES OF INVENTORY:

But…are’nt we always saying that WE DON’T WANT ANY

INVENTORIES ??????
CHAPTER 9. INVENTORY MANAGEMENT

Why?
 CHAPTER 9. INVENTORY MANAGEMENT

INVENTORY COSTS:

- HOLDING COSTS (OR CARRYING COSTS).

This includes the costs for storage facilities, handling,
insurance, pilferage, breakage, obsolescence, depreciation,
taxes, and the opportunity cost of capital.

High holding costs tend to favor low inventory levels and

frequent replenishments.
 CHAPTER 9. INVENTORY MANAGEMENT

INVENTORY COSTS:

- SETUP (OR PRODUCTION CHANGE) COSTS.

To make each different product involves obtaining the necessary
materials, arranging specific equipment setups, filling out the required
papers, appropriately charging time and materials, and moving out the
previous stock of material.

If there were no costs or loss of time in changing from one product to

another, many small lots would be produced. This would reduce
inventory levels, with a resulting savings in cost. The challenge today is
to try to reduce these setup costs to permit smaller lot sizes (JIT !!!).
 CHAPTER 9. INVENTORY MANAGEMENT

INVENTORY COSTS:

- SETUP (OR PRODUCTION CHANGE) COSTS.

To make each different product involves obtaining the necessary
materials, arranging specific equipment setups, filling out the
required papers, appropriately charging time and materials, and
moving out the previous stock of material.

If there were no costs or loss of time in changing from one

product to another, many small lots would be produced. This
would reduce inventory levels, with a resulting savings in cost.
The challenge today is to try to reduce these setup costs to
permit smaller lot sizes (JIT !!!).
 CHAPTER 9. INVENTORY MANAGEMENT

INVENTORY COSTS:

- ORDERING COSTS.
These costs refer to the managerial and clerical costs to
prepare the purchase or production order. Ordering costs
include all the details, such as counting items and
calculating order quantities, customs procedures... The
costs associated with maintaining the system needed to
track orders are also included in ordering costs.
 CHAPTER 9. INVENTORY MANAGEMENT

INVENTORY COSTS:

- SHORTAGE COSTS.
When the stock of an item is depleted, an order for that item
must either wait until the stock is replenished or be canceled.
There is a trade-off between carrying stock to satisfy demand
and the costs resulting from stockout. This balance is sometimes
difficult to obtain, because it may not be possible to estimate
lost profits, the effects of lost customers, or lateness penalties.
Frequently, the assumed shortage cost is little more than a
guess, although it is usually possible to specify a range of such
costs.
 CHAPTER 9. INVENTORY MANAGEMENT

INVENTORY COSTS:

- SHORTAGE COSTS.
When the stock of an item is depleted, an order for that item
must either wait until the stock is replenished or be canceled.
There is a trade-off between carrying stock to satisfy demand
and the costs resulting from stockout. This balance is sometimes
difficult to obtain, because it may not be possible to estimate
lost profits, the effects of lost customers, or lateness penalties.
Frequently, the assumed shortage cost is little more than a
guess, although it is usually possible to specify a range of such
costs.
 CHAPTER 9. INVENTORY MANAGEMENT

ABC CLASSIFICATION:
(This is not only for inventories…).

A. High money value; constitute roughly 15% of the items,

but about 80% of the total money value. Sophisticated
inventory system. (weekly ordering).
B. Moderate money value; constitute the next 35% of
items, but about 15-25% of the total money value.
Simple inventory system (biweekly ordering).
C. Low money value; constitute the last 50% of the items,
but about 5% of the total money value. Minimum
control (monthly,/bimonthly ordering).
 CHAPTER 9. INVENTORY MANAGEMENT

ABC CLASSIFICATION:
(This is not only for inventories…).

A. High money value; constitute roughly 15% of the items,

but about 80% of the total money value. Sophisticated
inventory system. (weekly ordering).
B. Moderate money value; constitute the next 35% of
items, but about 15-25% of the total money value.
Simple inventory system (biweekly ordering).
C. Low money value; constitute the last 50% of the items,
but about 5% of the total money value. Minimum
control (monthly,/bimonthly ordering).
 CHAPTER 9. INVENTORY MANAGEMENT

ABC CLASSIFICATION:
(This is not only for inventories…).

A. High money value; constitute roughly 15% of the items,

but about 80% of the total money value. Sophisticated
inventory system. (weekly ordering).
B. Moderate money value; constitute the next 35% of
items, but about 15-25% of the total money value.
Simple inventory system (biweekly ordering).
C. Low money value; constitute the last 50% of the items,
but about 5% of the total money value. Minimum
control (monthly,/bimonthly ordering).
 CHAPTER 9. INVENTORY MANAGEMENT

ABC CLASSIFICATION:
(This is not only for inventories…).

A. High money value; constitute roughly 15% of the items,

but about 80% of the total money value. Sophisticated
inventory system. (weekly ordering).
B. Moderate money value; constitute the next 35% of
items, but about 15-25% of the total money value.
Simple inventory system (biweekly ordering).
C. Low money value; constitute the last 50% of the items,
but about 5% of the total money value. Minimum
control (monthly,/bimonthly ordering).
 CHAPTER 9. INVENTORY MANAGEMENT

INVENTORY COSTS:

Establishing the correct quantity to order from

vendors or the size of lots submitted to the firm’s
production facilities involves a search for the
minimum total cost resulting from the combined
effects of four individual costs: holding costs,
setup costs, ordering costs, and shortage costs.
The timing of these orders is a critical factor that
may impact inventory cost.
 CHAPTER 9. INVENTORY MANAGEMENT

INVENTORY SYSTEMS:

MULTIPLE-PERIOD SYSTEM.

SINGLE-PERIOD SYSTEM.
 CHAPTER 9. INVENTORY MANAGEMENT

INVENTORY SYSTEMS:

MULTIPLE-PERIOD SYSTEM: items will be purchased

periodically:
- Fixed-order quantity models (Q-model):
- EOQ model.
- Price-break model.
- Probabilistic Models : see P-MODELS file
 CHAPTER 9. INVENTORY MANAGEMENT

INVENTORY SYSTEMS:

SINGLE-PERIOD SYSTEM: One-time purchase decision.

Example: The Newsvendor Problem.

 CHAPTER 9. INVENTORY MANAGEMENT

INVENTORY SYSTEMS:

MULTIPLE-PERIOD SYSTEM: items will be purchased

periodically:
- Fixed-order quantity models (Q-model):
- EOQ model.
- Price-break model.
 CHAPTER 9. INVENTORY MANAGEMENT

INVENTORY SYSTEMS:

MULTIPLE-PERIOD SYSTEM: items will be purchased

periodically:
- EOQ model. (EOQ: ECONOMIC ORDER QUANTITY).
- EOQ model. (EOQ: ECONOMIC ORDER QUANTITY).
ASSUMPTIONS:
- Planning horizon very long.
- Demand rate constant and deterministic.
- Replenishment time known and constant.
- Entire order quantity delivered at the same time.
- Unit variable (purchase) cost independent of replenishment
quantity.
- No shortages allowed.
- Single item.
- Tradeoff between the fixed order cost and the inventory
holding costs.
- EOQ model. (EOQ: ECONOMIC ORDER QUANTITY).

FORMULAS:

Q* = √ 2DS/H Q* = EOQ (optimal Q) D = Annual

demand

N = D/Q* S = Ordering cost H = Holding cost

T = Number of days / N T = Cycle time

_
d = D/number of days = Average daily demand

C = Purchase Cost
- EOQ model. (EOQ: ECONOMIC ORDER QUANTITY).

Example:

D = 25.600 units/year.
Purchase cost = 192 eur/u.
S = 120 eur/replenishment
H = 5% of purchase cost (C)
- EOQ model. (EOQ: ECONOMIC ORDER QUANTITY).
Example:

D = 25.600 units/year.
C = 192 eur/u.
S = 120 eur/replenishment
H = 5% of purchase cost

Q* = √ 2DS/H = √ 2x25.600x120/9,6 = 800 units/rep.

N = D/Q* = 25.600/800 = 32 replenishments/year
T = Number of days / N = 365/32 =11,40 days (between
replenishments)
_
d = D/number of days = 25.600/365 = 70,14 u/day.
- EOQ model. (EOQ: ECONOMIC ORDER QUANTITY).
Example:
D = 25.600 units/year.
Purchase cost = 192 eur/u.
S = 120 eur/replenishment
H = 5% of purchase cost (C)
________ ________
Q* = √ 2DS/H = √ 2x25.600x120/9,6 = 800 units/replenishment
N = D/Q* = 25.600/800 = 32 replenishments/year
T = Number of days / N = 365/32 =11,40 days (between replenishments)
_
d = D/number of days = 25.600/365 = 70,14 u/day.

TOTAL COST:

TC = DC + DS/Q + QH/2 = (25.600x192) + (25.600x120/800) + (800x9,6/2)

TC = 4.915.200 + 3.840 + 3.840 = 4.922.880 eur.

- EOQ model. (EOQ: ECONOMIC ORDER QUANTITY).

Suppose now that inventory cost is

D = 25.600 units/year.
Purchase cost = 192 eur/u.
S = 120 eur/replenishment
H = 15% of purchase cost (C)
- EOQ model. (EOQ: ECONOMIC ORDER QUANTITY).

D = 25.600 units/year. Purchase cost = 192 eur/u. S = 120 eur/replenishment

H = 15% of purchase cost (C)
________
Q* = √ 2DS/H = √ 2x25.600x120/28,8 = 461,88 ≈ 462 units
N = D/Q* = 25.600/462 = 55,41 replenishments/year*
T = Number of days / N = 365/55,41 =6,58 days/replenishment*
_
d = D/number of days = 25.600/365 = 70,14 u/day.

TOTAL COST:

TC = (25.600x192) + (25.600x120/462) + (462x28.8/2) ;

TC = 4.915.200 + 6.649,35 + 6.652,80) = 4.928.502,14 eur.
*should we round-up these figures?
- EOQ model. (EOQ: ECONOMIC ORDER QUANTITY).

*should we round-up these figures?

Let’s try this one:

C = 20 eur/unit
D = 1.000 u/year.
S = 500 eur.
H = 0,36 eur/unit-year
Q* =
N = D/Q* = 1.000/1.667 = 0,599880024 replenishments/year.
How many units do you purchase in 5 years? 5.000 units.
Now, round it up to 1 replenishment/year.
How many units do you purchase in 5 years? 8.335 units.
- EOQ model. (EOQ: ECONOMIC ORDER QUANTITY).

*should we round-up these figures?

Let’s try this one:

C = 20 eur/unit
D = 1.000 u/year.
S = 500 eur.
H = 0,36 eur/unit-year
Q* = 1.667 units/replenishment.
N = D/Q* = 1.000/1.667 = 0,599880024 ≈ 0,60 replenishments/year.
How many units do you purchase in 5 years? 5.001 units.
- EOQ model. (EOQ: ECONOMIC ORDER QUANTITY).

Another one:

C = 100 eur/unit
D = 20.000 u/year.
S = 5 eur.
H = 0,2C eur/unit-year
Q* = units/replenishment.
N = D/Q* = 20.000/ = ≈
T=
TC =
- EOQ model. (EOQ: ECONOMIC ORDER QUANTITY).

Another one:

C = 100 eur/unit
D = 20.000 u/year.
S = 5 eur.
H = 0,2C eur/unit-year
Q* = 100 units/replenishment.
N = D/Q* = 20.000/ 100 = 200
T= 365/200 = 1,85 days between replenishments.
TC = 2.000.000 + 1.000 + 1.000 = 2.002.000 eur.
AVERAGE DAILY DEMAND = 20.000/365 = 54,79 u./day
- EOQ model. (EOQ: ECONOMIC ORDER QUANTITY).

Another one:

C = 100 eur/unit
D = 20.000 u/year.
S = 5 eur.
H = 0,2C eur/unit-year
Q* = 100 units/replenishment.
N = D/Q* = 20.000/ 100 = 200
T= 365/200 = 1,85 days between replenishments.
TC = 2.000.000 + 1.000 + 1.000 = 2.002.000 eur.
Is this really an optimal result? Try Q* = 200, and try Q* = 50
- EOQ model. (EOQ: ECONOMIC ORDER QUANTITY).

Another one:

C = 100 eur/unit
D = 20.000 u/year.
S = 5 eur.
H = 0,2C eur/unit-year
Q* = 100 units/replenishment.
N = D/Q* = 20.000/ 100 = 200
T= 365/200 = 1,85 days between replenishments.
TC = 2.000.000 + 1.000 + 1.000 = 2.002.000 eur.
Is this really an optimal result? Try Q = 200, and try Q = 50
TC(200) = 2.000.000 + 500 + 2.000 = 2.002.500 eur.
TC(50) = 2.000.000 + 2.000 + 500 = 2.002.500 eur.
 CHAPTER 9. INVENTORY MANAGEMENT

INVENTORY SYSTEMS:

MULTIPLE-PERIOD SYSTEM: items will be purchased

periodically:
- Fixed-order quantity models (Q-model):
- EOQ model.
- Price-break model.
INVENTORY SYSTEMS:

Price-break model.
Now it’s different: selling price varies with order size (more
quantity, lower price).
For example:
- If you order 25 to 100 units, price is 5 eur/unit.
- If you order 101 to 500 units, price is 4,8 eur/unit.
- If you order more than 500 units, price is 4,5 eur/unit.
INVENTORY SYSTEMS:

Price-break model.

What we do now is:

- Compute Q* for each price range.
- If Q* is lower than the minimum quantity, we know that
this is non feasible, so we’ll select the minimum quantity.
- Compute total costs for each price range.
- Select Q that minimizes total cost.
Example:
Q Price
50 to 99 units 100 eur/unit
100 to 399 units 96 eur/unit
400 units or more: 94 eur/unit
D= 5.000 u/year S = 150 eur. H = 2% of purchasing cost.
Price-break model.
Now it’s different: selling price varies with order size (more quantity, lower price).
What we do now is:
- Compute Q* for each price range.
- If Q* is lower than the minimum quantity, we know that this is non feasible, so we’ll select
the minimum quantity.
- Compute total costs for each price range.
- Select Q that minimizes total cost.
Example:
Q Price
50 to 99 units 100 eur/unit
100 to 399 units 96 eur/unit
400 units or more: 94 eur/unit
D= 5.000 u/year S = 150 eur. H = 12% of purchasing cost.
Price-break model.
Now it’s different: selling price varies with order size (more quantity, lower price).
What we do now is:
- Compute Q* for each price range.
- If Q* is lower than the minimum quantity, we know that this is non feasible, so we’ll select
the minimum quantity.
- Compute total costs for each price range.
- Select Q that minimizes total cost.
Example:
Q Price
50 to 99 units 100 eur/unit Q* = 68,46
100 to 399 units 96 eur/unit Q* = 69,88
400 units or more: 94 eur/unit Q* = 70,61
D= 5.000 u/year S = 15 eur. H = 32% of purchasing cost.
Price-break model.
Now it’s different: selling price varies with order size (more quantity, lower price).
What we do now is:
- Compute Q* for each price range.
- If Q* is lower than the minimum quantity, we know that this is non feasible, so we’ll select
the minimum quantity.
- Compute total costs for each price range.
- Select Q that minimizes total cost.
Example:
Q Price
50 to 99 units 100 eur/unit Q* = 68,46 F
100 to 399 units 96 eur/unit Q* = 69,88 NF
400 units or more: 94 eur/unit Q* = 70,61 NF
D= 5.000 u/year S = 15 eur. H = 32% of purchasing cost.
TC68,46 =
(5.000X100)+(5.000*15/68,46)+(68,46*32/2)=500.000+1.095,53+1.095,36 = 502.590,89
TC100 =
(5.000X96)+(5.000*15/100)+(100*30,72/2) = 480.000 + 750 + 1536 = 482.286,00
TC400 =
(5.000X94)+(5.000*15/400)+(400*30,08/2) = 470.000 + 187,5 + 6016= 476.203,50
Example:
Q Price
50 to 99 units 100 eur/unit Q* = 867 non f.
100 to 399 units 96 eur/unit Q* = 884 non f.
400 units or more 94 eur/unit Q* = 894 YES!
D= 5.000 u/year S = 150 eur. H = 2% of purchasing cost.
Price-break model.
Now it’s different: selling price varies with order size (more quantity, lower price).
What we do now is:
- Compute Q* for each price range.
- If Q* is lower than the minimum quantity, we know that this is non feasible, so we’ll select
the minimum quantity.
- Compute total costs for each price range.
- Select Q that minimizes total cost.
Another example:
Q Price
50 to 99 units 100 eur/unit
100 to 399 units 95 eur/unit
400 or more units 80 eur/unit
D= 5.000 u/year S = 150 eur. H = 10% of purchasing cost.
Price-break model.
Now it’s different: selling price varies with order size (more quantity, lower price).
What we do now is:
- Compute Q* for each price range.
- If Q* is lower than the minimum quantity, we know that this is non feasible, so we’ll select
the minimum quantity.
- Compute total costs for each price range.
- Select Q that minimizes total cost.
 Price
50 to 99 units 100 eur/unit Q* = 388 non f.
100 to 399 units 95 eur/unit Q* = 398 YES!
400 or more units 80 eur/unit Q* = 433 YES!
D= 5.000 u/year S = 150 eur. H = 10% of purchasing cost.
Price-break model.

Now it’s different: selling price varies with order size (more quantity, lower price).

What we do now is:

- Compute Q* for each price range.

- If Q* is lower than the minimum quantity, we know that this is non feasible, so we’ll select the minimum quantity.

- Compute total costs for each price range.

- Select Q that minimizes total cost SO, WHAT NOW?

 Q Price
50 to 99 units 100 eur/unit Q* = 387 non f.
100 to 399 units 95 eur/unit Q* = 398 YES!
400 or more units 80 eur/unit Q* = 433 YES!
D= 5.000 u/year S = 150 eur. H = 10% of purchasing cost.

TC(50 to 99) = don’t even try it, it’s above the top of range.
TC(398) = (5.000x95) + (5.000x150/398) + (398x9,5/2) ;
TC(398) = 475.000 + 1.884,42 + 1.890,5 = 478.774,92 eur.
TC(433) = (5.000x80) + (5.000x150/433) + (433x8/2);
TC(433) = 400.000 + 1.732,10+ 1.732 = 403.464,10 eur.
Another one:

D = 20.000
Q Price
1 to 999 1.000 eur
1.000 to 4.999 995 eur
5.000 or more 985 eur

S = 25 eur.
H = 24% of purchasing cost
Obtain Q*, N, and total cost.
Another one:

D = 20.000
Q Price
1 to 999 1.000 eur
1.000 to 4.999 995 eur
5.000 or more 985 eur

S = 25 eur.
H = 24% of purchasing cost Q* = 64,55 ≈ 65 u/r.
N = D/Q = 20.000/65 = 307,69 replenishments/year.
TC = 20.000.000 + 7.692,25 + 7.800 = 20.015.492,25 eur.
Suppose now that the CEO of your company says that
It’s not a good idea to choose the order size
with the most expensive purchase price.
He asks you to switch to order size = 5.000 units per
replenishment. Show him he’s wrong.

D = 20.000
Q Price
1 to 999 1.000 eur
1.000 to 4.999 995 eur
5.000 or more 985 eur
S = 25 eur.
H = 24% of purchasing cost Q* = 5.000
Show him he’s wrong.

D = 20.000
Q Price
1 to 999 1.000 eur
1.000 to 4.999 995 eur
5.000 or more 985 eur

S = 25 eur.
H = 24% of purchasing cost Q* = 5.000
N = D/Q = 20.000/5.000 = 4 replenishments/year.
TC = 19.700.000 + 100 + 591.000 = 20.291.100,00 eur.
Which is T (Cycle Time)? = 365/N = 91,25 days (a quarter)
WHY is he’s wrong? (= Holding cost is so high, that is better to pay a
higher price for smaller orders than assuming this holding cost).

D = 20.000
Q Price
1 to 999 1.000 eur
1.000 to 4.999 995 eur
5.000 or more 985 eur

S = 25 eur.
H = 24% of purchasing cost Q* = 5.000
N = D/Q = 20.000/5.000 = 4 replenishments/year.
TC = 19.700.000 + 100 + 591.000 = 20.291.100,00 eur.
Which is T (Cycle Time)? = 365/N = 91,25 days (a quarter)
SEE P-MODELS FILE