Lecture class on
Inventory Control
Prepared by
Dr. G. S. Mahapatra
12/07/21 1
Siliguri Institute of Technology
Model II : The EOQ Model with Finite Replenishment (Supply) Rate.
Assumptions: 1) The demand (D) is known, is constant and occurs
uniformly.
2) P is the production rate per unit time,
3) Lead time is zero.
4) Shortages are not allowed.
T is the interval between production cycles
Q=DT the number of items produced per production run
In this model the assumptions are same as in model I except that the replenishment
rate (manufacturing rate) is finite (P).
Each production run of length T is divided into parts t1 and t2 such
that
(i) The inventory is building up at a constant rate of (P-D) units per
unit time during t1
(ii) there is no production during t2 and the inventory is decreasing
at the rate of D units per unit time
Model II : The EOQ Model with Finite Replenishment (Supply) Rate.
At the end of time t1 let the inventory level be S.
The inventory level at end of time t1 : S= t1 (P-D)
This inventory is used during the period t2 at the rate of D, so S= t2 D
S S
t1 and t2
PD D
Q
P-D -D P-D
O t1 t1+t2=T t
Figure : Model- II
Since Q be the quantity production per run, then Q Pt1 and
(Q S )
S ( P D)t1 Q Dt1 t1
D
Q Q (Q S ) ( P D)
12/07/21 Also t1 S Q 3
P P D D
Model II : The EOQ Model with Finite Replenishment (Supply) Rate.
Now, total inventory during time T 1/ 2(t1 t2 ) S
Average inventory =1/2(ST/T)=S/2
1 Q
Inventory holding cost = ( P D ) C1
2 P
C3
Setup cost nC3
T
since T=t1 t 2
S S
SP
P D
Q
P
Q
P D D D P D P D P D D
DC3
so, Setup cost nC3
Q
1 Q DC3
Thus thetotal inventory cost TC(Q) ( P D ) C1
2 P Q
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Model II : The EOQ Model with Finite Replenishment (Supply) Rate.
d d2
By the principle of optimality TC (Q ) 0 and 2
TC (Q ) 0
dQ dQ
dTC (Q) 2C3 PD
0 Q*
dQ C1 ( P D )
d2
and 2
TC (Q*) 0
dQ
2C3 PD
The optimum quantity Q*
C1 ( P D)
2C1C3 D( P D)
The optimum annual inventory cost TC *(Q*)
P
Q* 2C3 P
Optimum period of runT *
D DC1 ( P D )
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Model II : Numerical example
A contractor has to supply 10000 bearing per day to an automobile
manufacturer. He finds that, when he starts a production run, he can
produce 25000 bearing per day. The cost of holding a bearing in stock
for one year is Rs. 2 and the set up cost of a production run is Rs. 18.
How frequently should production run be made?
Solution:
We are given P =25000 /day, D =10000 /day, C1= Rs. 2/ year =
0.0055 /day, C3 = Rs. 18 per run.
2C3 PD
The optimum quantity Q* 104447 bearings
C1 ( P D)
Q*
Optimum period of runT * 104447 /10000 10.4 days
D
Length of production cycle 104447 / 25000 40 days
The optimum annual inventory cost TC *(Q*) Rs.34.46
Thus the production cycle starts at an interval of 10.4 days and production
continues for 40 days so that in each cycle a batch of 104447 bearings is produced.
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Numerical example
Problem 1: An item is produced at the rate of 50 units
per day. The demand is at the rate of 25 units per day.
The set-up cost is Rs. 100 and the holding cost is Rs. 0.01
per unit per day. Find the EOQ and the minimum
annual inventory cost. After how many days should
production be stooped during each run ?
Problem 2: The demand for a commodity is 600 units
per year. The ordering cost is Rs. 80. The cost of the
item is Rs. 3 and the inventory holding cost is 20% of
the cost per year. If the lead time is one year, find the
EOQ, the re-order point, the minimum average annual
cost.
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Thank you
End of Part-II