DEEN DAYAL

UPHADHYAYA
COLLEGE
UNIVERSITY OF
DELHI
SUBMITED BY:- HAMZA MOINI ,
PRASHANT (GROUP ACTIVITY)
ROLL NO:-20MTS5714,20MTS5742
SUBMITED TO:-MRS. KIRAN GARG
DESCRIPTION OF
FUNDAMENTAL
EOQ MODEL.
S U B M I T E D B Y: - H A M Z A M O I N I

ROLL NO:-20MTS5714

S U B M I T E D TO : - M R S . K I R A N G A R G

A S S U M P T I O N S & PA R A M E T E R S .
THE CONCEPT OF EOQ
The inventory problems in which demand is assumed to be fixed and completely pre-determined
are usually referred to as the economic order quantity (EOQ) or lot size problems.

By the ‘order quantity’ we mean the quantity produced or procured during one production cycle.
when the size of order increases , the ordering costs (cost of purchasing,inspection etc.) will
decrease whereas the inventory carrying costs (cost of storage,insurance etc.) will increase. Thus,
in the production process there are two opposite costs one encourages the increase in order size
and the other discourages. Economic Order Quantity (EOQ) is that size of order which minimizes
total annual costs of carrying inventory and cost of ordering.
GRAPH OF EOQ
THE FUNDAMENTAL PROBLEM
OF EOQ
The objective of the study of this problem is to determine an optimum order quantity (EOQ) such that the total inventory cost is
minimized. We illustrate the problem, under consideration , using the following assumptions:

1) Demand is known and uniform.

2) Let ‘D’ denote the total number of units purchased/produced or supplied per time period and ‘Q’ denote the lot size in each
production run.

3) Shortages are not permitted, As soon as the level of the inventory reaches zero, the inventory is replenished.

4) Production or supply of commodity is instantaneous (Abundant Availability).

5) Lead time is zero

6) Set – up cost (or ordering cost ) per production run on procurement is ‘A’.

7) Holding cost is ‘C1’ per unit in inventory for a unit , that is C1 = IC, where C is the unit cost, I is called inventory carrying charge
expressed as % of the value of the average inventory.
THE FUNDAMENTAL PROBLEM
OF EOQ
This fundamental situation can be shown on an inventory – time diagram, with Q on the vertical axis
and time on the horizontal axis. The total time period (one year) is divided into ‘n’ parts:

/
2
THE FUNDAMENTAL PROBLEM
OF EOQ
Here it is assumed that after each time t, the quantity Q is produced/purchased or supplied throughout the entire time
period, say one year. Now, if n denotes the total number of runs of the quantity produced or purchased during the
year , then clearly we have:-

1=nt and D=nQ

It may be clear that the average amount of inventory at hand on any day is then Q/2, as shown in the previous graph.

Total inventory over the time period ‘t’ days is clearly the area of the first triangle = (Qt/2). Thus, the average
inventory at any time on any given day in the t period is Qt/2t = Q/2.

Now, since each of the triangles in the graph over a year looks the same, Q/2 remains the average amount of
inventory in each interval of length t during the entire period. Annual inventory holding cost is therefore given by:-

F = QC1/2
THE FUNDAMENTAL PROBLEM
OF EOQ
Annual costs associated with runs of size Q are given by:-

G= nA , since n= D/Q

Since, the minimum total cost occurs at the point where ordering cost and the total inventory carrying
cost are equal, we must have:-

F=G

QC1/2 = nA

QC1/2=(D/Q)A

Q= or Q*=
CHARACTERISTICS OF THE
FUNDAMENTAL PROBLEM OF EOQ
Optimum number of orders placed per year

n*=D/Q*, n*=

Optimum length of time between orders

t* = T/n*, T

T=(total time horizon)

the optimum length of time between orders is also called the ‘economic review period’ (ERP).
CHARACTERISTICS OF THE
FUNDAMENTAL PROBLEM OF EOQ
Total annual expected cost (TEC) is given by:-

(TEC)=Annual inventory carrying cost + Annual ordering cost

=Q*C1/2 + (D/Q*)A

=
CHARACTERISTICS OF THE
FUNDAMENTAL PROBLEM OF EOQ
If the set – up cost (ordering) cost is in the form A + aQ ( where a is set-up cost per unit item
produced) then there will be no change in the optimum order quantity produced due to the change in
the set-up cost.

Since d(TC)/dQ = 0 at the optimum value of Q.

d(TC)/dQ= C1/2 – AD/Q^2

C1/2= AD/Q^2

Q= or Q*=
ASSUMPTION OF NO
LEAD TIME RELAXED &
Problem of EOQ with
Several Production Runs
of Unequal Length
S U B M I T T E D B Y: - P R A S H A N T

ROLL NO:-20MTS5742

S U B M I T T E D TO : - K I R A N G A R G
 HOW THIS MODEL WILL BEHAVE IF THE
ASSUMPTION OF NO LEAD TIME RELAXED

In the above EOQ problem lead time has been assumed to

be zero. But in most of the business situations, there exists
a positive lead time, say L. from the time the order is
placed until it is actually supplied.
Proof. If the inventory consumption rate is 'K' units per day and L is the lead time in
days, the total inventory requirements during the lead time will be 'LK. Therefore, as
soon as the inventory level becomes 'LK an order Q is placed. This is called the re-order
point p = LK. This is equivalent to continuously observing the level of inventory, until
the re-order point is obtained. Because of this reason, EOQ problem is sometimes called
the continuous review problem. Fig shows th reorder points
Figure given above assumes that the lead time is less than the cycle length,
which is not necessarily the case in general. To account for this situation, we
define the effective lead time as

Le = L - mtº,

where m is the largest integer not exceeding L/rº. This result is justified
because after m cycles of tº each, the inventory situation acts as if the interval
between placing an order and receiving another is Le.
Case 2. Problem of EOQ with Several Production Runs of Unequal Length

In this problem all the assumptions are same as in Case I except

that the demand is uniform and the production runs differ in
[Link] t1, t2….tn denote the times of successive production
runs, such that
t1 + t2 +……..t3 = 1 year
Thus, the fundamental situation can be represented graphically
as shown in Fig.
Obviously, the annual inventory holding cost is given by

and the set-up costs associated with runs of size Q are given by.

Total annual cost is

This cost is the same as was obtained in Case I and hence the optimum
quantities are

Co Remark.
If the total time period is T instead of one year, then the optimum order
quantity becomes Qº = √2C D/C₁T and the minimum cost becomes TC° =
0

√2C₁C D/T. Thus, the uniform rate of demand is replaced by average rate
0

of demand, i.e., D is replaced by D/T.

THAN
K YOU