Templates to accompany Operations Management, Seventh Edition

created by Lee Tangedahl, The University of Montana

Copyright 2001 by The McGraw Hill Companies, Inc.
All rights Reserved.

Chapter Thirteen - Inventory Management

Templates: ABC Classification System

Basic Economic Order Quantity (EOQ) Model
Economic Production Quantity (EPQ) Model
Quantity Discounts
Reorder Point (ROP) with EOQ Ordering
Fixed Order Interval Model
Single Period Model

Examples

Solved Problems

See Instructions template for complete instructions.

ABC Classification Syatem
Clear 80.00%
Dollar Amount Annual Demand
Class Total Percent Total Percent 70.00%
A 7,900,000 72.28% 6,000 21.43%
60.00%
B 2,765,000 25.30% 7,900 28.21%
C 264,000 2.42% 14,100 50.36%
50.00%
Enter lower limit for dollar amount:
40.00%

30.00%
A 3,600,000 B 480,000
20.00%
Unit Dollar
Item Usage Cost Amount Class 10.00%
1 1,000 4,300 4,300,000 A
2 5,000 720 3,600,000 A 0.00%
3 1,900 500 950,000 B Dollar Amount Annual Demand
4 1,000 710 710,000 B
A B C
5 2,500 250 625,000 B
6 2,500 192 480,000 B
7 400 200 80,000 C
8 500 100 50,000 C
9 200 210 42,000 C
10 1,000 35 35,000 C
11 3,000 10 30,000 C
12 9,000 3 27,000 C
 EOQ

Basic Economic Order Quantity (EOQ) Model

10000
Annual Demand D= 9600
Ordering cost per order S= 75 9000
Annual carrying cost per unit H= 16
8000
Working days per year D/Y = 360
Economic Order Quantity EOQ = 300 7000

6000
Actual Order Quantity Q= 300
4,800.00
Increment Q = 1 5000
Number of orders per year D/Q = 32
4000
Length of order cycle (days) Q/D = 11.25
Average Inventory Q/2 = 150 3000
Annual carrying cost (Q/2) * H = 2400
Annual ordering cost (D/Q) * S = 2400 2000
Total Annual Cost TC = 4800 1000

0
0 100 200 300 400 500 600 700

Order Quantity (Q)

Carrying Cost Ordering Cost
Total Cost Q

Page 3
 EPQ

Economic Production Quantity (EPQ) Model

3500
Annual Demand D= 48000
Setup cost S= 45
3000
Annual carrying cost per unit H= 1
Production rate p= 800
Usage rate u= 200 2500
Production days per year D/Y = 240
Economic Run Quantity Q0 = 2400 2000 1,800.00

1500
Actual Run Quantity Q= 2400
Increment Q = 100 1000
Number of runs per year D/Q = 20
Cycle time Q/u = 12 500
Run time Q/p = 3
Average Inventory Iave = 900
0
Maximum Inventory Imax = 1800
0 1000 2000 3000 4000 5000 6000
Annual carrying cost Iave * H = 900
Annual setup cost (D/Q) * S = 900 Run Quantity (Q)
Carrying Cost SetupCost
Total Annual Cost TC = 1800
Total Cost Q

Page 4
 Quantity Discounts

Quantity Discounts
Price Level: 1 2 3 4 5 6 7
Minimum quantity for price Qmin = 1 50 80 100
Price P= 20.00 18.00 17.00 16.00
Optimal Q (for each price) Qopt = 70 70 80 100
Number of orders per year D/Qopt = 11.657143 11.657143 10.2 8.16
Average Inventory Qopt/2 = 35 35 40 50
Annual carrying cost (Qopt/2) * H = 140 140 160 200
Annual ordering cost (D/Qopt) * S = 139.88571 139.88571 122.4 97.92
Annual purchase cost P*D= 16320 14688 13872 13056
Total Annual Cost TC = 16599.886 14967.886 14154.4 13353.92
20000
Annual Demand D= 816
Ordering cost per order S= 12 15000
Annual carrying cost per unit: H= 4 13,353.92
fixed percent of price1 H= 40.00% 10000
Optimal Q (overall) Qopt = 100
5000
Actual Order Quantity Q= 100
Increment Q = 10 0 0.00
Price P= 16 0 50 100 150 200 250
Number of orders per year D/Q = 8.16 Order Quantity (Q)
Average Inventory Qopt/2 = 50
Annual carrying cost (Qopt/2) * H = 200 1 2 3
Annual ordering cost (D/Q) * S = 97.92
4 5 6
Annual purchase cost P * D = 13056
7 Column W
Total Annual Cost TC = 13353.92

Page 5
 ROP

Reorder Point (ROP) with EOQ Ordering

16

Average demand d= 2 14
Std dev demand d = 0
Average lead time LT = 7 12
Std dev lead time LT = 0
Service level SL = 1 10
Increment SL = 0.01
Stock out risk 0 8
Average demand during lead time dLT = 14 14 #N/A
Std dev demand during lead time dLT = 0 6 14 14
Safety stock SS = 0 14 #N/A
Reorder point ROP = 14 4

0
Reorder point
Average demand during lead time

Page 6
 Fixed Order Interval

Fixed Order Interval Model

250

Average demand d= 30
200
Std dev demand d = 3
Lead time LT = 2
Amount on hand at reorder time A= 71 150
Order interval OI = 7
Service level SL = 0.99
Increment SL = 0.01 100
Stock out risk 0.01 199 270 #N/A #N/A
Average demand during lead time dLT = 270 199 270 219.93713 #N/A
Safety stock SS = 20.937131 50 199 270 #N/A #N/A
Amount to order 219.93713
0
Column K
Amount to order
Average demand during lead time
dLT less Amount on hand

Page 7
 Single Period

Single Period Model

0.45
Select demand distribution: Uniform
0.4
Uniform 1Normal 0 Poisson 0
0.35
Shortage cost (revenue - cost) Cs = 0.6 0.4
Ce = 0.3
Excess cost (cost - salvage) 0.2
Minimum demand 300 0.25
Maximum demand 500
Optimal Service Level SLo = 0.75 0.2
Optimal Stocking Level So = 450 0.15

0.1
Actual Stocking Level S= 450
0.05
Increment S = 1
Actual Service Level SL = 0.7500 0
Balance:
0.4 Ce * Service Level
Ce * Service Level 0.15
Cs * (1 - Service Level)
Cs * (1 - Service Level) 0.15

Page 8
Chapter 13 - Examples

1. ABC Classification Syatem

Dollar Amount Annual Demand

Class Total Percent Total Percent
A 7,900,000 72.28% 6,000 21.43%
B 2,765,000 25.30% 7,900 28.21%
C 264,000 2.42% 14,100 50.36%

Enter lower limit for dollar amount:

A 3,600,000 B 480,000

Unit Dollar
Item Usage Cost Amount Class
1 1,000 4,300 4,300,000 A
2 5,000 720 3,600,000 A
3 1,900 500 950,000 B
4 1,000 710 710,000 B
5 2,500 250 625,000 B
6 2,500 192 480,000 B
7 400 200 80,000 C
8 500 100 50,000 C
9 200 210 42,000 C
10 1,000 35 35,000 C
11 3,000 10 30,000 C
12 9,000 3 27,000 C

2. Basic Economic Order Quantity (EOQ) Model

Annual Demand D= 9600

Ordering cost per order S= 75
Annual carrying cost per unit H= 16
Working days per year D/Y = 360
Economic Order Quantity EOQ = 300

Actual Order Quantity Q= 300

Increment Q = 10
Number of orders per year D/Q = 32
Length of order cycle (days) Q/D = 11.25
Average Inventory Q/2 = 150
Annual carrying cost (Q/2) * H = 2400
Annual ordering cost (D/Q) * S = 2400
Total Annual Cost TC = 4800

3. Basic Economic Order Quantity (EOQ) Model

 Annual Demand D= 3600
Ordering cost per order S= 31
Annual carrying cost per unit H= 13
Working days per year D/Y = 360
Economic Order Quantity EOQ = 131.031411

Actual Order Quantity Q= 131

Increment Q = 1
Number of orders per year D/Q = 27.480916
Length of order cycle (days) Q/D = 13.1
Average Inventory Q/2 = 65.5
Annual carrying cost (Q/2) * H = 851.5
Annual ordering cost (D/Q) * S = 851.908397
Total Annual Cost TC = 1703.4084

4. Economic Production Quantity (EPQ) Model

Annual Demand D= 48000

Setup cost S= 45
Annual carrying cost per unit H= 1
Production rate p= 800
Usage rate u= 200
Production days per year D/Y = 240
Economic Run Quantity Q0 = 2400

Actual Run Quantity Q= 2400

Increment Q = 100
Number of runs per year D/Q = 20
Cycle time Q/u = 12
Run time Q/p = 3
Average Inventory Iave = 900
Maximum Inventory Imax = 1800
Annual carrying cost Iave * H = 900
Annual setup cost (D/Q) * S = 900
Total Annual Cost TC = 1800

5. Quantity Discounts
Price Level: 1 2 3 4
Minimum quantity for price Qmin = 1 50 80 100
Price P= 20.00 18.00 17.00 16.00
Optimal Q (for each price) Qopt = 70 70 80 100
Number of orders per year D/Qopt = 11.6571429 11.6571429 10.2 8.16
Average Inventory Qopt/2 = 35 35 40 50
Annual carrying cost (Qopt/2) * H = 140 140 160 200
Annual ordering cost (D/Qopt) * S = 140 140 122 98
 Annual purchase cost P*D= 16,320 14,688 13,872 13,056
Total Annual Cost TC = 16,600 14,968 14,154 13,354

Annual Demand D= 816

Ordering cost per order S= 12
Annual carrying cost per unit: H= 4
1 H= 40.00%
Optimal Q (overall) Qopt = 100

Actual Order Quantity Q= 100

Increment Q = 10
Price P= 16
Number of orders per year D/Q = 8.16
Average Inventory Qopt/2 = 50
Annual carrying cost (Qopt/2) * H = 200
Annual ordering cost (D/Q) * S = 98
Annual purchase cost P*D= 13,056
Total Annual Cost TC = 13,354

6. Quantity Discounts
Price Level: 1 2 3
Minimum quantity for price Qmin = 1 500 1000
Price P= 0.90 0.85 0.80
Optimal Q (for each price) Qopt = 816 840 1000
Number of orders per year D/Qopt = 4.90196078 4.76190476 4
Average Inventory Qopt/2 = 408 420 500
Annual carrying cost (Qopt/2) * H = 147 143 160
Annual ordering cost (D/Qopt) * S = 147 143 120
Annual purchase cost P*D= 3,600 3,400 3,200
Total Annual Cost TC = 3,894 3,686 3,480

Annual Demand D= 4000

Ordering cost per order S= 30
Annual carrying cost per unit: H=
H= 40.00%
Optimal Q (overall) Qopt = 1000

Actual Order Quantity Q= 1000

Increment Q = 100
Price P= 0.8
Number of orders per year D/Q = 4
Average Inventory Qopt/2 = 500
Annual carrying cost (Qopt/2) * H = 160
Annual ordering cost (D/Q) * S = 120
Annual purchase cost P*D= 3,200
Total Annual Cost TC = 3,480
7. Reorder Point (ROP) with EOQ Ordering

Average demand d= 2
Std dev demand d = 0
Average lead time LT = 7
Std dev lead time LT = 0
Service level SL = 1
Increment SL = 0.01
Stock out risk 0
Average demand during lead time dLT = 14
Std dev demand during lead tTime dLT = 0
Safety stock SS = 0
Reorder point ROP = 14

8. Reorder Point (ROP) with EOQ Ordering

Average demand d= 50
Std dev demand d = 5
Average lead time LT = 1
Std dev lead time LT = 0
Service level SL = 0.97
Increment SL = 0.01
Stock out risk 0.03
Average demand during lead time dLT = 50
Std dev demand during lead tTime dLT = 5
Safety stock SS = 9.40394784
Reorder point ROP = 59.4039478

9. Reorder Point (ROP) with EOQ Ordering

Average demand d= 50
Std dev demand d = 3
Average lead time LT = 2
Std dev lead time LT = 0
Service level SL = 0.9
Increment SL = 0.01
Stock out risk 0.1
Average demand during lead time dLT = 100
Std dev demand during lead tTime dLT = 4.24264069
Safety stock SS = 5.43715954
Reorder point ROP = 105.43716
 13. Fixed Order Interval Model

Average demand d= 30
Std dev demand d = 3
Lead time LT = 2
Amount on hand at reorder time A= 71
Order interval OI = 7
Service level SL = 0.99
Increment SL = 0.01
Stock out risk 0.1
Average demand during lead time dLT = 270
Safety stock SS = 20.9370774
Amount to order 219.937077

14a. Reorder Point (ROP) with EOQ Ordering

Average demand d= 10
Std dev demand d = 2
Average lead time LT = 4
Std dev lead time LT = 0
Service level SL = 0.77337432
Increment SL = 0.01
Stock out risk 0.22662568
Average demand during lead time dLT = 40
Std dev demand during lead tTime dLT = 4
Safety stock SS = 3.00002284
Reorder point ROP = 43.0000228

note: use goal seek to set ROP by changing SL

14b. Fixed Order Interval Model

Average demand d= 10
Std dev demand d = 2
Lead time LT = 4
Amount on hand at reorder time A= 43
Order interval OI = 12
Service level SL = 1
Increment SL = 0.01
Stock out risk 0.22662568
Average demand during lead time dLT = 160
Safety stock SS = 8
Amount to order 125

Q = 125 < 171 gives SL=1

15. Single Period Model

Select demand distribution: Uniform

1 0 0

Shortage cost (revenue - cost) Cs = 0.6

Excess cost (cost - salvage) Ce = 0.2
Minimum demand 300
Maximum demand 500
Optimal Service Level SLo = 0.75
Optimal Stocking Level So = 450

Actual Stocking Level S= 450

Increment S = 1
Actual Service Level SL = 0.7500
Balance:
Ce * Service Level 0.15
Cs * (1 - Service Level) 0.15

16. Single Period Model

Select demand distribution: Normal

0 1 0

Shortage cost (revenue - cost) Cs = 0.6

Excess cost (cost - salvage) Ce = 0.2
Average demand 200
Std dev demand 10
Optimal Service Level SLo = 0.75
Optimal Stocking Level So = 206.744904

Actual Stocking Level S= 207

Increment S = 1
Actual Service Level SL = 0.7580
Balance:
Ce * Service Level 0.15160728
Cs * (1 - Service Level) 0.14517815

18. Single Period Model

Select demand distribution: Poisson

0 0 1
Shortage cost (revenue - cost) Cs = 3
Excess cost (cost - salvage) Ce = 2
Average demand 4
10
Optimal Service Level SLo = 0.6

Actual Stocking Level S= 4

Increment S = 1
Actual Service Level SL = 1.0000
Balance:
Ce * Service Level 2
Cs * (1 - Service Level) 0

note: adjust S to balance Ce * Service Level and Cs * (1 - Service Level)

Chapter 13 - Solved Problems

1. Basic Economic Order Quantity (EOQ) Model

Annual Demand D= 32000

Ordering cost per order S= 24
Annual carrying cost per unit H= 0.6
Working days per year D/Y = 240
Economic Order Quantity EOQ = 1600

Actual Order Quantity Q= 1600

Increment Q = 10
Number of orders per year D/Q = 20
Length of order cycle (days) Q/D = 12
Average Inventory Q/2 = 800
Annual carrying cost (Q/2) * H = 480
Annual ordering cost (D/Q) * S = 480
Total Annual Cost TC = 960

2. Economic Production Quantity (EPQ) Model

Annual Demand D= 11000

Setup cost S= 35
Annual carrying cost per unit H= 1
Production rate p= 200
Usage rate u= 50
Production days per year D/Y = 220
Economic Run Quantity Q0 = 1013

Actual Run Quantity Q= 1013

Increment Q = 100
Number of runs per year D/Q = 10.8588351
Cycle time Q/u = 20.26
Run time Q/p = 5.065
Average Inventory Iave = 379.875
Maximum Inventory Imax = 759.75
Annual carrying cost Iave * H = 379.875
Annual setup cost (D/Q) * S = 380.05923
Total Annual Cost TC = 759.93423

3. Quantity Discounts
Price Level: 1 2
Minimum quantity for price Qmin = 1 1000
Price P= 3.00 2.00
Optimal Q (for each price) Qopt = 1155 1414
Number of orders per year D/Qopt = 2.94372294 2.40452617
 Average Inventory Qopt/2 = 577.5 707
Annual carrying cost (Qopt/2) * H = 294.525 240.38
Annual ordering cost (D/Qopt) * S = 294.372294 240.452617
Annual purchase cost P*D= 10200 6800
Total Annual Cost TC = 10788.8973 7280.83262

Annual Demand D= 3400

Ordering cost per order S= 100
Annual carrying cost per unit: H=
0 H= 17.00%
Optimal Q (overall) Qopt = 1414

Actual Order Quantity Q= 1414

Increment Q = 10
Price P= 2
Number of orders per year D/Q = 2.40452617
Average Inventory Qopt/2 = 707
Annual carrying cost (Qopt/2) * H = 240.38
Annual ordering cost (D/Q) * S = 240.452617
Annual purchase cost P*D= 6800
Total Annual Cost TC = 7280.83262

4. Reorder Point (ROP) with EOQ Ordering

Average demand d= 400

Std dev demand d = 9
Average lead time LT = 3
Std dev lead time LT = 0
Service level SL = 0.98
Increment SL = 0.01
Stock out risk 0.02
Average demand during lead time dLT = 1200
Std dev demand during lead tTime dLT = 15.5884573
Safety stock SS = 32.0147657
Reorder point ROP = 1232.01477

5. Reorder Point (ROP) with EOQ Ordering

Average demand d= 600

Std dev demand d = 0
Average lead time LT = 6
Std dev lead time LT = 2
Service level SL = 0.9
Increment SL = 0.01
 Stock out risk 0.1
Average demand during lead time dLT = 3600
Std dev demand during lead tTime dLT = 1200
Safety stock SS = 1537.86095
Reorder point ROP = 5137.86095

6. Reorder Point (ROP) with EOQ Ordering

Average demand d= 25
Std dev demand d = 3
Average lead time LT = 10
Std dev lead time LT = 2
Service level SL = 0.95
Increment SL = 0.01
Stock out risk 0.05
Average demand during lead time dLT = 250
Std dev demand during lead tTime dLT = 50.8920426
Safety stock SS = 83.709929
Reorder point ROP = 333.709929

8. Fixed Order Interval Model

Average demand d= 15.2

Std dev demand d = 1.6
Lead time LT = 5
Amount on hand at reorder time A= 275
Order interval OI = 30
Service level SL = 0.95
Increment SL = 0.01
Stock out risk 0.05
Average demand during lead time dLT = 532
Safety stock SS = 15.5697305
Amount to order 272.569731

9. Single Period Model

Select demand distribution: Poisson

0 0 1

Shortage cost (revenue - cost) Cs = 342.538936

Excess cost (cost - salvage) Ce = 500
Average demand 2
10
Optimal Service Level SLo = 0.40655562
Actual Stocking Level S= 1
Increment S = 1
Actual Service Level SL = 1.0000
Balance:
Ce * Service Level 500
Cs * (1 - Service Level) 0

Single Period Model

Select demand distribution: Poisson

0 0 1

Shortage cost (revenue - cost) Cs = 1046.30933

Excess cost (cost - salvage) Ce = 500
Average demand 2
10
Optimal Service Level SLo = 0.67664943

Actual Stocking Level S= 2

Increment S = 1
Actual Service Level SL = 1.0000
Balance:
Ce * Service Level 500
Cs * (1 - Service Level) 0

Note: use Goal Seek to set SLo by changing Cs