Inventory Management types

of control system and EOQ

 Lecture Outline
Types of control system
Re-order level system
Periodic review system
Economic Order Quantity (EOQ)
A graphical approach
The formula approach
EOQ with gradual replenishment
EOQ with stockouts
EOQ with discounts
 Types of control system
Re-order level system (ROLS) also know as the two-
bin system.
Characteristics of the ROLS:
a) A predetermined re-order level is set for each item
b) When the stock level falls to the re-order level, a
replenishment order is issued.
c) The replenishment order quantity is invariably the
EOQ
d) Stock is separated into two bins
e) Have re-order levels which triggers off the required
replenishment order.
 Types of control system
The periodic review system sometimes called the
constant cycle system has the following characteristics:
Stock levels are reviewed at fixed intervals.
Where necessary a replenishment order is issued
the replenishment order is based upon the likely
demand until the next review
The replenishment order quantity seeks to bring stocks
up to a predetermined level.
The effect of the system is to order variable quantities
at fixed intervals.
Economic Order Quantity (EOQ)
The EOQ has been previously defined as the ordering
quantity which minimizes the balance of cost between
inventory holding costs and re-order costs.

Example: A company uses 50,000 widgets per annum

which are $10 each to purchase. The ordering and
handling costs are $150 per order and carrying costs are
15% of purchase price per annum, i.e. it cost $1.5 p.a. to
carry a widget in stock ($10 x 15%).
Graphical Approach
Graphical Approach Contd
Economic Order Quantity (EOQ)
2 Co D
EOQ
Cc
Where:
Co = cost per order
D = Demand per annum
Cc = Carrying cost per item per annum
EOQ with gradual replenishment
2 Co D
EOQ
D
Cc 1
R
Where:
Co = cost per order
D = Demand per annum
Cc = Carrying cost per item per annum
R = production rate per annum
EOQ with gradual replenishment
Example 2: Assume that the firm described in
example 1 has decided to make the widgets in its
own factory. The necessary machinery has been
purchased which has a capacity of 250,000
widgets per annum. All other data are assumed to
be the same.
 EOQ with stockouts
2 Co D Cc Cs
EOQ
Cc Cs

Where:
Co = cost per order
D = Demand per annum
Cc = Carrying cost per item per annum
Cs = stockout costs
THE END