LESSON 15

INVENTORY MODELS (DETERMINISTIC)

EOQ MODEL FOR PRODUCTION PLANNING

Outline

• EOQ Model for Production Planning

– The multi-product inventory control model with a
finite production rate
– An example showing the problem with separate
EPQ computation
– The procedure
– An example
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 EOQ Model for Production Planning

• This model is an extension of the EPQ model

• Consider the problem of producing many products in
a single facility. The facility may produce only one
product at a time.
• In each production cycle there is only one setup for
each product, and the products are produced in the
same sequence in each production cycle. This
assumption is called the rotation cycle policy.
• For example, if there are three products A, B and C,
then a production sequence under the rotation cycle
policy is A, B, C, A, B, C, ….
2
 EOQ Model for Production Planning

• The goal is to determine the optimal production

quantities of various products produced in each cycle
and the optimal length of the cycle.
• Finding optimal production quantity of each product
separately using the EPQ formula
2K j j
Qj 
*

hj '
may not give a good solution because a production
quantity may not be large enough to meet the
demand between two production runs of the product.
3
 EOQ Model for Production Planning

• For example, suppose that there are three products

A, B and C, then a production sequence under the
rotation cycle policy is A, B, C, A, B, C, ….
• The production quantity of product A obtained from
the EPQ formula may not be large enough to meet
the demand during the production run of products B
and C.
• The next example elaborates on the problem of using
EPQ formula separately for each product.

4
 Optional

Example
Problem with Separate EPQ Computation
Example 6: Tomlinson Furniture has a single lathe for turning
the wood for various furniture pieces including bedposts,
rounded table legs, and other items. Two products and
some relevant information appear below:
Annual Setup Time Unit Annual
Piece Demand (hours) Cost Production
J-55R 18,000 1.2 $20 33,600
H-223 24,000 0.8 35 52,800
Worker time for setup is valued at $85 per hour, and holding
costs are based on a 20 percent annual interest charge.
Assume 8 hours per day and 240 days per year.
5
 Optional

Example
Problem with Separate EPQ Computation
Find the optimal production quantities separately for each
product and show that production quantity of H-223 is not
large enough to meet the demand between two production
runs of H-223.
Product J - 55R :
K  set - up time  worker time  1.2  85  $102
h  Ic  0.20  20  $4/unit/year
 18,000
  0.5357
P 33,600
 
h'  h1    41  0.5357   $1.8571/unit/year
 P 6
 Optional
Product J - 55R (continued from the previous slide) :
2 K 2 102 18,000
Q  EPQ 
*
  1,406.1404 units
h' 1.8571
* 
Max Inventory, H  Q 1    1,406.141  0.5357   652.85 units
 P
Q * 1,406.1404
Uptime, T1   240  10.0439 days
P 33,600
Minimum downtime (days), required
 Uptime for H - 223  setup time of H - 223
 4.2027 days (see the next slide)  0.8 hr/ 8 hr per day
 4.3027 days
H 652.8509
Maximum inventory lasts for (days)   240
 18,0001
 8.7047 days  4.3027 days (downtime demand met) 7
 Optional
Product H - 223 :
K  set - up time  worker time  0.8  85  $68
h  Ic  0.20  35  $7 /unit/year
 24,000
  0.4545
P 52,800
 
h'  h1    71  0.4545  $3.8182 /unit/year
 P
2 K 2  68  24,000
Q  EPQ 
*
  924.5848 units
h' 3.8182
* 
Max Inventory, H  Q 1    924.581  0.4545  504.32 units
 P
Q * 924.5848
Uptime, T1   240  4.2027 days
P 52,800
8
 Optional
Product H - 223 (continued from the previous slide) :
Minimum downtime (days), required
 Uptime for J - 55R  setup time of J - 55R
 10.0439 days  1.2 hr/ 8 hr per day  10.1939 days
Maximum inventory lasts for (days)
H 504.3190
  240
 24,000
 5.0432 days  10.1939 days
(downtime demand cannot be met)

Conclusion : If EPQ quantities are produced, demand for

Product H - 223 cannot be met when product J - 55R
is produced.
9
 Optional
J-55R H-223
Annual production rate (units/year) 33600 52800
Annual Demand rate (units/year) 18000 24000
Setup time (hour) 1.2 0.8
K, Setup cost, $
Unit cost, $ 20 35
h, Holding cost/unit/year
demand/production
h'

Separate EPQ solution

Q*
Maximum inventory
Uptime (days)
Minimum downtime (days)
Maximum inventory lasts for (days) 10
 Optional
J-55R H-223
Annual production rate (units/year) 33600 52800
Annual Demand rate (units/year) 18000 24000
Setup time (hour) 1.2 0.8
K, Setup cost, $ 102 68
Unit cost, $ 20 35
h, Holding cost/unit/year 4 7
demand/production 0.5357 0.4545
h' 1.8571 3.8182

Separate EPQ solution

Q* 1406.1404 924.5848
Maximum inventory 652.8509 504.3190
Uptime (days) 10.0439 4.2027
Minimum downtime (days) 4.3027 10.1939
Maximum inventory lasts for (days) 8.7047 5.0432
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 EOQ Model for Production Planning

• The previous example shows that if production

quantities of different products are computed
separately, then demand of every product may not be
met.
• Therefore, all the products must be considered at the
same time.
• To solve the integrated problem, first, the cycle time T
is computed. For each product j, the production
quantity Q j is the demand of the product during the
cycle time. If  j is the annual demand of product j
Q j   jT
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 EOQ Model for Production Planning

• Let T be the cycle time and Tj be the production time

of product j
Tj j
Q j   jT  PjT j  
T Pj
• Let sj be the setup time of product j and n be the
number of products

T  s1  T1  s2  T2    sn  Tn  Idle time

13
EOQ Model for Production Planning

T  s1  T1  s2  T2    sn  Tn  Idle time
s1 T1 s2 T2 sn Tn
       1
T T T T T T
n s n T n n 
1
    1   s j    1
j j j

j 1 T j 1 T T j 1 j 1 Pj
n

s
j 1
j

T  n j
1 
j 1 Pj 14
 EOQ Model for Production Planning

• Two rules for T*

n

s
n
j 2 K j
j 1
T *  Cycle1  T *  Cycle2 
j 1
n j n
1   h' j j
j 1 Pj j 1

• T* is the maximum of the two. T* = max (Cycle1, Cycle2)

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 Example
EOQ Model for Production Planning
Example 7: Tomlinson Furniture has a single lathe for turning
the wood for various furniture pieces including bedposts,
rounded table legs, and other items. Two products and
some relevant information appear below:
Annual Setup Time Unit Annual
Piece Demand (hours) Cost Production
J-55R 18,000 1.2 $20 33,600
H-223 24,000 0.8 35 52,800
Worker time for setup is valued at $85 per hour, and holding
costs are based on a 20 percent annual interest charge.
Assume 8 hours per day and 240 days per year. Find the
optimal production quantities. 16
 n 2

s  s
j 1
j
j 1
j  s1  s2 

n 2

K  K
j 1
j
j 1
j  K1  K 2 

n j 2 j 1 2
P P
j 1 j 1

P1

P2

j j

n 2

 h'
j 1
j  j   h' j  j
j 1

 h'1 1  h'2 2 

17
 n

s
j 1
j

Cycle1  
n j
1 
j 1 Pj

n
2 K j
j 1
Cycle2  n

 h'
j 1
j j

T *  max Cycle1, Cycle2  

18
Product J - 55R :
Q *  T * 
 
Max Inventory, H  Q*  1   
 P
Q*
Uptime, T1  
P
Downtime  T *  Uptime 
H
Maximum inventory lasts for (days)  


 downtime of J - 55R
 (uptime  setup time) of H - 223 (check)

19
Product H - 223 :
Q *  T * 
 
Max Inventory, H  Q*  1   
 P
Q*
Uptime, T1  
P
Downtime  T *  Uptime 
H
Maximum inventory lasts for (days)  


 downtime of H - 223
 (uptime  setup time) of J - 55R (check)

20
 J-55R H-223 Total
K, Setup cost, $ 102 68 170
h, Holding cost/unit/year 4 7
demand/production 0.5357 0.4545 0.9903
h' 1.8571 3.8182
h'(demand)

EOQ Model for Production Planning

Cycle1 in days
Cycle2 in days
Cycle time=max(cycle1, cycle2) in days
Q* = cycle time demand
Maximum inventory
Uptime (days)
Downtime (days)
Maximum inventory lasts for (days)
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 READING AND EXERCISES
Lesson 15

Reading:
Section 4.9 , pp. 226-229 (4th Ed.), pp. 215-220 (5th
Ed.)

Exercise:
29, 30 pp. 230-231(4th Ed.), pp. 219-220 (5th Ed.)

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