Production Planning & Control

Order Quantities - Examples

Outline:
I. Basic Inventory Planning Questions
II. Inventory Models
III. EOQ Model
IV. EOQ Model Example
V. Production Order Quantity Model
VI. POQ Model Example
VII. Fixed Period Model
VIII. Quantity Discount Model
IX. Probabilistic Models and Safety Stock.
Tugas baca untuk Rabu, 18 Maret 2020
Session-6
Rabu, 18 Mar 2020
PPC/Session-6/yad/18 Mar 2020
I. Basic Inventory Planning Questions

How much to order?

Purchase Order
Description Qty.
Microwave 1000
• How much to order?
• When to order? Purchase Order
Description Qty.
Microwave 1000
 II. Inventory Model

Help answer the

We need Inventory Models: inventory planning
questions!
1. Economic order quantity
2. Production order quantity
3. Quantity discount
4. Probabilistic model
 Why Carrying Cost Increases?

More units must be stored if more

ordered

Purchase Order Purchase Order

Description Qty. Description Qty.
Microwave 1 Microwave 1000
Order Order
quantity quantity
 Why Order Cost Decreases?

Cost is spread over more units

Example: You need 1000 microwave ovens

1 Order (Postage $ 0.32) 1000 Orders (Postage $320)

Purchase Order PurchaseOrder
Purchase Order
PurchaseOrder
Order
Description
Purchase Qty.
Description Qty. Description Qty.
Microwave 1000 Description
Microwave
Description Qty.1
Qty.
Microwave 11
Microwave
Microwave 1
Order quantity
 III. EOQ Model

Annual Cost 1. How much to order?

Order Quantity
 EOQ Model

Annual Cost 1. How much to order?

Carrying Cost

Order Quantity
 EOQ Model

Annual Cost 1. How much to order?

Carrying Cost

Order (Setup) Cost

Order Quantity
 EOQ Model

Annual Cost 1. How much to order?

Total Cost Curve

Carrying Cost

Order (Setup) Cost

Order Quantity
 EOQ Model

Annual Cost 1. How much to order?

Total Cost Curve

Carrying Cost

Order (Setup) Cost

Optimal Order Quantity

Order Quantity (Q*)
 EOQ Model: When to Order?

2. When to order?
Inventory Level

Time
 EOQ Model

Inventory Level 2. When to order?

Optimal
Order
Quantity
(Q*)

Time
 EOQ Model

2. When to order?
Inventory Level
Optimal
Order Decrease due to
Quantity constant demand
(Q*)

Time
 EOQ Model

2. When to order?
Inventory Level
Optimal Instantaneous
Order receipt of optimal
Quantity order quantity
(Q*)

Time
 EOQ Model

2. When to order?
Inventory Level
Optimal
Order
Quantity
(Q*)

Time
 EOQ Model

2. When to order?
Inventory Level
Optimal
Order
Quantity
(Q*)

Time
 EOQ Model

2. When to order?
Inventory Level
Optimal
Order
Quantity
(Q*)

Time
 EOQ Model

2. When to order?
Inventory Level
Optimal
Order
Quantity
(Q*)

Time
 EOQ Model

2. When to order?
Inventory Level
Optimal
Order
Quantity
(Q*)

Time
 EOQ Model

2. When to order?
Inventory Level
Optimal
Order
Quantity
(Q*)

Time
Lead Time
 EOQ Model

Inventory Level 2. When to order?

Optimal
Order
Quantity
(Q*)

Reorder
Point
(ROP)
Time
Lead Time
 EOQ Model

2. When to order?
Inventory Level
Optimal
Order Average
Quantity Inventory (Q*/2)
(Q*)

Reorder
Point
(ROP)
Time
Lead Time
 IV. EOQ Model Example

Problem 1:
When the inventory of microwaves gets
down to 15 units (reorder point), order
35 units (EOQ).
Purchase Order
Description Qty.
15 Microwave 35
left
 EOQ Model Equation

2XAXS
Q* = Optimal Order Quantity
iXc

A
d= Demand per day
Working Da ys/ Year

ROP = d  L Reorder Point

A = Demand per year
L = Lead time in days
Problem 2:
You’re a buyer for Wal-Mart.
Wal-Mart needs 1000 coffee
makers per year. The cost of
each coffee maker is $78.
Ordering cost is $100 per order.
Carrying cost is 40% of per unit
cost. Lead time is 5 days. Wal-
Mart is open 365 days/yr. What
is the optimal order quantity &
ROP?
A = 1,000 unit
S = $ 100 per order
c = $ 78 per unit
i = 0.40
L = 5 days
Working days/year = 365 days

Question:
a. EOQ = ?
b. ROP = ?
 EOQ Solution*

2XAXS 2X1000X100
Q* = = = 80 units
iXc .40 (78)

A 1000
d= = = 2.74 units / day
Working Da ys/ Year 365

ROP = d  L = 2.74 X 5 = 13.7 units

 V. Production Order Quantity Model

1. Answers how much to order & when to order

2. Allows partial receipt of material (other EOQ
assumptions apply)
3. Suited for production environment
• Material produced, used immediately
• Provides production lot size
4. Lower carrying cost than EOQ model.
 POQ Model: Inventory Levels

Inventory Level

Time
 POQ Model: Inventory Levels

Inventory Level

Time
Supply
Begins
 POQ Model: Inventory Levels

Inventory Level

Supply Time
Supply Ends
Begins
 POQ Model: Inventory Levels

Inventory Level
Condition 1: Inventory level with NO
demand during supply of optimum order
quantity

Supply Time
Supply Ends
Begins
 POQ Model: Inventory Levels

Inventory Level
Condition 1: Inventory level with NO
demand during supply of optimum order
quantity

Q*

Supply Q* is optimum Time

Supply Ends
Begins order qty
 POQ Model: Inventory Levels

Inventory Level

Q* Condition 2: Inventory level with CONSTANT

demand during supply of optimum order quantity

Supply Q* is optimum Time

Supply Ends
Begins order qty
 POQ Model: Inventory Levels

Inventory Level

Q* Quantity used before becoming inventory

Supply Time
Supply
Ends
Begins
 POQ Model: Inventory Levels

Inventory Level

Decrease due to no supply

& constant demand

Supply Time
Supply Ends
Begins
 POQ Model: Inventory Levels

Inventory Level

Production portion
of cycle

Demand portion of cycle

with no supply

Supply Time
Supply Ends
Begins
 POQ Model: Inventory Levels

Inventory Level
Next Cycle

Time
 POQ Model: Inventory Levels

Inventory Level
Next Cycle

Supply Time
Begins
 POQ Model: Inventory Levels

Inventory Level

Time
Supply Supply
Begins Ends
 POQ Model: Inventory Levels

Inventory Level

Supply Supply Time

Begins Ends
 POQ Model: Inventory Levels

Inventory Level

Max. Inventory
Q*·(1- d/p)

Time
 POQ Model Equations

Optimal Order Quantity = Qp* = 2xAxS

H x (1- d/p)

d
Max. Inventory Level = Q x 1 -
p
A = Demand per year
A x
Order Cost = S S = Order cost
Q H = Carrying cost (i X c)
Carrying Cost = d = Demand per day
p = Production per day
Q 1 - (d/p) H
 VI. POQ Model Example

You’re a production planner

for Stanley Tools. Stanley
Tools makes 30,000 screw
drivers per year. Demand is
100 screw drivers per day &
production is 300 per day.
Production setup cost is $150
per order. Carrying cost is
$1.50 per screw driver. What
is the optimal lot size? Max.
Inv. Level?
 Production Order Quantity Model Solution*

2A S 2  30000  150

Qp * = = = 3000
d 100
H  1- 1.5  1 -
p 300
100
Max. Inventory Level = 3000  1 - = 2000
300
A = Demand Per Year = 30000 unit
S = Order Cost = $ 150 per order
H = Carrying Cost = $ 1,5 per unit
d = Demand Per Day = 100 unit
p = Production Per Day = 300 unit
 VII. Fixed Period Model
Answers how much to order
Orders placed at fixed intervals
Inventory brought up to target amount
Amount ordered varies
No continuous inventory count
Possibility of stockout between intervals
Useful when vendors visit routinely
Example: P&G representative calls every 2
weeks
 Inventory Level in a Fixed Period System

Various amounts (Qi) are ordered at regular time intervals (p)

based on the quantity necessary to bring inventory up to
target maximum

Target maximum

Q1 Q2 Q4
On-Hand Inventory

Q3

p p p

Time
p = time interval (fixed period system)
VIII. Quantity Discount Model

Answers how much to order &

when to order
Allows quantity discounts
Reduced price when item is purchased
in larger quantities
Other EOQ assumptions apply
Trade-off is between lower price &
increased holding cost
 Quantity Discount Models

• Reduced prices are often available when

larger quantities are purchased
• Trade-off is between reduced product cost
and increased holding cost

Total cost = Setup cost + Holding cost + Product cost

A QH
TC = S+ + cA
Q 2
 Quantity Discount Model:
How Much to Order?

Total Cost

Order
Quantity
 Quantity Discount Model:
How Much to Order?

Total Cost
Price 1

Discount Order
Quantity 1 Quantity
 Quantity Discount Model:
How Much to Order?

Total Cost
Price 1 Price 2

Discount Discount Order

Quantity 1 Quantity 2 Quantity
 Quantity Discount Model:
How Much to Order?

Total Cost
Price 1 Price 2 Price 3

Discount Discount Order

Quantity 1 Quantity 2 Quantity
 Quantity Discount Model:
How Much to Order?

Total Cost TC for

Price 1 Price 2 Price 3 Discount 1

Discount Discount Order

Quantity 1 Quantity 2 Quantity
 Quantity Discount Model:
How Much to Order?

Total Cost TC for

Price 1 Price 2 Price 3 Discount 1

Q* Discount Discount Order

Quantity 1 Quantity 2 Quantity
 Quantity Discount Model:
How Much to Order?

Total Cost TC for

Price 1 Price 2 Price 3 Discount 1

Outside
discount
range

Q* Discount Discount Order

Quantity 1 Quantity 2 Quantity
 Quantity Discount Model:
How Much to Order?

Total Cost TC for

Price 1 Price 2 Price 3 Discount 1
TC for
Discount 2

Discount Discount Order

Quantity 1 Quantity 2 Quantity
 Quantity Discount Model:
How Much to Order?

Total Cost TC for

Price 1 Price 2 Price 3 Discount 1
TC for
Discount 2

Q* Disc Discount Order

Qty 1 Quantity 2 Quantity
 Quantity Discount Model:
How Much to Order?

Total Cost TC for

Price 1 Price 2 Price 3 Discount 1
TC for
Discount 2

Outside
discount
range

Outside Q* Disc Discount Order

discount range Qty 1 Quantity 2 Quantity
 Quantity Discount Model:
How Much to Order?

Total Cost TC for

Price 1 Price 2 Price 3 Discount 1
TC for
Discount 2

Q* Disc Discount Order

Qty 1 Quantity 2 Quantity
adjusted
 Quantity Discount Model:
How Much to Order?

Total Cost TC for

Price 1 Price 2 Price 3 Discount 1
TC for
Discount 2
TC for
Discount 3

Discount Discount Order

Quantity 1 Quantity 2 Quantity
 Quantity Discount Model:
How Much to Order?

Total Cost TC for

Price 1 Price 2 Price 3 Discount 1
TC for
Discount 2
TC for
Discount 3

Discount Q* Discount Order

Quantity 1 Quantity 2 Quantity
 Quantity Discount Model:
How Much to Order?

Total Cost TC for

Price 1 Price 2 Price 3 Discount 1
TC for
Discount 2
TC for
Discount 3

Outside Disc Q* Discount Order

discount range Qty 1 Quantity 2 Quantity
 Quantity Discount Model:
How Much to Order?

Total Cost TC for

Price 1 Price 2 Price 3 Discount 1
TC for
Discount 2
TC for
Discount 3

X
Discount Q* Disc Order
Quantity 1 adjusted Qty 2 Quantity
 Quantity Discount Model:
How Much to Order?

Total Cost TC for

Price 1 Price 2 Price 3 Discount 1
TC for
Discount 2
TC for
Discount 3
Quantity
Ordered

Lowest cost not Discount Discount Order

in discount range Quantity 1 Quantity 2 Quantity
 Quantity Discount Model Steps

Compute EOQ for each quantity

discount price
Is computed EOQ in discount range?
If not, use the lowest cost quantity in
discount range
Compute total cost for EOQ or lowest
cost quantity in discount range
Select quantity with lowest total cost
 Contoh: Quantity Discount Schedule

Discount Discount Discount Discount

Number Quantity (%) Price (P)
1 0 to 999 No $5.00
discount
2 1,000 to 1,999 4 $4.80
3 2,000 and over 5 $4.75
 Quantity Discount Models

Steps in analyzing a quantity discount

1. For each discount, calculate Q*
2. If Q* for a discount doesn’t qualify,
choose the smallest possible order size
to get the discount
3. Compute the total cost for each Q* or
adjusted value from Step 2
4. Select the Q* that gives the lowest total
cost
Given:
A = 5000 unit/year
S= $49/order
i = 20%/year
Quantity Discount Example

Calculate Q* for every discount 2AS

Q* =
ic
2(5,000)(49)
Q1* = = 700 cars order
(.2)(5.00)

2(5,000)(49)
Q2* = = 714 cars order
(.2)(4.80) 1,000 — adjusted
2(5,000)(49)
Q3* = = 718 cars order
(.2)(4.75) 2,000 — adjusted
Quantity Discount – How Much to Order
Given:
A = 5000 unit/year
S= $49/order Quantity Discount Example
i = 20%/year

Annual Annual Annual

Discount Unit Order Product Ordering Holding
Number Price Quantity Cost Cost Cost Total
1 $5.00 700 $25,000 $350 $350 $25,700

2 $4.80 1,000 $24,000 $245 $480 $24,725

3 $4.75 2,000 $23.750 $122.50 $950 $24,822.50

Table 12.3

Choose the price and quantity that gives

the lowest total cost
Buy 1,000 units at $4.80 per unit
 IX. Probabilistic Models and
Safety Stock

• Answer how much and when to order

• Used when demand is not constant or
certain
• Use safety stock to achieve a desired
service level and avoid stockouts

ROP = (d x L) + ss
Annual stockout costs = the sum of the units short
x the probability x the stockout cost/unit
x the number of orders per year
Contoh Safety Stock
Given:
ROP = 50 units (d*L) Stockout cost = $40 per frame
Orders per year = 6 Carrying cost = $5 per frame per year

Number of Units Probability

30 .2
40 .2
ROP=50 zero
ROP → 50 .3 safety
stock
60 .2
70 .1 SS
1.0
Berapa besar safety stock yang diperlukan di tangan?

Note:
Start with zero safety stock. For this safety stock, a shortage of 10 frames will
occur if demand is 60, and a shortage of 20 frames will occur if the demand is 70.
Safety Stock Example
Given:
ROP = 50 units Stockout cost = $40 per frame
Orders per year = 6 Carrying cost = $5 per frame per year

Hitung Total Cost untuk alternatif-alternatif dimulai “zero safety stock”, sehingga terjadi
shortage 10 frames pada demand 60, dan shortage 20 frames pada demand 70.

Solution:
This table summarizes the total cost for each of the three alternatives:

Safety Additional Total

Stock Holding Cost Stockout Cost Cost

20 (20)($5) = $100 $0 $100

10 (10)($5) = $50 (10)(.1)($40)(6) = $240 $290

0 $0 (10)(.2)($40)(6) + (20)(.1)($40)(6) = $960 $960

Conclusion: A safety stock of 20 frames gives the lowest total cost

Jadi ROP menjadi, ROP = 50 + 20 = 70 frames
Probabilistic Demand
Bila, kita kesulitan menentukan cost dari out of stock, maka dapat
dilakukan kebijakan untuk menjaga safety stock di tangan untuk memenuhi
customer service level. Diketahui mean demand 350 kits, dan standar
deviasi 10 kit. Pada soal ini ditetapkan kebijakan terjadinya stock out 5%.

Minimum demand during lead time

Inventory level

Maximum demand during lead time

Mean demand during lead time

ROP = 350 + safety stock of 16.5 = 366.5
ROP →
Normal distribution probability of
demand during lead time
Expected demand during lead time (350 kits)

Safety stock 16.5 units

0 Lead
time Time
Place Receive
order order
Probabilistic Demand

Probability of Risk of a stockout

no stockout (5% of area of
95% of the time normal curve)

Mean ROP = ? kits Quantity

demand
350
Safety
stock
0 z
Number of
standard deviations
Probabilistic Demand

Use prescribed service levels to set safety

stock when the cost of stockouts cannot be
determined

ROP = demand during lead time + Zsdlt

where Z = number of standard deviations

sdlt = standard deviation of demand
during lead time
 Probabilistic Example

Given:
Average demand = m = 350 kits
Standard deviation of demand during lead time = sdlt = 10 kits
5% stockout policy (service level = 95%)
ROP = ?

Solution:
• For an area under the normal curve of 95%, the Z = 1.65

• Safety stock = Zsdlt = 1.65(10) = 16.5 kits

Reorder point = expected demand during lead time
+ safety stock
= 350 kits + 16.5 kits of safety stock
= 366.5 or 367 kits
Thank you