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INVENTORY MODELS
Inventory models are the different technical methods used to determine order quantity which minimizes the total costs (i.e. ordering cost + inventory carrying cost)
Deterministic
probabilistic
Production model
Consumption rate
Average inventory
QUANTITY
TIME
2 D Co Ch
5) Optimum no. of orders (N*) = D/Q* 6) Time interval between = no. of working days in a year two orders N*
PRODUCTION MODEL
Max. inventory level STOCK LEVEL (QUANTITY)
If the item is produced within the company itself. Its batch size is decided by production model.
Assumptions in this model are:1) Uniform demand rate. 2) Gradual replenishment. 3) Set up cost is fixed and it does not change with lot size.
tp T
tc
Time
PRODUCTION MODEL
Notations:D = annual demand (units/year) Co= ordering cost (units/annum) Ch =inventory carrying cost Cp = price per unit Q = Order quantity Q* = Economic order quantity N = No. order placed per annum Tc = Total cost per annum P= production rate d=consumption rate T= Cycle time P-d = inventory build up rate tp= production period
Max. inventory at the end of production run = (p-d) tp Quantity produced during production period (Q) = p tp Average inventory = (p-d) tp = Q 2 2 Annual inventory carrying cost = Q 2 1- d p 1- d p Ch
2D Co (1-d/p) Ch
2 D Co Ch (1-d/p)
Assumptions in this model are: Uniform demand rate. Instantaneous replenishment. Shortages are allowed. Quantity discounts are not allowed.
QUANTITY
t2
Q-S t1
TIME
Q* =
2 D Co (Cs+Ch) Ch Cs
S* =
2 D Co Cs Ch (Cs+Ch)
Q*- S* = Q* 1 Cs (Ch+Cs)
Tcm =
2 D Co Ch
Cs Ch+ Cs