Inventory Management III

EOQ Notes & Some Extensions

Lecture 6
ESD.260 Fall 2003

Caplice
 Assumptions: Basic EOQ Model
Demand Discounts
„ Constant vs Variable „ None
„ Known vs Random „ All Units or Incremental
„ Continuous vs Discrete Excess Demand
Lead time „ None
„ Instantaneous „ All orders are backordered
„ Constant or Variable „ Lost orders
(deterministic/stochastic)
„ Substitution
Dependence of items
Perishability
„ Independent
„ None
„ Correlated
„ Uniform with time
„ Indentured
Planning Horizon
Review Time
„ Single Period
„ Continuous vs Periodic
„ Finite Period
Number of Echelons „ Infinite
One vs Many
Number of Items
„

Capacity / Resources „ One

„ Unlimited vs Limited „ Many

MIT Center for Transportation & Logistics – ESD.260 2 © Chris Caplice, MIT
 Managing Multiple Locations
n
; di =
D = ∑ di D
i=1
n

* 2 DC o * 2 d i Co
Q = ; q = i
Ch C p Ch C p

∑ i=
q
i=1
*
nQ *

MIT Center for Transportation & Logistics – ESD.260 3 © Chris Caplice, MIT
 Managing Multiple Locations

∑ TC[ q
* *
i ] = nTC[ Q ]
i=1

∑q *
TC *[M ]
i M
=
i= 1
=
N
N

∑q TC *[ N ]
i
*

i=1

MIT Center for Transportation & Logistics – ESD.260 4 © Chris Caplice, MIT
 Managing Multiple Locations

Policy EOQ
Locations 1 N
Lot Size Q q
Avg Inv Q/2 √N[Q/2]
Order Cost OQ1 √N[OQ1]
Holding Cost HQ1 √N[HQ1]
Total Cost OQ1+HQ1 √N[OQ1+HQ1]

MIT Center for Transportation & Logistics – ESD.260 5 © Chris Caplice, MIT
 Managing Multiple Locations

Policy Fixed Order Size Days of Supply

Locations 1 N 1 N
Lot Size T T M m
Avg Inv T/2 N[T/2] M/2 M/2
Order Cost OT1 OT1 OM1 NOM1
Holding Cost HT1 NHT1 HM1 HM1
Total Cost OT1+HT1 OT1+NHT1 OM1+HM1 NOM1+HM1

MIT Center for Transportation & Logistics – ESD.260 6 © Chris Caplice, MIT
 Inventory Turnover
Median Turns per Year

25.00X

20.00X

15.00X Plant Inventory

Field Inventory
10.00X 3rd Party Whse

5.00X

0.00X
1994 1996 1998 2000
Year

Source: OSU Survey of Career Patterns in Logistics

MIT Center for Transportation & Logistics – ESD.260 7 © Chris Caplice, MIT
 Managing Inventory Turn Rates

2D
Turnover = TO =
Q
2D 2 DCh C p
TO* = =
Q* Co
N
2∑ Di C p[i ]
TO *SYSTEM = i =1
N

∑Q C
i =1
*
i p[ i ]

MIT Center for Transportation & Logistics – ESD.260 8 © Chris Caplice, MIT
 Managing Multiple Items

2 D[i ,l ] C o
Q W [ i ,l ]
=
C h C p[ i ]

Q W [ i ,l ] 2C o
=
D D[ i ,l ] C h C p[i ]

MIT Center for Transportation & Logistics – ESD.260 9 © Chris Caplice, MIT