MTH 4603

OPERATIONS RESEARCH

21/03/2007

Deterministic Inventory Models

Purpose:
To determine rules that management can use to minimize the costs
associated with maintaining inventory and meeting customer demand.
Basic questions:
1. When should an order be placed for a product ?
2. How large should each order be ?

Costs involved:
Ordering and setup cost
- Cost of paperwork and billing associated with an order
Unit purchasing cost
- Cost associated with purchasing and producing a single
unit.
Holding or carrying cost
- meyimpan, menyelia dan mengurus stok yang ada.
- Storage cost
- Insurance cost
- Taxes on inventory
- Cost due to the possibility of spoilage, theft, or
obsolescence
- Opportunity cost incurred by tying up capital in
inventory
Stockout or shortage cost
- Back-order customer willing to accept delivery at a
later date
MOHD RIZAM ABU BAKAR, UPM

MTH 4603

OPERATIONS RESEARCH

21/03/2007

- Customers go else where to meet current and future

demands
- Lost sales
- Lost goodwill
To minimized Total Cost,
Total Cost = Ordering and setup cost + Holding Cost + Shortage
Cost
Model Ketentuan (Deterministic Model)
Basic Economic Order Quantity (EOQ) Model
Assumptions of the Basic EOQ Model :
a - number of units demanded per unit time.
Lead time the length of time between the instant when an
order is placed and the instant at which the order arrives,
L=0 .
No out of stock. (Negative inventory policy is not allowed)

Q-at
Q

Q/2

Q/a

MOHD RIZAM ABU BAKAR, UPM

MTH 4603

OPERATIONS RESEARCH

21/03/2007

Setup cost associated with the placement of an order (RM per

order) = K
Any interval of time that begins with the arrival of an order and
ends the instant before the next order is received is called a
cycle.
Ordering Cost per order (cycle) for Q unit at RM c per unit
= K + cQ
Average Inventory Level = Q/2 units.
Holding cost (RM per inventory unit per unit time) = h
Inventory interval (Jangkamasa simpanan) = Q/a
Holding Cost/cycle = (average stock level) x (holding cost) x
(inventory interval)
Holding Cost/cycle = Q/2 X h X Q/a = (hQ2)/(2a)
Setup cost/cycle = K
Ordering cost/cycle = (K + cQ)
Total cost/cycle = (K + cQ) + (hQ2)/(2a)
Time per cycle = Q/a

MOHD RIZAM ABU BAKAR, UPM

MTH 4603

OPERATIONS RESEARCH

21/03/2007

Total Cost per unit time

hQ 2
K + cQ +
2a
T (Q) =
Q/a
aK hQ
T (Q) = ca +
+
2
Q

Thus, the optimum inventory policy for the model is to order

Q* =

2aK
h

units for every t0*=Q*/a time units.

Order Q* units per order.

Need to reorder in Q*/a time .
Total cost T(Q*).
Example
A printing company utilized 32 roles of paper per week. For each
re-order, the company need to pay for processing fees plus cost
of paper per roll. Let the processing fees for re-order = RM25.00
Storage cost = RM1.00/roll/week and price for a rool of paper is
RM20.
K = RM25.00
a = 32
h = RM1.00

MOHD RIZAM ABU BAKAR, UPM

MTH 4603

OPERATIONS RESEARCH

21/03/2007

Problems:
How many rolls need to be re-order ?
When to re-order ?
What is the minimum total cost ?
K setup cost
c cost per unit
h holding cost per item per time

Q* =

2aK
2(32)(25)
=
= 1600 = 40
h
1

Needs to re-order 40 rolls of paper.

40 / 32 = 1.25 1 week or 8.75 8 days

T (40) = 32(20) + 32(25) / 40 + 1(40) / 2 = 680 (RM680.00)

MOHD RIZAM ABU BAKAR, UPM

MTH 4603

OPERATIONS RESEARCH

21/03/2007

Model with shortage allowed.

Shortages occur.
Costs are incurred because of lost business, the cost of placing
special orders, loss of future goodwill and so on.

Q-at
Q
B
M

A
Q-M
L
Q/a

Assuming that s be the cost of shortage,

OA =

M
,
a

OB =

Q
,
a

AB =

(Q M )
a

M 2h
M M
Holding Cost/cycle :
h =
2
2a
a
Q M Q M
Shortage Cost/cycle :

2 a

MOHD RIZAM ABU BAKAR, UPM

(Q M ) s

=
s

2a

MTH 4603

OPERATIONS RESEARCH

21/03/2007

Order Cost/cycle : K + cQ

M 2h s (Q M )
+
K + cQ +
2
2a
a
T ( Q, M ) =
Q/a
Total cost,

aK M 2 h s ( Q M )
= ca +
+
+
Q
2Q
2Q

M 2 h 2 s ( Q M ) 2
T
2
Q
Q + s ( Q M ) Q 1
= aKQ
Q
2
2
2

s ( Q M ) 1
T
Q
= MhQ 1
2
M
Minimized when
1/ 2

2aK s
M =

h h + s
*

1/ 2

s
= EOQ

h+s

h+s
Q = EOQ
.
s
1/ 2

Example:
Each year, the Serdang Optometry Clinic sells 10,000 frames for
eyeglasses. The clinic orders frames from a regional supplier,
which charges RM15 per frame. Each order incurs an ordering
cost of RM50. Serdang Optometry believes that the demand for
frames can be backlogged and that the cost of being short one
frame for one year is RM15 (because of loss of future business).
MOHD RIZAM ABU BAKAR, UPM

MTH 4603

OPERATIONS RESEARCH

21/03/2007

The annual holding cost for inventory is RM0.30 per Ringgit value
of inventory. What is the optimal order quantity? What is the
maximum shortage that will occur? What is the maximum
inventory level that will occur?
Solution
a = 10,000 frames per year
h = 0.30 15 = 4.50
s = 15/frame/year
K = 50.00

h+s
Q = EOQ

1/ 2

= 537.48

1/ 2

2aK s
M =

h h + s
*

1/ 2

s
= EOQ

h+s

= 413.45

The maximum shortage occurring will be

Q* M * = 124.03 frames, and each order should be for 537 or 538
frames. A maximum inventory level of M * = 413.45 frames will
occur.

lingo shortage

MOHD RIZAM ABU BAKAR, UPM

MTH 4603

OPERATIONS RESEARCH

21/03/2007

(Multi-item EOQ with storage limitation)

i = 1,2,3,", n
ai = demand for item i

Assume we have

(types of item)

K i = fixed charge for item i

h i = holding cost per item per unit time
Qi = quantity re-order for item i
si = storage per unit item i
S = total capacity
Objektif
Minimumkan
n

T (Q1 , Q2 ,", Qn ) = ai ci +
i =1

ai K i hiQi
+
2
Qi

tertakluk kepada
n

siQi S

i =1

Langkah penyelesaian:
Langkah 1:
Selesaikan tanpa kekangan.
Langkah 2:
Jika selesaian langkah 1 tidak menyalahi kekangan, berhenti.
Selesai.

Langkah 3:

MOHD RIZAM ABU BAKAR, UPM

MTH 4603

OPERATIONS RESEARCH

21/03/2007

Jika selesaian lankah 1 menyalahi kekangan, selesaikan

menggunakan kaedah pendarab Lagrangean.
Contoh
Andaikan terdapat 3 jenis barangan yang perlu dipesan dan
disimpan dalam stor dengan kapasiti stor adalah terhad, iaitu S.

T (Q1 , Q2 , Q3 ) = T (Q1 ) + T (Q2 ) + T (Q3 )

Min

T (Q1 , Q2 , Q3 ) = T (Q1 ) + T (Q2 ) + T (Q3 )

s1Q1 + s2Q2 + s3Q3 = S

Tertakluk kepada

Kaedah Pendarab Lagrangean

Ingin menentukan,

, supaya

minimum:

L(Q1 , Q2 , Q3 , ) =
T (Q1 ) + T (Q2 ) + T (Q3 ) + ( s1Q1 + s2Q2 + s3Q3 S )

ai
Ki
hi
si

Item 1
32
25
1
4

Item 2
24
18
1.5
3

Item 3
20
20
2
2

Katakan S = 200.

MOHD RIZAM ABU BAKAR, UPM

10

MTH 4603

OPERATIONS RESEARCH

21/03/2007

Step 1: Solve without constraints.

Q1 =

(2)(25)(32)
= 40
1

Q2 =

(2)(18)(24)
= 24
1.5

Q3 =

(2)(20)(20)
= 20
2

Step 2:

4(40) + 3(24) + 2(20) = 272 > 200

violating the constraint.

Step 3:

L(Q1 , Q2 , Q3 , ) =
a1K1 h1Q1 a2 K 2 h2Q2 a3 K 3 h3Q3
+
+
+
+
+
Q1
Q2
Q3
2
2
2
+ ( s1Q1 + s2Q2 + s3Q3 S )

MOHD RIZAM ABU BAKAR, UPM

11

MTH 4603

OPERATIONS RESEARCH

21/03/2007

Partial derivatives

L
aK h
= 1 2 1 + 1 + s1
Q1
Q1
2
L
aK
h
= 2 2 2 + 2 + s2
Q2
Q2
2

aK h
L
= 3 2 3 + 3 + s3
Q3
Q3
2
L
= s1Q1 + s2Q2 + s3Q3 S

Q1 =

s1

160

2a1K1
2a2 K 2
; Q2 =
h1 + 2 s1
h2 + 2 s2

; Q3 =

2a3 K3
h3 + 2 s3

2a3 K3
2a1K1
2a2 K 2
+ s1
+ s3
S =0
h1 + 2 s1
h2 + 2 s2
h3 + 2 s3
1
1
1
+ 72
+ 40
200 = 0
1 + 8
1 + 4
1 + 2

click to solve excel multi

Q1 = 26.988 ; Q2 = 18.983

Q3 = 17.547

May used Newtons method (or any other optimization techniques)

MOHD RIZAM ABU BAKAR, UPM

12

MTH 4603

OPERATIONS RESEARCH

21/03/2007

Model EOQ dengan diskaun kuantiti

Consider

12.00
10.00

ci =
9.50
9.00
with

Q < 10

, 10 Q < 50
, 50 Q < 100
,

a = 32; K = 25;

Q 100

h =1

aK 40h
+
+ 10(32)
40
2
= 40 + 320 = 360

T (40) =

aK 50h
+
+ (9.50)(32)
50
2
= 41 + 304 = 345

T (50) =

aK 100h
+
+ (9.00)(32)
100
2
= 58 + 288 = 346

T (100) =

What will be our optimal policy ?

Consider

c ,Q q
, c1 > c2
c= 1
c
>
,
Q
q
2

MOHD RIZAM ABU BAKAR, UPM

13

MTH 4603

OPERATIONS RESEARCH

21/03/2007

aK hQ

=
+
+
T
Q
c
a
(
)
1
1
Q
2 , Qq

T (Q ) =
T (Q ) = c a + aK + hQ , Q > q
2
2
Q
2
T1

T2

Region
I

Where

Q0 =

Q0

Region
R
II

Region
III

2aK
h

R is the solution to T2 ( R) = T1 (Q0 )

0 < q < Q0 : Q* = Q0
Q0 < q < R : Q* = q
q > R : Q* = Q0

MOHD RIZAM ABU BAKAR, UPM

14

MTH 4603

OPERATIONS RESEARCH

21/03/2007

Model Pengeluaran-Permintaan Serentak

(The continuous rate EOQ model)
Assume that p as a production rate and a as a demand.

Q
pt

Tp = Q/p
It is necessary for ( p > a ). Why ???
Hence the continuous rate EOQ can be modeled as:

(p - a)t
w

p
w
- at
pa

w/a
w
Q
=
Tp =
( p a) p

MOHD RIZAM ABU BAKAR, UPM

Time, t
w p Q

=
a pa a

15

MTH 4603

OPERATIONS RESEARCH

21/03/2007

Holding cost:

w
Q Q 2 ( p a)h
h =
2
a
2p
Setup cost:

K + cQ
Then, total cost per unit time:

Q 2 ( p a)h Q
aK h ( p a ) Q
T (Q) = ( K + cQ ) +
/
ca
=
+
+

2
p
a
Q
2
p

aK h ( p a )
T (Q) = 2 +
2 p
Q
Hence the production should stops when

Q* =

p 2aK
=
EOQ

p a
h

pa

Example 1
Assume that the production rate for item A is 3 unit per day and
the demand is 2 unit per day. If the setup cost (service charge) is
RM100.00 and storage cost is RM0.03 per unit per day, what will
be your strategy for the optimum profit ?
1/ 2

3
Q =

3 2
*

2(2)(100)
= 200
0.03

MOHD RIZAM ABU BAKAR, UPM

16

MTH 4603

OPERATIONS RESEARCH

21/03/2007

We should produce 200 unit ( 67 days of production

process(Q/p)).
Start producing again after 34 days (Q/(p-a)).
Example 2
A factory needs to produce 10,000 car chassis per year. Each is
valued at RM2,000. The plant has the capacity to produce 25,000
car chassis per year. It costs RM200 to set up a production run,
and the annual holding cost is RM0.25, per ringgit of inventory.
Determine the optimal production run size. How many production
runs should be made each year?

K = RM200 per production run

a = 10,000 car chassis

p = 25,000 car chasis per year

h = 0.25(2,000) / chassis/year
= 500/chassis/year
1/ 2

2(200)(10,000)(25,000)
Optimal run size =

500(25,000 10,000)
= 115.47

10,000
= 86.60 production runs per year
115.47
Activities:
What happen if only p increases ?
What happen if only a increases ???
What will happen if p too different from a ???

MOHD RIZAM ABU BAKAR, UPM

17