Title: OM Diary Session 18 PGDM NO: 18104

Date: 18/12/18 Section: “B”

Name: Neha Premchandani

Summary: The session focused on topics related to Inventory management in which the sub topics were
Economic Production Quantity Model and Quantity Discount Model.

Economic Production Quantity Model (EPQ): It determines the quantity a company or retailer should
order to minimize the total inventory costs by balancing the inventory holding cost and the average fixed
inventory cost. This model was developed by E.W. Taft in 1918. It Is said to be the expansion of Economic
order quantity model.

Production Order Quantity Model: It is used when inventory builds up over a period after an order is
placed. It is used when units are produced and consumes or sold simultaneously.

Quantity Discount model: are price reductions for large orders offered to customers to induce them to buy
in large quantity. The buyer must weigh the potential benefits of reduced purchase price. Price per unit
minimise as order quantity increases. Two general cases in QDM: carrying cost is constant. The carrying
cost is a percentage of the purchase price.

EOQ when carrying cost is constant:

 compute the common minimum point by using the basic economic order quantity model.
 Only one of the unit prices will have the minimum points in its feasible range since the ranges do not
overlap.
 If the feasible minimum point is on the lowest price range, that is said to be optimal order quantity.
 Compare the total cost, the quantity that yields the lowest cost is the optimal order quantity.

Formulas:

EPQM: Q= sqrt(2*O*D/H(1-d/p)); set up cost= (D/Q*S)

HC= HQ/2*(1-d/p).

Where: Q= no. of pieces S= setup cost

P= daily production rate

D= daily demand

D= annual demand
Examples:

EPQ is an extension of EOQ.

Toyota: The traditional approach to EOQ is deeply integrated in their enterprise resource planning (ERP)
and Supply Chain Management programs. During the installation, these factors are chosen with expediency
in mind rather than the broader business implications. The numbers for set-up and inventory carrying costs
in their materials management systems are examined. Set-up is a variable and can be reduced through
process change. Because it is the numerator, a smaller set-up lowers the EOQ. EOQ drives the associated
work-in-process and stockroom inventory. Cutting EOQ has a corresponding reduction in the inventory.
Installation of EOQ will have a positive change in operational performance, the balance sheet, and
stockholder value.

DELL: First, it uses the company’s annual usage or annual consumption. This is the number of
consumables, raw materials or finished goods purchased by the company each year. Second, it uses the
company’s costs of purchasing as part of the overall equation. These costs include time spent on approvals
and purchase requisitions. Next, it accounts for the time spent placing the order, sending the order, receiving
the order, inspecting the order, placing the goods on the shelves, and finally, paying the vendor for the order.
Third, it relies upon the company’s specific costs of holding inventory. These costs include costs of
inventory damage, pilferage (theft), obsolescence, counting, storage and handling, financing (cost of
capital), insurance and incoming freight. These afore-mentioned costs vary in their impact depending upon
the company’s market, its customers purchasing patterns and the company’s market.

B BROWN MEDICAL INDIAN PVT. LTD.: The Economic Order Quantity (EOQ) is the number of units
that a organization should add to inventory with each Order to minimize the total Costs of inventory such as
holding Costs, Order Costs, and inventory Cost. In inventory management, economic Order quantity (EOQ)
is the Order quantity that minimizes the Order Quantity, Ordering Cost, Number of Orders, Total Annual
Cost, Carrying Cost, Order Size and Average Inventory. Simplicity and precautionary modelling
assumptions usually go together, and the EOQ model is not an exception. The purpose of this model is to
decide order quantity and reorder point. This research goes throughout the process of analyse the company’s
current forecasting model and recommends an inventory control model. Order Quantity and Reorder Point
was recommended to reduce product inventory.

COCA-COLA: Inventory is considered as a significant investment affecting the financial decisions of an

industry. This paper represents the conduction of ABC Analysis, determination and optimization of total
variable inventory costs for the raw material inventory of an Orthoses manufacturing company through the
implementation of basic Economic Order Quantity (EOQ) model. The different costs associated with the
raw material inventory, that is, ordering costs and holding costs, have also been calculated for fifteen major
raw material items of the manufacturing firm. The total variable inventory costs determined by
implementation of basic EOQ model have been compared with the existing costs and a net saving of 13.65%
have been found in the total variable inventory costs.

References: https://www.jstor.org/stable/2583790?seq=1#page_scan_tab_contents

https://www.iiste.org/Journals/index.php/EJBM/article/viewFile/18699/18855

https://www.inc.com/encyclopedia/economic-order-quantity-eoq.html
Problems:

1.A local distributor for a national tire company expects to sell approximately 9600 steel-belted radical tires
of a certain size and tread design next year. Annual carrying cost is $16 per tire, and ordering cost is $75 per
order. The distributor operates 288 days a year.1. What is the EOQ?

Q= sqrt(2*O*D/H(1-d/p)); set up cost= (D/Q*S)

2(9600)75/16 = 300

2. How many times per year would the store reorder if the ECQ is

ordered?

D/Q∗ = 9600/300 = 32

2. Given:

Annual demand = 15,000, Setup cost = $500 per production run, Holding cost = $50 per item per year,
Number of working days per year = 240, Annual production rate = 25,000. What is the EPQ? What is TC at
EPQ.
Solution: EPQ= sqrt (2*15000*500/50(1-15000/25000) = 866

Total cost at EPQ= 2*(D/EPQ*S)

=2*(15000/866*500) = 17320

3. Given: annual demand = 100 units, Ordering cost = $45 per order, Holding cost per year = 20% of item
cost, Quantity discounts: 50 0r less: 18, 51 to 59: 60 or more: 12.

Solution: The lowest cost per item is $12 if ordered 60 units or more. EOQ= sqrt(2DS/H); =sqrt
(2*100*45/0.2*12) = 62 units. TC EOQ: (D/EOQ+EOQ/2*H+PD); 100/62*45+62/2*0.2+12+12*100;

=7.53+7.53+1200=1347. Order at 62 units at a time is the recommended policy.

4. What skills do you gain from EPQ?

Solution: It helps in developing and making decision making skills, problem solving skills, extend their
planning, critical thinking, evaluation and presentation skills, use their learning experience to support their
personal aspirations for higher education and career development.

5. What are the advantages of using EPQ model in inventory management?

Solution: It helps in maintaining enough inventory levels so that it can match customers demand can be a
balancing act for many small businesses, it helps in specifying numbers to the business how much inventory
to hold when to order or re-order and how much to do so.

6. What are the assumptions for EOQ model?

Cost of ordering remain constant, the lead time is not fluctuating, the demand rate for the year is known and
evenly spread throughout the year, the optimal plan is calculated for only one product, no cash or settlement
discounts are available, and the purchase price is constant for every item, there is no delay in stock update.
INDIAN CASE: B. Brown Medical Indian Pvt.Ltd.

In the respective company the optimal inventory control is done by the help of EOQ and EPQ. This
company manufactures IV sets and sutures, right heart catheters, and chip products. The Economic Order
Quantity (EOQ) is the number of units that a organization should add to inventory with each Order to
minimize the total Costs of inventory such as holding Costs, Order Costs, and inventory Cost. In inventory
management, economic Order quantity (EOQ) is the Order quantity that minimizes the Order Quantity,
Ordering Cost, Number of Orders, Total Annual Cost, Carrying Cost, Order Size and Average Inventory.
Simplicity and precautionary modelling assumptions usually go together, and the EOQ model is not an
exception. The purpose of this model is to decide order quantity and reorder point. This research goes
throughout the process of analyse the company’s current forecasting model and recommends an inventory
control model. Order Quantity and Reorder Point was recommended to reduce product inventory. With the
help of EOQ they preferred to analyse the single product inventory in which the cyclic view of inventory
control, where unsystematic demand may be satisfied. ITEMS: Billets/Blooms Qty (Mt) 1,06,066, Ordering
Cost per Order Rs 2,400, Carrying Cost 10%, Purchase price per unit Rs 440

Calculation of EOQ

Total units required (A) =106066mt

The Ordering Cost per Order (OC) = Rs.2400

Carrying Cost per unit (Cc) = 10%

(i.e.) 10% of Rs.2000 =Rs.44

EOQ =√2AOc/Cc

=2 *106066* 2400/44

=Rs.3401.59

Number of Orders for the year = A/EOQ

=106066/3401.59

=31.18~32Orders

Results indicate that the Inventory Cost for the year 2016 has been reduced up to 5.83 % and the Ordering
Cost has been reduced up to 0.91%. Similarly, it has been found that the Number of Order for the year 2016
has been reduced up to 6.25% and the Total Annual Cost has also been decreased up to 3.01%. The Carrying
Cost has been reduced up to 15.57. The Order Size has been reduced up to 2.56% and the Average Inventory
has been reduced up to 8.63%.

References:
file:///C:/Users/Neha%20Premchandani/Downloads/ANALYSIS_OF_INVENTORY_MANAGEMENT_IN
_A_SU.pdf

Feedback: The topic which you talked about in the class was informative and will help us understand the
different models in inventory model more easily. This topic of inventory management is helpful to
understand the real-life scenarios happening in companies because every company is dealing with inventory.