A Variant Deterministic Model of Classical EOQ Formula

Abstract

Inventory management and transportation have been the principal areas of focus in industrial engineering and management for a long time. Inventory management attracts considerable attention in logistics and supply chain management today because new supply chain models have become more integrative and complex. New market forces have introduced many complex elements which affect the performance of the supply chain in general and inventory level in particular. Inventory decisions are high risk and high impact for supply chain management. Hence, this paper compiles all the derivations of classical deterministic lot size economic order quantity models and proposes a new method to verify the formula. Keyword: Inventory Management, Supply Chain Management (SCM), Economic Order Quantity (EOQ) I. INTRODUCTION At the very basic level any firm faces two main decisions concerning the management of inventory: When should new stock be ordered and in what quantities? With regard to the order quantity, that minimizes inventory related costs. The classical EOQ (economic order quantity) model remains the basic inventory model even when it is not applicable in real life business situations in most cases. In inventory related literature, the answer to the question of when to order is given with reference to the ROP (reorder point), and the point at which the replenishment order should be initiated so that the facility receives the inventory in time to maintain its target level of service. In the static and deterministic model, the ROP is the simple multiplication of the number of lead days and the daily demand. It means that every time the inventory falls to the ROP level, an order must be initiated. And the order quantity is given by the EOQ model which is based on cost minimization. Figure-1:~ A simple inventory model based on fixed demand and fixed lead time (1). The EOQ is the balance between order and holding costs attached with the inventory. The order cost is made up of fixed and variable costs, whereas the holding cost consist of costs of maintenance. The formula is: Q = √ (2CoD/Cc) Q is the order quantity per order, D is the demand per year Co is the fixed cost which the warehouse incurs every time it places an order Cc is the inventory carrying or holding cost per unit per year, and Notice that it highlights two important insights regarding the EOQ model. These are: 1. Optimum order size is a balance between the holding cost and the fixed order cost. 2. Total inventory cost is related with order size, but the relationship is not significant.