EOQ MODEL FOR PLANNED SHORTAGES BY USING EQUIVALENT HOLDING AND SHORTAGE COST

Abstract

In this manuscript, we propose the concept of Equivalent of Holding and shortage cost (EHSC). The EHSC is the effective holding cost due to holding the items in stock and also the cost of shortage when items are not in stock (back-ordered or planned shortages). We demonstrate Economic Order Quantity with Backordering (EOQB) model simplifies to the level of Economic Order Quantity (EOQ) model (in terms of formulae and difficulty-level) by use of new “Factor for Back-ordering” or “Factor for Planned Shortages”. We derive that the product of factor for backordering and holding cost is the Equivalent Holding and shortage cost for EOQB model. This factor magically simplifies EOQB model.