MANAGEMENT SCIENDE
SECOND YEAR – SECOND SEM | A.Y. 2023-2024
Where:
LESSON 4: INVENTORY MODEL TCC – Total Carrying Cost
INVENTORIES AI – Average Inventory
CC – Carrying Cost per Unit
“Inventory is money sitting around in another form.”
- Rhonda Adams, USA Today Average Inventory Level Formula
Inventories – are goods intended for sale. They are EOQ
purchased from suppliers and sold to customers. AI =
2
Economic Order Quantity Model Total Ordering Cost Formula
- developed by F. W. Harris in 1915
- is a deterministic inventory model, which is applicable TOC = (D ÷ EOQ) (OC)
when there is a constant rate of demand for a product.
How much goods should be ordered? Where:
When should an order be made? TOC – Total Ordering Cost
D – Annual Demand
Assumptions of EOQ Model EOQ – Economic Order Quantity
OC – Ordering Cost per Unit
The demand is considered normal and constant.
The ordering cost, carrying cost, and purchase price REORDER POINT
are constant and not dependent to the quantity
ordered. When to place an order?
Shortages do not exist. - Determine the reorder point.
The lead time is constant.
The order quantity is the same for each other. Reorder point – is a point in the inventory level
that requires placing an order.
Ordering Cost – It is the cost when placing an order for a
product. Factors in Determining the Reorder Point
Carrying Cost – it is the cost associated with maintaining Lead Time – the time required between placing of
an inventory. an order and its receipt by a business.
Lead Time Usage – the number of units demanded
EOQ Formula or consumed during the lead time period.
Safety stock – the amount of inventory maintained
2 x D x OC to reduce the risk of stockout.
EOQ¿ √
CC Reorder Point Formula
Where:
EOQ - Economic Order Quantity ROP =ALTU + SS
D – Annual Demand
OC - Ordering Cost per Unit
Where:
CC – Carrying Cost per Unit
ROP – reorder point
ALTU – average lead time usage
Total Inventory Cost
SS – safety stock
TAIC = TOC + TCC
Where: Average Lead Time Usage Formula
TAIC – Total Annual Inventory End
TOC – Total Ordering Cost
TCC – Total Carrying Cost ALTU = LT x (AU/UT)
Where:
Total Carrying Cost
ALTU – average lead time usage
LT – lead time
TCC = AI x CC AU/UT – average usage per unit of time
Average Usage per Unit of Time Formula
MANAGEMENT SCIENDE
SECOND YEAR – SECOND SEM | A.Y. 2023-2024
D
AU/UT =
WD/Y
Where:
AU/UT – average usage per unit of time
D – annual demand
WD/Y – working days per year
Cycle Time Formula
WD
x EOQ
CT = Y
D
Where:
CT – cycle time
WD/Y – working days per year
EOQ – economic order quantity
D – annual demand
Total Number of Orders placed in a Year
D
TNO/Y =
EOQ
Where:
TNO/Y – total number of orders placed in a year
D – annual demand
EOQ – economic order quantity
