ISEN 315 Spring 2011 Dr. Gary Gaukler. EOQ Discussion 1. Demand is fixed at  units per unit time. 2. Shortages are not allowed. 3. Orders are received.

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Presentation transcript:

ISEN 315 Spring 2011 Dr. Gary Gaukler

EOQ Discussion 1. Demand is fixed at  units per unit time. 2. Shortages are not allowed. 3. Orders are received instantaneously. 4. Order quantity is fixed at Q per cycle. 5. Cost structure: a) Fixed and marginal order costs (K + cx) b) Holding cost at h per unit held per unit time.

When to Use EOQ

Number of occurrences Room svcCheck-inPool hoursMinibarMisc. 72%16%5%4%3% – 60 – 50 – 40 – 30 – 20 – 10 – 0 – Frequency (number) Causes and percent Cumulative percent Data for October Pareto Charts

Inventory Control Deterministic inventory control Stochastic inventory control MRP / Lot sizing / JIT Supply chain management

Demand Uncertainty We will model demand uncertainty by treating demand as a random variable

Newsvendor Model - Assumptions Assumptions: One short selling season No re-supply within selling season Single procurement at start of season Known costs, known demand distribution

Newsvendor Model – Continuous Demand

Newsvendor Example Selling a magazine with a one-week selling season Weekly demand ~N(11.73; 4.74) Purchase cost $0.25 Salvage value $0.1 Selling price $0.75 Underage cost: Overage cost: Critical ratio:

Determination of the Optimal Order Quantity for Newsvendor Example

Check in tables: Which z-value corresponds to F(z)=0.77? Look up: Table A4 in the Nahmias book: z=0.74 This is the standard normal z-value, hence need to scale it to our demand distribution: