 1. PURCHASE COST.  2. CAPITAL COST.  3. ORDERING COST.  4. INVENTORY CARRING COST.  5. SHORTAGE COST.

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 1. PURCHASE COST.  2. CAPITAL COST.  3. ORDERING COST.  4. INVENTORY CARRING COST.  5. SHORTAGE COST.

 1. Demand : Number of items required per unit time.  2. Order Cycle : The time period b/w two successive order.  3. Lead Time : The time gap b/w placing a order & received the item.  4. Safety stock : This is the buffer stock for overcome uncertainties.  5. Re-order level : When the stock level reaches re-order level new order issued.  6. Re-order quantity : This is the quantity of material to be ordered in ROL.

 Let, D = Annual demand.  C 0 = Order cost.  C h = Inventory carrying cost.  C p = Price per unit.  Q = Quantity order.  Q* = Economic order quantity.  N = Number of order placed per year.  T c = Total cost per annum.

 Annual ordering cost = No. of orders * ordering cost / order. = Annual demand / order quantity * ordering cost / order. = D / Q * C 0 …………..(i) Annual inventory carrying cost = Avg. Inventory investment * inventory carrying cost. = (Max Inventory – Min Inventory ) / 2 * Inventory carrying cost. = Q / 2 * C h (ii) Annual Total Cost = Annual ordering cost + Annual Inventory cost. = DCo / Q + QC h /2 ………….(iii) To determine EOQ differentiate Annual Total Cost eq (iii) we got, dTC / dQ = -d DCo / Q² So, Q² = 2DCo / C h Q* = √ 2DCo / C h ( Q* = economic order quantity). If inventory carrying cost is expressed as a % of annual avg. inventory investment then, Q* = √ 2DCo / C p. I

 1. Optimal number of order placed (N*) = D / Q*  2. Optimal time diff b/w two order (T*) = no. of working days / N* 3. Minimum total yearly inventory cost (Tcm) = √ 2 D. Co. C h

 A co. has got a demand for particular part at 10,000 units per year. The cost per unit is Rs. 2 & it costs Rs. 36 to place an order and to process the delivery. The inventory carrying cost is estimated at 9% of average inventory investment. Determine  (i) Economic order quantity.  (ii) Optimum no. of orders placed per annum.  (iii) Minimum total cost of inventory per annum. Sol : (i) EOQ ( Q*)= √ 2DCo / C p. I = √ 2. 10, / = 2000 units. (ii) Optimum no. of order = D / Q* = 10,000 / 2000 = 5 (iii) Total annual inventory cost = Ordering cost + Inventory carrying cost = 2 * Ordering cost ( at EOQ Ordering cost=carrying cost) = 2. D / Q*. Co = = 360.