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Cycle inventory. First of all, we need to go through the idea of economic order quantity (EOQ). [6] EOQ is an attempt to balance inventory holding or carrying costs with the costs incurred from ordering or setting up machinery. The total cost will minimized when the ordering cost and the carrying cost equal to each other.
The figure graphs the holding cost and ordering cost per year equations. The third line is the addition of these two equations, which generates the total inventory cost per year. The lowest (minimum) part of the total cost curve will give the economic batch quantity as illustrated in the next section.
Economic order quantity (EOQ), also known as financial purchase quantity or economic buying quantity, [citation needed] is the order quantity that minimizes the total holding costs and ordering costs in inventory management.
This figure graphs the holding cost and ordering cost per year equations. The third line is the addition of these two equations, which generates the total inventory cost per year. This graph should give a better understanding of the derivation of the optimal ordering quantity equation, i.e., the EPQ equation
There is a setup cost s t incurred for each order and there is an inventory holding cost i t per item per period (s t and i t can also vary with time if desired). The problem is how many units x t to order now to minimize the sum of setup cost and inventory cost. Let us denote inventory:
The average cost = only the setup cost and there is no inventory holding cost. To satisfy the demand for period 1, 2 Producing lot 1 and 2 in one setup give us an average cost: = + The average cost = (the setup cost + the inventory holding cost of the lot required in period 2.) divided by 2 periods.
The total cost is given by the sum of setup costs, purchase order cost, stockout cost and inventory carrying cost: (,) = + [(,)] + (,) What changes with this approach is the computation of the optimal reorder point:
The economic lot scheduling problem (ELSP) is a problem in operations management and inventory theory that has been studied by many researchers for more than 50 years. The term was first used in 1958 by professor Jack D. Rogers of Berkeley, [1] who extended the economic order quantity model to the case where there are several products to be produced on the same machine, so that one must decide ...
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