ISEN 315
Spring 2011
Dr. Gary Gaukler
EOQ Discussion
1. Demand is fixed at l 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
Pareto Charts
Data for October
60 –
54
Cumulative percent
Frequency (number)
70 –
50 –
40 –
Number of
occurrences
30 –
20 –
12
10 –
4
0 –
Room svc
72%
Check-in Pool hours
3
2
Minibar
Misc.
16%
5%
4%
Causes and percent
3%
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
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: