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ISEN 315 Spring 2011 Dr. Gary Gaukler

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 )

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ISEN 315 Spring 2011 Dr. Gary Gaukler

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  1. ISEN 315Spring 2011Dr. Gary Gaukler

  2. 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.

  3. When to Use EOQ

  4. Data for October 70 – 60 – 50 – 40 – 30 – 20 – 10 – 0 – 54 Frequency (number) Number of occurrences Cumulative percent 12 4 3 2 Room svc Check-in Pool hours Minibar Misc. 72% 16% 5% 4% 3% Causes and percent Pareto Charts

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

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

  7. 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

  8. Newsvendor Model – Continuous Demand

  9. 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:

  10. Determination of the Optimal Order Quantity for Newsvendor Example

  11. 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:

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