As one of the first models to deal with inventory associated issues, in case of this model, it is taken that a number of shortages are present and associated with that a particular shortage cost is incurred.
It is also assumed that Demand associated with the concerned product is known, along with the zero lead time, as well as shortage and replenishment amounts.
It is expressedas Components that make up cost per period
Cost of order + Holding cost + Cost associated with shortage + Total cost of the item
Here are two sums, solving which can get you a better idea of the topic.
- It is taken that a medical supplier provides 30 bottles on a weekly basis to various shops. The buying amount is taken as 120 for $1200 on a lot. If the ordering cost is taken at $210 per order, and incremental cost is taken at $0.60, what would be the multiple and fractional lots that can be ordered? It is given that holding company is paid 2% on a monthly basis for borrowing funds.
- If a company takes a 3 month collection into consideration and gets a set of 500 goods, then cost of each of the item is taken at $50, while total cost associated with ordering is taken at $100. If inventory carrying cost is only 20% of the total unit value, then what amount of money can be saved by ordering the economic order quantity? Also, what is the total cost that is associated with inventory policy that is existing?
Solving these sums will give you a better idea of the whole context.
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