Production Order Quantity
Model
Used when inventory builds up
over a period of time after an
order is placed
Used when units are produced
and sold simultaneously
© 2008 Prentice Hall, Inc. 12 – 1
Production Order Quantity
Model
Part of inventory cycle during
which production (and usage)
is taking place
Inventory level
Demand part of cycle
with no production
Maximum
inventory
t Time
Figure 12.6
© 2008 Prentice Hall, Inc. 12 – 2
Production Order Quantity
Model
Q = Number of pieces per order p = Daily production rate
H = Holding cost per unit per year d = Daily demand/usage rate
t = Length of the production run in days
Annual inventory Holding cost
= (Average inventory level) x
holding cost per unit per year
Annual inventory
= (Maximum inventory level)/2
level
Maximum Total produced during Total used during
= –
inventory level the production run the production run
= pt – dt
© 2008 Prentice Hall, Inc. 12 – 3
Production Order Quantity
Model
Q = Number of pieces per order p = Daily production rate
H = Holding cost per unit per year d = Daily demand/usage rate
t = Length of the production run in days
Maximum Total produced during Total used during
= –
inventory level the production run the production run
= pt – dt
However, Q = total produced = pt ; thus t = Q/p
Maximum Q Q d
inventory level = p –d =Q 1–
p p p
Maximum inventory level Q d
Holding cost = (H) = 1– H
2 2 p
© 2008 Prentice Hall, Inc. 12 – 4
Production Order Quantity
Model
Q = Number of pieces per order p = Daily production rate
H = Holding cost per unit per year d = Daily demand/usage rate
D = Annual demand
Setup cost = (D/Q)S
Holding cost = 1 HQ[1 - (d/p)]
2
1
(D/Q)S = 2 HQ[1 - (d/p)]
2
2DS
Q =
H[1 - (d/p)]
2DS
Q*p =
H[1 - (d/p)]
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Production Order Quantity
Example
D = 1,000 units p = 8 units per day
S = $10 d = 4 units per day
H = $0.50 per unit per year
2DS
Q* =
H[1 - (d/p)]
2(1,000)(10)
Q* = = 80,000
0.50[1 - (4/8)]
= 282.8 or 283 hubcaps
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Production Order Quantity
Model
Note:
D 1,000
d = 4 = Number of days the plant is in operation = 250
When annual data are used the equation becomes
2DS
Q* =
annual demand rate
H 1–
annual production rate
© 2008 Prentice Hall, Inc. 12 – 7
