EOQ

Question 1

What is EOQ?

Answer 1

Economic Order Quantity. A mathematic model used to determine the optimal size for an order lot Q, to minimize the total costs for inventory management.
- This is by optimizing the tradeoff between ordering costs and holding costs

Question 2

How du you calculate the holding cost, the ordering cost and the total cost för the ideal EOQ case? Write the formulas

Answer 2

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Question 3

Can you illustrate the ideal EOQ case with two graphs?

Answer 3

Sawtooth diagram and Diagram showing that the EOQ optimizes total cost for inventory management. Kolla facit

Question 4

What is the average inventory for ideal EOQ?

Answer 4

Q/2 (since inventory decreases at constant rate)

Question 5

What are the assumptions of EOQ?

Answer 5

1. Demand is independent, known and constant
2. Lead time is known and constant
3. The only variable costs are ordering costs and holding costs
4. No quantity discounts are allowed
5. Receipt of inventory is instataneous and complete:
   - dvs the order arrives at one batch at a time
6. Stockout can be completely avoided if orders are placed at the right time (at ROP)

Question 6

What does ordering costs include?

Answer 6

• Administrative costs
• Transportation costs
• Costs for setting up production (more in manufacturing)

Question 7

What does holding costs include?

Answer 7

• Warehouse costs
• Insurance and security costs
• Obsolescence costs

Question 8

Can you write down the formula for EOQ and the total variable costs for the ideal case?

Answer 8

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Question 9

What is the reorder lead time?

Answer 9

The time from which an order is placed until it is received by customer

Question 10

At what times can the purchase price be impacted by the order lot size Q?

Answer 10

When EOQ assumptions are relaxed a quantity discounts are allowed

Question 11

What is a backorder?

Answer 11

A order that cannot be fulfilled when promised or demanded, but is filled later.

• Orders are still accepted even though there is no on hand inventory left. The orders are added to the next periods demand and fulfilled once the stock is replenished again

Question 12

What is the difference between a backorder and a stockout?

Answer 12

A backorder is an order that cannot be fulfilled when demanded, but is fulfilled later, while stockout is an order that cannot be satisfied, resulting in a loss of sale

Question 13

What are the advantages/disadvantages with using backorders?

Answer 13

Can allow company to reduce storage costs without losing sales opportunities, but can also lead to customer dissatisfaction since their demand isn’t met instantly

Question 14

Can you draw the sawtooth diagram for EOQ with backorders? Can you also write the formula for EOQ with backorders as well as the total costs for EOQ with backorders?

Answer 14

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Question 15

What is aggregating replenishment? Give an example of how to utilize this and how it can affect the inventory costs

Answer 15

Combinating several orders in on shipment. One major source of fixed inventory costs is the transportation cost. This cost can be reduced by combining (aggregating) orders and deliveries across product families, suppliers, or retailers

• Either that single truck delivers products for different product families

or
- That orders from multiple suppliers can be combined into one shipment

Effect–> Ordering costs are spread over more items, making it easier to order smaller amount of each product which in turn will reduce unnecessary holding costs

Question 16

How do you determine the optimal order quantity for order schedules that offer price discounts?

Answer 16

First determine regular EOQ, the compare the total costs between quantity discount for a bigger lot

Question 17

What does it mean that a discount is lot size based?

Answer 17

The pricing schedule offers discounts based on the quantity ordered in a single lot. Usually there are quantity thresholds in which the unit price of the product is increased

Question 18

What does the total price formula look like for EOQ with discounts? Motivate why it looks like it does

Also draw the total cost graph for EOQ with discounts as well as a graph of how the price schedule with breakpoints for quantity affects the purchase/unit cost?

Answer 18

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Question 19

There can be different types of discount offers, name 2

Answer 19

1. All unit quantity discounts:
   - Pricing schedule contains specified breakpoints
   - Once quantity reaches a breakpoint, the average unit cost is decreased for all units in the lot
2. Marginal Unit Quality Discounts
   - Pricing schedule contains specified breakpoint
   - Once Q reaches a breakpoint, the marginal cost of those units above the threshold are reduced

Question 20

What is important when determining the optimal order lot size for orders with quantity discounts?

Answer 20

it is important to evaluate the tradeoff between possibly higher carrying costs with the discount quantity VS the total cost for EOQ-lot size

Question 21

What is the formula for ROP? Write it down

Answer 21

ROP= d * L, where L=lead time and d=demand/day

Question 22

How is demand/day calculated?

Answer 22

d=D/ average annual working days

Question 23

Why are safety stocks added? What happens to the formula of ROP?

Answer 23

Added to prevent stockouts from occurring

ROP= d*L + SS

Question 24

What is dynamic lot sizing? name some methods that handle dynamic demand

Answer 24

Methods used to handle demand variations

1. Lot-for-lot rule. Produce exactly what is needed in each week: Setup cost every week but no inventory cost
2. Fixed order quantity. Produce a fixed amount each time a setup I performed:
   - Added inventory costs
3. Wagner-Within algoritm: Either the inventory carried to next week from a previous week will be zero, or the production quantity in next week will be zero.
   - So production is only carried out if inventory from previous week is empty

Question 25

For aggregating replenishment/multiple product shipments, what methods can the manager choose to aggregate his orders?

Answer 25

1. Each product manager orders their product independently:
   –> no aggregation –> high costs

Question 27

What types of order methods can be used for aggregating replenishment?

Answer 27

1. Each product manager orders their product individually
   - No aggregation –> High costs and big orders
2. The product manager jointly order every product in each lot
   - Lower ordering costs and holding costs, but not optimal that low demand products are ordered together with high demand products
3. Product manager orders the product jointly but not every order contains every product
   - low cost and more optimal, but more complex to manage

Question 28

Write the formulas for optimal order frequency and annual Total cost for the aggregation order of three different products

Answer 28

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Question 29

what is the difference between ideal/traditional EOQ formula compared to other variants?

Answer 29

The purchase is not affected by the lot size, while in the case with quantity discounts, the purchase priced can be adjusted based on how many units you order.

Then it is important to investigate the tradeoff:the total cost difference between a bigger lot size to a lower discounted unit price, or a smaller lot size without discount.