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## Inventory Optimization

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Inventory Optimization use different variations of the economic order quantity (EOQ) model in order to determine proper order or production quantities that minimize the Total Inventory Cost. Besides the standard EOQ model, the economic production quantity (EPQ) model may be perform . For EOQ and EPQ Analysis , both analyses allow shortages are included. Finally, quantity discounts for the EQD Analysis can be perform as well. Both EOQ and EQD has been widely accepted and practiced across industries.

#### Economic Order Quantity ( EOQ )/ Economic Quantity Discount (EQD)

Economic Order Quantity ( EOQ ) serve to find the optimal value of Order Quantity that would give the lowest Total Inventory Cost . Typically , among other factors that need to be considered in deciding how much to order are

1. Demand Rate
2. Ordering/Setup costs
3. Unit Costs
4. Lead Time ( i.e Time of Delivery )
5. Reorder point
6. Quantity Discount given by suppliers and
7. Amount of Desire Safety Stock required ( Assuming all Demand need to be satisfied ) .

Given the above factors, What is the Optimal Order Quantity ? Consider the following example .

Suppose that :-

Annual Demand Rate = 2000
Ordering/Set up Cost = 200 ( e.g Administrative Costs )
Holding Cost = 20% ( e.g Insurance , Rent , embezzlement and etc)
Unit Costs = 0
Safety Stock = 30 required

Quantity Discounts

Under such circumstances , how much should the company order that would minimize the Total Inventory Cost ?

The Solution

Given the above circumstances , the Economic Order Quantity ( EOQ )computed based on the criteria is estimated :-

EOQ = 160
Orders per Period = 120
Annual Set Up and Holding Cost = 2440.95 Reorder Point = 34

Total Cost = RM 4890 .98

#### Economic Production Quantity ( EPQ )

Economic Production Quantity ( EPQ ) serve to find the optimal value of Production Quantity that would give the lowest Total Inventory Cost . Typically, among other factors that need to be considered in deciding how much to produce are

1. Demand Rate
2. Ordering/Setup costs
3. Unit Costs
4. Daily Producing Rate
5. Unit Costs and
6. Economic Order Quantity ( EOQ )

Let’s consider the following example .

Suppose that :-

Annual Demand Rate = 10000
Ordering/Set up Cost = 25 ( e.g Administrative Costs )
Holding Cost = 20% ( e.g Insurance , Rent , embezzlement and etc) Unit Costs = 90
Economic Order Quantity = 300

Under such circumstances , how much should the company produce in order to minimize the Total Inventory Cost ?

The Solution

Given the above circumstances , the Economic Production Quantity ( EPQ )computed based on the criteria is estimated :-

Economic Production Quantity ( EPQ ) = 235.7
Average Inventory Level = 58.7
Production Run per Period ( year ) = 42
Annual Set Up and Holding Cost = RM 1060
Total Cost = RM 902121.3

#### Economic Order Quantity ( EOQ ) Vs Economic Quantity Discount (EQD) Analysis

This analysis helps operation managers to optimize total cost ( inventory and unit costs) when there is dilemma in which analysis ( EOQ or EQD) should the operation manager choose to optimize at different service level. Using EOQ analysis strictly may result in lowest inventory costs but at the expense of  increase unit costs and on the other hand, using EQD analysis strictly may reduce overall unit cost at the expense of increasing inventory costs. As such, this analysis helps operation manager to determine which analysis to use that would result in lowest total cost for each different service level.