Revision

Example 1
• The sales of automobiles have grown steadily during the past 5 years
(see table below). The sales manager had predicted before the new
model was introduced that first-year sales would be 500 units. Using
exponential linear smoothing with a weight of 0.30, develop forecasts
for years 2 through 6.
Year Demand
1 400
2 420
3 450
4 500
5 600

2
Solution
• Initial forecast for year 1 (F1) = 500 units (predicted)
• Demand for years 1 to 5: 400, 420, 450, 500, 600
• Smoothing constant (α) = 0.30

3
Example 2
A company uses a 3-month moving average to forecast monthly demand.
Calculate the 3-month moving average forecasts for 6 months based on actual
demand data as given in below table. Using the data above, calculate the
following: MAD (Mean Absolute Deviation), MAPE (Mean Absolute
Percentage Error).

Month Actual Demand

1 120
2 130
3 125
4 135
5 140
6 150

4
Solution

Step 1: Calculate 3-month Moving Average Forecasts

Month 4: (120 + 130 + 125)/3 = 125.00
Month 5: (130 + 125 + 135)/3 = 130.00
Month 6: (125 + 135 + 140)/3 = 133.33

Step 2: Calculate Errors:

Month 4: Error = 135 - 125.00 = 10.00
Month 5: Error = 140 - 130.00 = 10.00
Month 6: Error = 150 - 133.33 = 16.67

Step 3: Calculate MAD, MAPE, and MPE:

MAD = (10 + 10 + 17) / 3 = 12.33
MAPE = (7.41% + 7.14% + 11.11%) / 3 = 8.55%
Minimizing Costs- EOQ model
▶By minimizing the sum of setup (or ordering) and holding costs, total costs are
minimized
▶Optimal order size Q* will minimize total cost
▶A reduction in either cost reduces the total cost
▶Optimal order quantity occurs when holding cost and setup cost are equal
Minimizing Costs
• Q = Number of pieces per order Annual setup cost =
D
S
Q
• Q* = Optimal number of pieces per order (EOQ)
• D = Annual demand in units for the inventory item
• S = Setup or ordering cost for each order
• H = Holding or carrying cost per unit per year
Annual setup cost = (Number of orders placed per year)
x (Setup or order cost per order)

Annual demand Setup or order

=
Number of units in each order cost per order
æ Dö
= ç ÷S
èQø
Minimizing Costs
D
Annual setup cost = S
Q = Number of pieces per order Q
Q* = Optimal number of pieces per order (EOQ) Q
Annual holding cost = H
2
D = Annual demand in units for the inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year

Annual holding cost = (Average inventory level)

x (Holding cost per unit per year)

Order quantity
= (Holding cost per unit per year)
2

æQö
= ç ÷H
è2ø
Minimizing Costs
D
Q = Number of pieces per order Annual setup cost = S
Q
Q* = Optimal number of pieces per order (EOQ) Q
Annual holding cost = H
D = Annual demand in units for the inventory item 2

S = Setup or ordering cost for each order

H = Holding or carrying cost per unit per year

Optimal order quantity is found when annual

setup cost equals annual holding cost

Solving for Q* 2DS = Q 2 H

D æQ ö
S = ç ÷H 2DS
Q è2ø Q2 =
H
2DS
Q* =
H
An EOQ Example

Determine optimal number of needles to order

D = 1,000 units
S = $10 per order
H = $.50 per unit per year

2DS
Q* =
H

2(1,000)(10)
Q* = = 40,000 = 200 units
0.50
An EOQ Example

Determine expected number of orders

D = 1,000 units Q* = 200 units
S = $10 per order
H = $.50 per unit per year

Expected Demand D
number of = N = =
orders Order quantity Q*

1,000
N= = 5 orders per year
200
An EOQ Example

Determine optimal time between orders

D = 1,000 units Q* = 200 units
S = $10 per order N = 5 orders/year
H = $.50 per unit per year

Expected Number of working days per year

time between =T =
orders Expected number of orders

250
T= = 50 days between orders
5
An EOQ Example

Determine the total annual cost

D = 1,000 units Q* = 200 units
S = $10 per order N = 5 orders/year
H = $.50 per unit per year T = 50 days

Total annual cost = Setup cost + Holding cost

D Q
TC = S+ H
Q 2
1,000 200
= ($10) + ($.50)
200 2
= (5)($10) + (100)($.50)
= $50 + $50 = $100
The EOQ Model

When including actual cost of material P

Total annual cost = Setup cost + Holding cost + Product cost

D Q
TC = S + H + PD
Q 2
 XYZ is a large manufacturer of injection molded plastics in Delhi. An investigation of
the company’s manufacturing facility in Delhi yields the information presented in the
table below. How would the plant classify these items according to an ABC
classification system?

Numerical
 Item Code Number Average Dollar Volume Percent of Total $ Volume
1289 → 400  3.75 = 1,500.00 44.0%
2347 → 300  4.00 = 1,200.00 36.0%
2349 → 120  2.50 = 300.00 9.0%
2363 → 75  1.50 = 112.50 3.3%
2394 → 60  1.75 = 105.00 3.1%
2395 → 30  2.00 = 60.00 1.8%
6782 → 20  1.15 = 23.00 0.7%
7844 → 12  2.05 = 24.60 0.7%
8210 → 8  1.80 = 14.40 0.4%
8310 → 7  2.00 = 14.00 0.4%
9111 → 6  3.00 = 18.00 0.5%
$3,371.50 100%
(rounded)

Sol
Problem 2
William Beville’s computer training school, in Richmond, stocks workbooks with
the following characteristics:
Demand D = 19,500 units/year
Ordering cost S = Rs. 25/order
Holding cost H = Rs. 4/unit/year
a) Calculate the EOQ for the workbooks.
b) What are the annual holding costs for the workbooks?
c) What are the annual ordering costs?
Sol
 BITS Pilani
Pilani Campus

EPQ model
Production Order Quantity Model
• The Production Order Quantity Model (also known as the Economic Production Quantity (EPQ) model)
is particularly useful in industries where items are produced in batches and the production process is continuous
but not instantaneous. One notable example is the manufacturing industry, especially sectors like automotive
manufacturing.

Part of inventory cycle during which

Inventory level

production (and usage) is taking place

Demand part of cycle with
no production (only usage)
Maximum
inventory

t Time
 • In automotive manufacturing, companies produce parts such as tires, engines, and other components in batches.
Production facilities may have machines that operate continuously but require a setup time to switch between
different products.

• Why EPQ is Useful:

1. Batch Production: Automotive components are produced in large batches to reduce the frequency of setups.
2. Production and Usage Rates: The production rate of components is often faster than their usage rate in the
assembly line. EPQ helps determine the optimal batch size to minimize the total cost.
3. Setup and Holding Costs: There are significant costs associated with setting up machines for a new
production run, as well as holding the inventory until it is used in assembly.

Example: Automotive Manufacturing

 • Reduces Inventory Holding Costs: By determining the ideal production batch
size, companies avoid overproducing and tying up capital in excess inventory.
• Minimizes Setup Costs: Optimizes the number of production runs, reducing
the frequency and cost of machine setups.
• Ensures Smooth Operations: Aligns production schedules with assembly line
requirements, preventing delays or shortages.

Benefits
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 = (Average inventory level) x Holding cost

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
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 p –d p =Q 1– p

Maximum inventory level QH d

Holding cost = (H) = 1–
2 2 p
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

Setup cost = (D / Q)S

Holding cost = 21 HQ éë1- d p ùû ( )
D
Q
S = 21 HQ éë1- d p ùû ( )
2DS
Q2 =
(
H éë1- d p ùû )
2DS
Q *p =
(
H éë1- d p ùû )
 • A company manufactures widgets and operates a production facility that
produces these widgets at a rate of 1,000 units per month. The annual
demand for widgets is 6,000 units. The setup cost per production run is
₹500, and the holding cost per unit per year is ₹20.

• Determine the following:

1.The optimal production quantity (EPQ).
2.The maximum inventory level.
3.The total annual cost (setup cost + holding cost).

Example
 • D= Annual demand (6,000 units)
• S= Setup cost (₹500)
• H= Holding cost per unit per year (₹20)
• p= Production rate (1,000 units per month = 12,000 units per year)
• d= Demand rate (6,000 units per year) D
Q
1 é ù
S = 2 HQ ë1- d p û ( )
2DS
Q2 =
(
H éë1- d p ùû )
2DS
Q *p =
(
H éë1- d p ùû )
Data
Thank You!!