Economic Order Quantity | EOQ Model

RUNNING HEAD: - Economic 0 | P a g e
ECONOMNIC
Module Number

Economic 1 | P a g e
Table of Contents
Introduction................................................................................................................ 2
Exercise A (Answerer)................................................................................................ 2
(B) Determine decision variables of the EOQ model with backorders and derive
the expression of the total relevant cost as function of decision variables.............4
Exercise- B.................................................................................................................. 4
ECONOMIC ORDER QUANTITY WITH BACK ORDERS................................................4
Average loss compared to optimal policy................................................................5
Conclusion.................................................................................................................. 6
References................................................................................................................. 7

Economic 2 | P a g e
Introduction
With the ramified economic changes, economic order quantity is imperative part for the business
economic project. In this report, various parts of the project has been taken into consideration
which reveals the EOQ model, expected cost and average loss compared to optimal policy has
been divulged.
Exercise A (Answerer)
(a) It is the optimum quantity of the a product which required to be purchased at one time in
order to minimize the ordering cost and carrying cost of product. In today’s world customer is
the king of market and the company who is selling the product has to provide the product to
customer on insistent demand that’s means customer do not accept waiting time before they
receive their orders. Therefore inventory management implement replenishment policy which
means inventory manager will order the product quantity when level of stock will reach to
optimum stock level. (Average daily usage multiply by the lead time in days. The backordering
means when company do not have the sufficient stock available to satisfy customer demand then
it has to take time to make the product available to customer.
Impact of Backordering over Optimal replenishment:-
The inventory level is affected by demands and replenishments, but the demand process is
variable. Sometimes the demand is high causing quickly declining inventory levels, for example
there would be some inventory level 100 quantity at which there would place an order for an
inventory replenishment. This is known as the reorder quantity level. When there is order is
placed then there must wait for some period which also known as the lead time, before the
inventory is replenished. Demand cannot be constant Because of the variable demand and the
lead time, there is a risk that shortages will occur. If the demand is high during the lead time then
there would not be able to satisfy all of our customer then there will have to backorder the
shortage. Eventually as supply becomes available the backordered demand is satisfied. It is
analyzed that that there could set the reorder point high to make shortages unlikely, but that will
increase the inventory levels.