Announcements

1
Announcements

• Office Hours MWF 1130-1220,
• MR 930-1030 and by appointment
• Homework is due next Thursday, September 3
• HW Read Chapter 1 in your book, do the problem
  on the handout.
• Calculators/Software
• Evening Study Sessions

2
Models and Decision Making

• Quantitative Decision Making with Spreadsheet
  Applications 7th ed.
• By Lapin and Whisler
• Section 1-4

3
Inventory Problem
Total annual cost ordering cost holding cost
procurement cost Minimize Where A annual
number of items demanded k cost of
placing an order h annual cost per
dollar value for holding items
in inventory c unit cost of procuring
an item Q order quantity ? this is
a variable And TC is a variable, everything else
is a parameter
4
Constraints and Feasible Solutions

• Constraints place special limitations on the
  problem variables.
• Ex Q 300
• Feasible Solutions values of Q less than or
  equal to 300.
• Infeasible Solutions values of Q bigger than 300.

5
Optimal Solution

• Use quantitative methods to find an optimal
  solution.
• We find the optimal solution by setting the
  formula for the holding cost equal to the formula
  for the ordering cost and solving for Q.
• Set holding cost
  equal to
• ordering
  cost
• Solve for Q.
  This is
• Wilsons
  Formula

6

• Suppose each order costs 4 to place, the annual
  demand is 1000 units, it costs .20 per year for
  each dollar value of items held in inventory, and
  these items can be procured from the supplier for
  1 each.
• k4
• A1000
• h.20
• c1

7
Wilsons Formula

• The Wilson formula is a method for determining
  the optimal quantity to order and the time
  between any two orders for a given entity.
• Assumption The only costs entailed are a
  warehousing cost per stock keeping unit and a
  one-time cost every time an order is placed.
• Goal Find an optimal balance between the two
  costs to minimize the total cost, which is known
  as the economic order quantity (EOQ).
• lthttp//www.masystem.com/o.o.i.s/1360gt
• lthttp//www.free-logistics.com/index.php/Spec-Shee
  ts/Forecasts-Supply-and-Inventory/Wilson-Formula-E
  conomic-Order-Quantity.htmlgt

8
Algorithms and Model Types

• An algorithm is the procedure used to solve a
  problem.
• Deterministic models are models that contain
  known and fixed constants throughout their
  formulation.
• Stochastic models are models that involve one or
  more uncertain quantities and probability must be
  considered to find a solution.

9
Discussion Question

• Analee Mark owns a tea shop. The demand for
  gourmet teas is roughly constant over the year.
  Past data indicate that the annual demand for
  Assam Tea is 5200 cases per year. Ordering costs
  are 10/order. The procurement cost is 1.50 per
  case for the tea and .50 for shipping. The
  holding cost (storage and theft insurance) is
  .20 per dollar value of the tea held in
  inventory. She wants to place orders at regular
  time intervals for the same amount of tea each
  time.

10
Discussion Question

• A annual number of items demanded
• 5200
• k cost of placing an order
• 10
• h annual cost per dollar value for holding
• items in inventory
• .20
• c unit cost of procuring an item
• 1.50 .50 2.00
• Q order quantity
• this varies depending how frequently she
  orders

11
Discussion Question
What would be the cost if she were to order the
total inventory once a year?
Q5200
11,450
12
Discussion Question
What would be the cost if she were to order the
total inventory once a week?
Q5200/52100
10,940