Spreadsheet Models for Managers
Getting Access to Spreadsheet Models for Managers
If 
you use Excel to model businesses, business processes, or
business transactions, this course will change your life. You’ll learn how to create tools for yourself that will amaze
even you. Unrestricted use of this material is available in two ways.
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Spreadsheet Models for Managers
| Constant demand | 11/10 Session Links |
- On annual basis:
where
- D = Annual demand (units per year)
- Q = Quantity in one order (units)
- Co = Cost to place one order (dollars)
- Cc = Carrying cost of inventory (dollars per unit per year) (if restock point is 0)
For constant demand, use evenly spaced, equal sized orders
The total cost of acquiring and holding inventory has two contributions. Under conditions of constant demand, with equally spaced orders, the cost is as shown above in the second line. Since D/Q is the number of orders, multiplying by C0 gives the total cost of placing all the orders. And since the average inventory is Q/2, the cost of carrying the inventory is given by the second term. And since the average inventory is I/2 when the restock point is zero, we have the result as shown.
Last Modified: Wednesday, 27-Apr-2016 04:15:26 EDT
Although the assumption of constant demand is critical to justifying the derivation of the formula for Economic Order Quantity, most problems don’t satisfy that requirement in the strict sense. But EOQ is nevertheless a valuable concept in two kinds of circumstances. The first case is when the time scale of the inventory management decisions is much shorter than the time scale of the variations in demand. And the second is when the fluctuations in demand occur much more rapidly than the inventory management decisions.
These two approximations occur repeatedly in modeling problems. Watch for opportunities to apply them elsewhere.