DISSERTATION

On
INVENTORY CONTROL MODEL
In partial fulfilment of the requirement for the award of the degree of
MASTER OF SCIENCE(MATHEMATICS)2022-24

SUBMITTED TO: SUBMITTED BY:

Mr.Vijayveer Sonam Yadav
Assistant professor University SRN:221280560010
Department of Mathematics Class Roll no.-2205622
M.Sc(Mathematics)2022-24

GOVERNMENT COLLEGE,SECTOR-9
GURUGRAM, HARYANA

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 STUDENT DECLARATION

I , Sonam Yadav, University SRN:2201280560010 hereby declare that

this dissertation entitled “INVENTORY CONTROL MODEL ” is
written and submitted by me. I further declare that this project is based
on the information collected by me and has not been submitted to any
other university or academy body.

Student Signature
Sonam yadav
Class Roll no: 2205622
University SRN:221280560010
Master of science (Mathematics)2022-2024

ACKNOWLEDGEMENT
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Words cannot express my gratitude to my professor Mr. Vijayveer for his invaluable patience
and feedback. I also could not have undertaken this journey without my maths department
professors, who generously provided knowledge to me. This endeavor would not have been
possible without the generous support from them.

I am also grateful to my classmates and especially for their editing help, late-night feedback
sessions, and moral support. Thanks should also go to the librarians, research assistants, and
study participants from the university, who impacted and inspired me.

Lastly, I would be remiss in not mentioning my family, especially my parents. Their belief in
me has kept my spirits and motivation high during this process.

I perceive as this opportunity as a very important phase of my life. I will strive to use all the
gained knowledge in the best possible way and I will continue to work on improvement also for
my further career development purpose in this field.

PREFACE

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Inventory models form a crucial aspect of decision-making,
focusing on the timing and quantity of orders for goods.

The primary research concern lies in optimizing these decisions

by considering factors such as the procurement cost, holding
cost per unit in inventory, and the cost incurred due to shortages.

Advanced inventory models extend their scope to scenarios

involving constraints on production facilities, storage capacity,
time limitations, and financial constraints.

Notably, the field of Operations Research has historically

allocated significant effort to advancing inventory models,
making it a focal point for decision optimization over several
decades.

CONTENTS
Student declaration 2
Acknowledgement 3
Preface 4

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 Models / Title Page no.
Introduction
Introduction Inventory Model 6-12
Model I EOQ model with 13-16
uniform demand
Model II EOQ model with 17-19
different rate of
demand
Model III EOQ model when 20-23
shortages are allowed
Model IV EOQ model with 24-25
uniform
replenishment
Model V EOQ model with 26-31
price break/ discount

Bibliography 32

INTRODUCTION OF INVENTORY

INVENTORY refers to a crucial component within a business, comprising stocks

of goods, materials, human resources, financial resources, or any other idle
resource that holds economic value. These resources are stored to cater to future

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demands efficiently. Virtually every business, regardless of its size or sector, must
maintain an inventory to ensure the smooth and efficient operation of its processes.
While inventories are indispensable for business operations, their maintenance
incurs costs in the form of expenses on storage facilities, equipment, personnel,
insurance, and other related factors. Therefore, excessive inventories are deemed
undesirable as they impose unnecessary financial burdens. Consequently, there is a
need to control inventories in the most profitable manner possible.
In addressing this challenge, businesses employ various inventory control models,
with one of the prominent ones being the economic order quantity (EOQ) models.
These models provide a framework for determining the optimal quantity of
inventory to be kept in stock, striking a balance between the costs associated with
holding excess stock and the costs of ordering in smaller quantities.
By utilizing EOQ models, businesses can make informed decisions regarding
inventory management, ensuring that they maintain adequate stock levels to meet
demand while minimizing holding costs and optimizing operational efficiency.
This proactive approach to inventory control enables businesses to enhance their
financial performance and competitiveness in the market.

OBJECTIVES:

The primary objectives of inventory management include:

1) minimizing holding costs,

2) optimizing order quantities, and
3) preventing stockouts or overstocks.
4) Efficient inventory management contributes to improved customer
satisfaction and overall operational efficiency.

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INVENTORY CONTROL
Inventory control refers to the systematic regulation and management of a
company's stock of goods. It involves monitoring, organizing, and optimizing
inventory levels to ensure that products are available when needed, while
minimizing holding costs and the risk of stockouts. Effective inventory control
aims to strike a balance between meeting customer demand and avoiding
excess inventory.
Maintaining inventory is crucial for several reasons:

i) Facilitates smooth and efficient business operations.

ii) Enables prompt customer service, enhancing goodwill and attracting
more orders.
iii) Prevents the need for costly piecemeal purchasing, allowing for bulk
discounts and reducing clerical costs.
iv) Provides the opportunity to capitalize on favorable market conditions.
v) Serves as a buffer stock to address delays in receiving raw materials and
handling shop rejections.

Factors Influencing Inventories

The major problem of inventory control is to answer two questions:

1. How much to order?

2. When to order?

These are answered by developing a model. An inventory model is based on the

consideration of the main

Aspects of inventory. The varieties of factors related to these are placed below:
1. Inventory related costs

Various costs associated with inventory control are often classified as

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 Follows:

i) Set-up cost: This is the cost associated with the setting up of

machinery before starting production. The set-up cost is generally

assumed to be independent of the quantity ordered for.

ii) Ordering cost: This is the cost incurred each time an order is placed.

This cost includes the administrative costs (paper work, telephone

calls, postage), transportation, receiving and inspection of goods, etc.

iii) Purchase (or production) cost: It is the actual price at which an item

is purchased (or produced). It may be constant or variable. It becomes

variable when quantity discounts are allowed for purchases above a

certain quantity.

iv) Carrying (or holding) cost: The cost includes the following costs for

maintaining the inventory: i) Rent for the space; ii) cost of equipment

or any other special arrangement for storage; iii) interest of the money

blocked; iv) the expenses on stationery; v) wages of the staff required

for the purpose; vi) insurance and depreciation; and vii) deterioration

and obsolescence, etc.

v) Shortage (or Stock-out) cost: This is the penalty cost for running out of

stock, i.e., when an item cannot be supplied on the customer’s demand.

These costs include the loss of potential profit through sales of items

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 demanded and loss of goodwill in terms of permanent loss of the customer.

2. Demand

Demand is the number of units required per period and may either be

known exactly or known in terms of probabilities. Problems in which

demand is known and fixed are called deterministic problems whereas

problems in which demand is known in terms of probabilities are called

probabilistic problems.

3. Selling Price

The amount which one gets on selling an item is called its selling price.

The unit selling price may be constant or variable, depending upon

whether quantity discount is allowed or not.

4. Order Cycle

The period between placement of two successive orders is referred to as

an order cycle. The order may be placed on the basis of either of the

Following two types of inventory review systems:

a) The record of the inventory level is checked continuously until a

specified point is reached where a new order is placed. This is called

continuous review.

b) The inventory levels are reviewed at equal intervals of time and orders

are placed accordingly at such levels. This is called periodic review.

5. Time Horizon

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 The period over which the time cost will be minimized and inventory

level will be controlled is termed as time horizon. This can be finite or

infinite depending on the nature of demand.

6. Stock Replenishment

The rate at which items are added to the inventory is called the rate of

replenishment. The actual replenishment of items may occur at a uniform

rate or be instantaneous over time. Usually uniform replacement occurs in

cases when the item is manufactured within the factory while

instantaneous replacement occurs in cases when the items are purchased

from outside sources.

7. Lead Time

The time gap between placing an order for an item and actually receiving

the item into the inventory is referred to as lead time.

8. Reorder Level

The lower limit for the stock is fixed at which the purchasing activities

must be started for replenishment. With this replenishment, the stock

reached at a level is known as maximum stock. The level between

Maximum and minimum stock is known as the reorder level.

9. Economic Order Quantity (EOQ)

The order in quantity that balances the costs of holding too much stock

vis-à-vis the costs of ordering in small quantities too frequently is called

Economic Order Quantity (or Economic lot size).

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 10. Reorder Quantity

The quantity ordered at the level of minimum stock is known as the

reorder quantity. In certain cases it is the ‘Economic Order Quantity’.

We shall discuss the following inventory models for

obtaining economic order quantity:

(i) EOQ Model with Uniform Demand

(ii)EOQ Model with Different Rates of Demand in Different Cycles

(iii) EOQ Model when Shortages are Allowed

(iv) EOQ Model with Uniform Replenishment

(v)EOQ Model with Price (or Quantity) Discounts

The notations commonly used in inventory models are:

Q: Order quantity or lot size (number of units ordered per order/supply).

D: Demand rate or demand per unit time (units of inventory demanded per year).

N: Number of orders placed per year.

TC: Total Inventory Cost.

Co: Ordering cost per order.

C: Purchase or manufacturing cost per unit of inventory.

Ch: Carrying or holding cost per unit per period of time the inventory is kept.

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 Cs: Shortage cost per unit of inventory.

t: Time between placing two successive orders (ordering cycle).

rp : Replenishment rate at which lot size Q is added to inventory.

Model I: EOQ Model with Uniform Demand

The objective of the model is to determine an optimum EOQ such that the total
inventory cost is minimum.
Following assumptions are made for this model:
1. Demand D is constant and known.
2. Replenishment is instantaneous i.e. the entire order quantity Q is received at one
time as soon as the order is released.
3. Lead time is zero.
4. Purchase price or cost per unit is constant i.e. discounts are not allowed.

Carry cost Ch and ordering cost Co are known and constant.

6. Shortage is not allowed.

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 Since lead time is zero and replenishment is instantaneous safely stock is
not required i.e. minimum level is zero. Also, demand is uniform. So, the
average inventory per cycle= ½(maximum level + minimum
level)=1/2(Q+0)=Q/2

Since the average inventory during any cycle period is Q/2, the average
inventory during the entire period is also Q/2.

So,carrying cost =average units in inventory×carrying cost per unit =Q/2

Ch

Ordering cost =number of orders ×ordering cost per order =N×Co=

D/Q ×Co
Total variable inventory cost is then given by TC= Ordering cost+
Carrying cost
Differentiating TC w.r.t Q, and equating it to zero,we get
-D/Q2 ×Co +1/2× Ch =0
D/Q×Co =Q/2 ×Ch
Q2 = 2DC0 /Ch
Q= √2DCo/Ch
This value of Q minimizes the TC and hence it is the EOQ.
Let us denote it by Q*

Hence,the total number of orders placed per year N*=D/Q*

The minimum total yearly inventory cost is

TC*=√2DCo Ch (on simplification)

And the total minimum cost =TC*+ cost of material

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 APPLICATION OF EOQ MODEL WITH UNIFORM
DEMAND:

 Inventory Management: EOQ (Economic Order Quantity) helps

optimize inventory levels, ensuring that businesses order the right
quantity of goods to meet demand without excess or shortages.

 Cost Minimization: The EOQ model minimizes total inventory

costs by finding the ideal balance between ordering costs and
holding costs. This is crucial for efficient cost management in
businesses.

 Supplier Negotiations: EOQ provides a basis for negotiating with

suppliers. By understanding the optimal order quantity, businesses
can negotiate better terms, such as discounts for larger orders, thus
reducing overall costs.

 Production Planning: Manufacturers can use EOQ to plan

production schedules efficiently. This helps in maintaining a steady
production flow while avoiding overproduction or
underproduction, leading to improved resource utilization.

 Cash Flow Management: EOQ aids in managing cash flow by

preventing tying up excessive funds in inventory. It ensures that
capital is used judiciously, balancing the need for sufficient stock
with the necessity of keeping liquid assets available for other
business needs.

LIMITATIONS OF THIS MODEL :

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  ng the average inventory level over the entire cycle. This involves
integrating the demand function to find the average demand and then
using it to determine the average inventory.
2. Calculation of Ordering Costs:
 Determine the ordering costs by incorporating the variable demand into
the ordering cost formula. This adjustment ensures that the model reflects
the actual costs associated with placing orders during varying demand
conditions.
3. Optimal Order Quantity Calculation:
 Utilize the modified EOQ formula that accounts for the changing demand.
The objective is to find the order quantity that minimizes the total cost,
considering both holding costs and ordering costs.

Here ,the stock will vanish at different time periods with a policy of
ordering same quantity for replenishment of inventory.

Hence, replenishment rate is infinite, replenishment is instantaneous and

shortage is not allowed.

The total demand D is specified as demand during total time period T and
stock level Q is fixed.

Number of production cycles, 𝑛 = D/Q

Let the demand in different time periods be 𝐷1, 𝐷2, … , 𝐷𝑛 respectively
so that total demand in time T is

D= D1 +D2 + …..+Dn

Where, 𝑇 = 𝑡1 + 𝑡2 + ⋯ + 𝑡𝑛

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 Cost of ordering in time T is given by𝐷/Q 𝐶𝑜

Let Ch = holding cost per unit time

Carrying cost per unit time T = Q/2 × Ch ×T
Total inventory cost ,TC = Ordering cost + Carrying cost
Total cost is minimum,when ordering cost = carrying cost
Q*= √2Co /Ch × D/T

The result is similar to the previous model with only difference that
uniform demand is replaced by average demand.
Total minimum cost = TC*+ cost of material where TC*= √2D/T× Co × C

Advantages and Considerations:

Reflects Realistic Scenarios:The modified EOQ model with variable demand provides a more

realistic representation of inventory management in situations where demand is not constant.

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Complexity and Data Requirements: Implementing this model may require more complex

mathematical calculations and a deeper understanding of the demand variations. Accurate data on

demand patterns throughout the cycle is crucial.

Continuous Monitoring and Adaptability:Businesses need to continuously monitor demand

patterns and adjust the model parameters accordingly. This adaptability is necessary for effectively

managing changing demand scenarios.

Technology and Tools:The use of advanced inventory management software or tools that can

handle variable demand scenarios can facilitate the practical application of the modified EOQ

model.

In summary, the EOQ model with different rates of demand within a cycle enhances the accuracy of

inventory management by accommodating real-world variations. However, it demands a more

sophisticated approach ,considering the dynamic nature of demand

patterns and the associated complexities in calculations.

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MODEL III: EOQ MODEL WHEN SHORTAGES ARE ALLOWED

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ADVANTAGES OF SHORTAGES ALLOWANCE:

1. Cost Savings: Allowing for shortages in the Economic Order Quantity (EOQ)
model can lead to cost savings as it helps minimize holding costs associated with
excess inventory.
2. Flexibility: EOQ with shortages allows for more flexibility in inventory
management, accommodating situations where immediate fulfillment may not be
critical, enabling businesses to adapt to varying demand patterns.
3. Reduced Obsolescence Risk: By tolerating shortages, the risk of inventory
obsolescence is reduced, particularly for products with a limited shelf life or those
susceptible to rapid technological changes.

SOME LIMITATIONS ARE ALSO THERE AS:

Potential Customer Dissatisfaction: Allowing shortages may result in unfulfilled

customer demands, potentially leading to dissatisfaction and negatively impacting

customer relationships.

Lost Sales Opportunities: Shortages might cause businesses to miss out on potential sales

opportunities, as customers may turn to competitors who can fulfill their needs promptly.

Complexity in Planning: Managing inventory with allowances for shortages can add

complexity to the planning process, requiring careful monitoring and coordination to avoid

disruptions in the supply chain.

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MODEL IV : EOQ MODEL WITH UNIFORM REPLENISHMENT

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MODEL V : EOQ MODEL WITH PRICE BREAKS/ DISCOUNT

Economic Order Quantity (EOQ) model with price breaks refers to a

variation of the traditional EOQ model that takes into account quantity

discounts or price breaks offered by suppliers for purchasing larger quantities

of goods. In this model, the objective is to determine the optimal order

quantity that minimizes total inventory costs, considering the varying unit

costs at different order quantities.

Key features of the EOQ model with price breaks include:

Quantity Discounts: Suppliers may offer lower unit costs when the buyer

orders larger quantities. These discounts could be in the form of reduced per-

unit costs or fixed discounts for reaching specific order quantity thresholds.

Optimizing Total Cost: The EOQ with price breaks aims to find the order

quantity that minimizes the total cost, which includes both holding costs

(costs associated with holding inventory) and ordering costs (costs associated

with placing orders).

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Multiple EOQs: Unlike the basic EOQ model, which results in a single

optimal order quantity, the EOQ model with price breaks may identify

multiple order quantities corresponding to different price break points.

By considering quantity discounts, businesses can make informed decisions

about the order quantity that not only minimizes holding and ordering costs

but also takes advantage of price breaks offered by suppliers, ultimately

optimizing their overall procurement strategy.

We can define two variations of price break model as :

PRICE INVENTORY MODEL WITH ONE PRICE BREAK:

The Price-Break Inventory Model, also known as the Quantity Discount

Model or the EOQ model with a single price break, is a variation of the

Economic Order Quantity (EOQ) model that accounts for quantity discounts

offered by suppliers. This model is used to determine the optimal order

quantity that minimizes total inventory costs while considering changes in

unit costs at a specific order quantity threshold, known as the price break

point.

Key Components:

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Basic EOQ Parameters:

 Demand Rate (D): The rate at which units are consumed or sold over
a specific period.

 Ordering Cost (S): The cost associated with placing an order.

 Holding Cost per Unit (H): The cost of holding one unit of inventory
for a specified time.

Additional Parameters for Price-Break Model:

 Unit Cost Before Price Break (C1): The cost per unit for quantities up
to the price break point.

 Unit Cost After Price Break (C2): The cost per unit for quantities
beyond the price break point.

 Price Break Quantity (Qb): The order quantity at which the unit cost
changes.

Objective: The primary goal is to determine the order quantity that

minimizes the total cost, considering the varying unit costs due to the

price break.

EOQ MODEL WITH TWO PRICE BREAK

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 The Economic Order Quantity (EOQ) model with two price breaks is an

extension of the traditional EOQ model that incorporates quantity discounts

offered by suppliers at two different order quantity thresholds. This model

aims to determine the optimal order quantity that minimizes total inventory

costs, taking into account variations in unit costs associated with two distinct

price breaks.

Key Components:

Basic EOQ Parameters:

 Demand Rate (D): The rate at which units are consumed or sold
over a specific period.

 Ordering Cost (S): The cost associated with placing an order.

 Holding Cost per Unit (H): The cost of holding one unit of inventory
for a specified time.

Additional Parameters for Two-Price-Break Model:

 Unit Cost Before First Price Break (C1): The cost per unit for

quantities up to the first price break point.

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  Unit Cost Between First and Second Price Breaks (C2): The cost
per unit for quantities between the first and second price break points

 Unit Cost After Second Price Break (C3): The cost per unit for
quantities beyond the second price break point.

 First Price Break Quantity (Qb1): The order quantity at which the
unit cost changes from C1 to C2.

 Second Price Break Quantity (Qb2): The order quantity at which the
unit cost changes from C2 to C3.

OBJECTIVE :

The primary goal is to find the order quantity that minimizes the total cost,

considering the varying unit costs due to the two price breaks.

SUMMARY :

Inventory models are analytical tools used in supply chain management to

optimize the balance between holding and ordering costs. These models aim

to determine the most cost-effective order quantity and reorder point.

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These models provide valuable insights for businesses, helping them strike a

balance between holding excess inventory to meet demand and minimizing

the costs associated with ordering and holding stock. Extensions and

variations cater to diverse supply chain scenarios, offering flexibility in

optimizing inventory management strategies.

BIBLIOGRAPHY

 Silver, E.A., Pyke, D.F., & Peterson, R. (1998). Inventory Management

and Production Planning and Scheduling. John Wiley & Sons.

 Nahmias, S. (2014). Production and Operations Analysis. McGraw-Hill

Education.

 Tersine, R.J. (1994). Principles of Inventory and Materials

Management. North River Press.

 Ravi, V. (2014). Inventory Models: A Tool for Effective Management

of Inventory System. Global Journal of Finance and Management, 6(3),

257-262.

 Sharma, S. (2011). A Study of Inventory Management in Small Scale

Industries: A Case Study of Mysore Sandal Soap Factory, Mysore.
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 International Journal of Engineering Science and Technology, 3(2),

1335-1343.

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