Original scientific paper

Optimal order policy for EOQ model under shortage level constraint

Singa Wang Chiu ; Department of Business Administration, Chaoyang University of Technology, Taichung, TAIWAN
Chia-Kuan Ting ; Department of Industrial Engineering and Management, Chaoyang University of Technology, Taichung, TAIWAN
Yuan-Shyi Peter Chiu ; Department of Industrial Engineering and Management, Chaoyang University of Technology, Taichung, TAIWAN

Abstract

This paper studies the optimal order policy for the economic order quantity (EOQ) inventory model under maximal shortage level constraint. We first prove that the total inventory cost per unit time for the classic EOQ model with backlogging permitted is less than or equal to that of the EOQ model with shortage not allowed. Secondly, the relationship between the “imputed backorder cost” and the maximal proportion of shortage permitted time per cycle is derived for decision-making on whether the service level can be accomplished or not. Finally, an equation for calculating the intangible backorder cost is proposed for the situation when the required service level is not achievable. By incorporating this intangible backorder cost, the newly derived optimal order policy is able to achieve the necessary service level as well as minimize the overall inventory costs. A numerical example is provided to demonstrate its practical usage.

Keywords

inventory, allowable shortage time, service level constraint, EOQ model, intangible backorder cost

Hrčak ID:

295596

URI

https://hrcak.srce.hr/295596

Publication date:

15.12.2005.

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