Optimal Inventory Policy of Production Management: A Present Value Framework

Li-Fen Chang¹, Shou-Mei Su^1,2, Shy-Der Lin¹

¹Department of Applied Mathematics and Business Administration, Chung Yuan Christian University, Chung-Li City.
²Department of Banking and Finance, Takming University of Science and Technology, Taipei City.

DOI: 10.4236/eng.2013.56067                

Abstract

The classical economic production quantity (EPQ) assumes that the replenishments are instantaneous. As a manager of a factory, there is a problem must be taken into consideration. If the establishment buys all of the raw materials at the beginning, the stock-holding cost for the raw materials should be counted into the relevant costs. So the main purpose of this paper will add the raw materials stock-holding cost to the EPQ model and take the time value of money into consideration. Therefore, we will calculate the present value and compare the difference between take and does not take the time value of money into consideration. From these procedures of calculating, we found some interesting results: 1) the present value of total stock-holding cost of raw materials plus products from the beginning to time t is the same as the stock-holding cost of classical economic order quantity (EOQ) model; 2) the present value of total relevant cost is independent of the production rate (if the production rate is greater than the demand rate); 3) the optimal cycle time of total relevant cost not taking the time value into consideration is the same the optimal cycle time of classical EOQ model; 4) the purchasing cost per unit time is irrelevant to time.

Keywords

Inventory; EPQ; Present Value

Conflicts of Interest

The authors declare no conflicts of interest.

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