A practical model for managing inventories with unknown costs and a budget constraint

Abstract

The economic production quantity method is one of the simplest models to control production and inventory. However, the assumptions on which it is based make its application difficult in practical situations. In most companies, set-up and inventory costs are unknown, or may not even exist as such, although other data are known, such as available capacity in machining hours and limits set by the financing subsystem. The present work offers a multi-item inventory model that sets reference values using known values such as inventory investment limits and production capacity. In order to confer the proposed model’s larger practical content, a spreadsheet available to be downloaded has been implemented. Finally, the model dynamics is illustrated as a numerical example obtained from a real company.

Keywords:

• inventory management
• cost management
• modelling
• lot sizing
• EPQ
• budget constraint

Acknowledgements

The authors thank some anonymous referees for their constructive suggestions that have improved the paper.