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THE BELL SYSTEM TECHNICAL JOURNAL, JANUARY 1954 



Fig. 3 — Lot-size cost penalty relationships. 



1.22 Inventory Costs 



When more parts are made than are immediately needed, it becomes 

 necessary to store them until they are all used, when the process will 

 be repeated. The resulting cost penalty, compared to no storage at all, 

 may be stated analytically with the help of Fig. 3, which is a plot of 

 production as a function of time. Line A represents the number of parts 

 made in a lot as a function of time, while line B represents the parts used 

 in the next manufacturing stage, as a function of time. The difference 

 between the two lines at any time represents the number in storage, from 

 which their value and hence the interest charges may be found. 



The cost penalty per part due to storage is: 



Annual interest factor X value of one part X 



av. no. of parts in storage (6) 

 Annual production of this part 



C = 



The following steps can be taken to supply values for this equation. 

 From the figure, the maximum ciuantity of parts stored equals 



Ln 



or 



1 - 



