An economic production quantity inventory model with backorders considering the raw material costs

The classical Economic Production Quantity (EPQ) inventory model does not consider ordering and holding costs of raw materials. In this direction, this paper considers the ordering and holding costs for both raw materials and nished product. Basically, four EPQ inventory models are developed from an easy perspective that has not been considered before. It was found that the ordering and holding costs of raw materials must be taken into account, because they signicantly impact on the optimal production lot size of the nished product in both EPQ without shortages and EPQ with shortages inventory models. Furthermore, an EPQ inventory model that determines the optimal lot size for a product that requires more than one raw material, and an EPQ inventory model that obtains the optimal batch size for multiple products, which are manufactured with multiple raw materials, are proposed. Numerical examples are presented in order to illustrate the use of the proposed inventory models.