Ninth AIMS International Conference on Management January 1-4, 2012 1042 Simplification of EOQ Model for Planned Shortages by using Equivalent Holding Cost Bhausaheb Kharde Gahininath Vikhe Patil khardebr@yahoo.com gjvploni@yahoo.co.in Amrutvahini College of Engineering, Sangamner Keshav Nandurkar keshav1965@gmail.com K. K. Wagh College of Engineering, Nasik 1. Introduction Economic Order Quantity for Planned Shortages (EOQB) model is illustrated in very few text books (Anderson, 2009; Gupta, 2008; Narsimhan, 2010; Pannerselvam, 2009; Sharma, 2010; and Vora, 2011) due to its complexity. In literature, few authors use term "back ordering" while many authors prefer "planned shortages" to describe this model. Both terms carry the meaning but back ordering is more preferable as it deal with the cost of back ordering. Hence in this paper back-ordering i.e. 'b' is used for subscript. For the model, replenishment is done at a point when stock reaches maximum planned shortages (negative inventory). Vora (2011) have given the assumptions. Gupta, Hira (2008) explains almost all the model including EOQB. Some authors prefer the term “carrying cost” (Sharma, 2010) while many authors use “holding cost” (Anderson, 2009; Pannerselvam, 2009; Vora, 2011). Holding cost is more meaningful in inventory model context and hence should be preferred. Inventory is waste; and should be minimized, as it could not be eliminated. So Inventory models have significant applications. Inventory Models Four basic models are used: 1) EOQ, 2) ELS or EPQ, 3) EOQ with planned shortages (EOQB ) and 4) ELS with planned shortages (ELSB). The objective is to minimize the total inventory cost wherever applicable. However last three models are more complex, requires very complicated formulae; and are not included in many texts. This is all do to complicated derivations and complex formulae involved in these two models. Equivalent holding cost really simplifies the traditional inventory models (Kharde, Vikhe Patil; 2011a, 2011b). We develop the concept of Equivalent Holding Cost (EHC) for EOQB in this manuscript. As a result, inventory model are very much simplified by usage of Equivalent Holding Cost (EHC) and surprisingly complex models have been now very simple to use and practice! It is just similar to using EOQ formulae. The manuscript is organized as given below. Notation is noted in the Section 2. The literature survey is presented in Section 3. Section 4, illustrates EOQB model with basic formulae. We introduce new research: factor for back ordering or planned shortages in Section 5. Our new concept of equivalent holding cost is derived in Section 6. Section 7, brings out the new formulae with derivation for EOQB model. At the end of this section, comparative formulae of model are noted. This gives an idea how our work have simplified the EOQB model. We explains working of one problem and derivation of classical EOQB model formulae conversion in Section 8. The conclusions are given in Section 9 and bibliography in Section 10. 2. Notation Notation Q The order quantity; Units Q* Economic Order Quantity (EOQ) ; Units O Ordering cost per order; $ per order H Holding Cost/unit/year; or Carrying cost /unit/year; $ per unit per year B Shortage Cost/unit/year; or back-ordering cost /unit/year; $ per unit per year T(Q) Total annual inventory cost; $ per year O(Q) Total annual ordering cost; $ per year H(Q) Total annual holding cost;$ per year