Question

In: Operations Management

Case - 3 You are newly appointed assistant plant manager and have been assigned the task...

Case - 3
You are newly appointed assistant plant manager and have been assigned the task of
examining ordering policies for supplies used in production. You found that your employer
was using an EOQ policy for ordering cases of lubricating oil. You called the finance
department and was told that for the purposes of analysis, the appropriate holding cost
was 24 % per year. Demand over the past three years was for 7486 cases or an average
of 2495 cases per year. At a cost of $ 6.32 per case, the cost of ordering the oil was
estimated to be $ 83 per order. You used these numbers to find the EOQ.
EOQ = ? 2DS / H .= ? [2* (7486 / 3) *83 ] / 0.24 * 6.32 .? 523
The result basically agreed with the employer's ordering size of 500. You then developed a table
showing oil usage for the past 36 months.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total
Gross requirement 2003 345 28 417 52 0 379 288 76 221 34 322 227 2389
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total
Gross requirement 2004 379 32 489 50 4 433 267 83 244 32 354 259 2626
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total
Gross requirement 2005 368 4 423 48 15 382 306 84 218 38 333 252 2471
Gross Total 7486
Note: Holding cost is per period
Also the case assumes there are 36 periods
So Holding cost is to be defined for a month
Now you are going to experiment on the past figures to calculate optimal inventory cost.
Q-1 Would lot for lot ordering be better than the current EOQ policy? Show calculations as proof.
Q-2 Would part period balancing be the best possible policy? Show calculations as proof.
Q-3 Is just in time inventory a relevant notion for lot sizing?
Q-4 How many orders would you recommend in 36 months? Show order cost as proof.
Q-5 Give recommendations with solid arguments?
Q-6 Any suggestions for improvements.

Solutions

Expert Solution

1. a. Based on EOQ of 523 units the total Cost of ordering + Inventory holding cost for 3 years is is 2429[ 810 + 877 + 742]

b. Based on Lot by Lot the cost is 996 * 3 = 2988

Hence the cost by EOQ method is lower that lot by lot

2.

1. EOQ =

Where D is Average annual demand

S is cost of ordering

H is annual holding cost per unit

= EOQ= 523

Below is the table where the Ordering Cost + Holding cost is calculated for Lot by Lot , EOQ and Part balancing method.

2. As shown above the total cost by part balancing is 1859 [ 740 + 603 + 516] its is lower than other methods.

3. Yes with lot size we order only the inventory required for the period and don't have any carry over inventory

keosha answered 9 months ago
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