Question

In: Operations Management

In inventory management, economic order quantity (EOQ) is the order quantity that minimizes the total holding...

  1. In inventory management, economic order quantity (EOQ) is the order quantity that minimizes the total holding costs and ordering costs. It is one of the oldest classical production scheduling models.

Requirements:

Discuss the EOQ Model using an quantitative example computation with interpretation of the solution.

2. The B. N. Thayer and D. N. Thaht Computer Company sells a desktop computer that is popular among gaming enthusiasts. In the past few months, demand has been relatively consistent, although it does fluctuate from day to day. The company orders the computer cases from a supplier. It places an order for 5,000 cases at the appropriate time to avoid stockouts. The demand during the lead time is normally distributed, with a mean of 1,000 units and a standard deviation of 200 units. The holding cost per unit per year is estimated to be $4.

Requirements:

a. How much safety stock should the company carry to maintain a 95% service level?

b. What is the reorder point?

c. What would the total annual holding cost be if this policy is followed

The answer should Include: Computations, Evaluation, and Recommendation

Solutions

Expert Solution

(2)

Given:

Quantity ordered = Q = 5000

Standard deviation during lead time = σ = 200

Annual holding cost per unit = H = 4

Average demand during lead time = d = 1000

(a)

Safety stock = SS = z*σ

Z is the corresponding value to the 95% service level. Value of z = 1.65

Safety Stock = 1.65 * 200 = 330 units

The company should keep 330 units as inventory in the warehouse.

(b)

Reorder point = ROP = Average demand during lead time + Safety stock = 1000 + 330 = 1330 units

The company should start ordering process when the company has 1330 units in the inventory.

(c)

Total Annual Holding cost = Q/2 * H + SS * H = (5000/2) *4 + (330*4) = 10,000+ 1320 = 11320 dollars

The company should focus on reducing annual holding cost.

Recommendation:

The company should reevaluate the inventory policy. The company should identify the ordering cost and total annual inventory cost. So the company can reduce inventory cost. Moreover, the company should identify the trend (if present) in the demand to predict the demand more accurately. This will help the company to reduce inventory.


Related Solutions

Economic Order Quantity (EOQ) is the order quantity that minimizes the total holding costs and ordering...
Economic Order Quantity (EOQ) is the order quantity that minimizes the total holding costs and ordering costs. 1) What's the impact of a positive lead time on EOQ? 2) Can supply chain managers in fast-fashion industries apply the EOQ model to manage their inventories? If yes, how? If no, why?
The Economic Order Quantity (EOQ) model is a classical model used for controlling inventory and satisfying...
The Economic Order Quantity (EOQ) model is a classical model used for controlling inventory and satisfying demand. Costs included in the model are holding cost per unit, ordering cost and the cost of goods ordered. The assumptions for that model are that only a single item is considered, that the entire quantity ordered arrives at one time, that the demand for the item is constant over time, and that no shortages are allowed. Suppose we relax the first assumption and...
Find the EOQ, the total annual cost associated with the economic order quantity, the reorder point,...
Find the EOQ, the total annual cost associated with the economic order quantity, the reorder point, number of orders per year and the time between orders. Annual Demand 15,600 units Weeks Operating 52 weeks/year Set up Cost $60/order Holding rate 20% Unit cost $80 /unit Lead-Time 5 weeks
A company examines its inventory policy and considers using an economic order quantity (EOQ) approach. They...
A company examines its inventory policy and considers using an economic order quantity (EOQ) approach. They have the following information about their bestselling model of televisions: Annual demand - 4000 sets Current order quantity - 80 sets Carrying cost - $80.00/set/year Order cost - $200 Lead time - 6 days Operating days per year - 300 days a. What is the current total annual cost (TC) at the current order quantity? b. What is the economic order quantity (EOQ)? c....
Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within...
Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within the company, especially to reduce the existing fixed costs that can arise from the purchase of goods using expedition services. For example, buying goods with Full Container Load (FCL) and Less Container Load (LCL), the LCL fixed cost will be greater because the goods purchased are small but the tariff for sending goods from the supplier to the factory requires no small cost, especially...
COST ACCOUNTING Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory...
COST ACCOUNTING Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within the company, especially to reduce the existing fixed costs that can arise from the purchase of goods using expedition services. For example, buying goods with Full Container Load (FCL) and Less Container Load (LCL), the LCL fixed cost will be greater because the goods purchased are small but the tariff for sending goods from the supplier to the factory requires no small...
Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within...
Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within the company, especially to reduce the existing fixed costs that can arise from the purchase of goods using expedition services. For example, buying goods with Full Container Load (FCL) and Less Container Load (LCL), the LCL fixed cost will be greater because the goods purchased are small but the tariff for sending goods from the supplier to the factory requires no small cost, especially...
Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within...
Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within the company, especially to reduce the existing fixed costs that can arise from the purchase of goods using expedition services. For example, buying goods with Full Container Load (FCL) and Less Container Load (LCL), the LCL fixed cost will be greater because the goods purchased are small but the tariff for sending goods from the supplier to the factory requires no small cost, especially...
Using the EOQ​ model, if a​ firm's order quantity is 500 units and its annual holding...
Using the EOQ​ model, if a​ firm's order quantity is 500 units and its annual holding cost is greater than its annual setup​ cost, then what can we say about the optimal order​ quantity? A. Optimal order quantity​ = 500 units B. Optimal order quantity​ < 500 units C. Optimal order quantity​ > 500 units D. Not enough information is given to answer the question
Which of the following is NOT an assumption of the traditional economic order quantity (EOQ) model?...
Which of the following is NOT an assumption of the traditional economic order quantity (EOQ) model? a. Holding and ordering costs are stable and known. b. Demand is constant and known. c. Supply lead time is constant and known. d. Quantity discounts are possible. Kim’s Nail Salon uses a weighted moving average method to forecast demand. She assigns a weight of 5 to the previous month’s demand, 3 to demand two months ago, and 2 to demand three months ago....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT