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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.

keosha answered 5 months ago
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