Question

Each pair of LIGHTRUN sneakers costing $100 is ordered in quantities of 500 units with annual demand is 52000 units.

The carrying costs are 20%, and the cost of placing an order is $30.

1: Assit the retailer to calculate the inventory cost (carrying, ordering and item cost on annual total basis)

2: If the goods delivery is 10 working days, what will be average inventory in transit in dollars?

3:What will it be when the delivery lead time is improve by 20%?

4: Give 2 reasons why the retailer should reduce the in transit inventory?

Answer 1

Answer :

Ordering Cost = (annual demand/order quantity) x cost per order

= (52000 / 500 ) * 30 = 3120

No. of orders = 52000/500 = 104

Time between orders = 365/104 = 3.5

At Economic order quantity level :

Carrying/holding cost = ordering cost

(order quantity/2) x holding cost per unit per year = (annual demand/order quantity) x cost per order

(500/2) x holding cost per unit per year =(52000 / 500 ) * 30

holding cost per unit per year = 12.48

Carrying cost = 500 / 2 *12.48 = 3120

Total cost of sneakers = 52000*100 = 52,00,000

Average inventory in transit in dollars = 3120/3.5 * 10 = 8914

If delivery lead time is improved by 20%, means delivery lead time will be 8 days. Average inventory = 3120/3.5*8

= 7131

The retailer should reduce the in transit inventory to reduce the cost of carrying inventory

And to reduce the loss during transit.