Question

1) Clancy's Motors has the following demand to meet for custom manufactured fuel injector parts. The holding cost for that item is $2 per month and each setup costs $80. Lead time is 0 months. Calculate the planned order releases using: (a) the EOQ technique, and (b) the POQ technique. And What are the costs of each plan, including the holding cost of any inventory left over after month 7? What technique performance is better.

Month	1	2	3	4	5	6	7
Requirement	400	150	200	150	100	150	250

Answer (Show all mathematical work):

(a) The monthly holding cost = $2/month

Average monthly demand = ??? units

The EOQ = ??? units

Total inventory held = ??? units

Setup costs = $???

Holding cost = $????

Total cost = $????

(b) POQ Interval = ?.??, round to # month.

Total inventory held = ? units

Setup costs = $???

Holding cost = $?

Total cost = $???

Answer 1

(a)

As given, holding cost for that item is $2 per month and each setup costs $80.

Average monthly demand = (Total demand)/ (number of months) = (400+150+200+150+100+150+250)/ (7) = 1400/ 7= 200

Total project annual demand is 200*12=2400.

EOQ = square root (2*D*S/H)

where D is annual demand, S is ordering cost, H is holding cost per year

EOQ = square root (2*2400*80/ (2*12)) = 126.49 ~127 (rounded)

Planned order release plan

Month	1	2	3	4	5	6	7
Requirement	400	150	200	150	100	150	250
Planned order receipt	508	127	127	254		254	254
Planned order release	508	127	127	254		254	254
Balance inventory available	508-400=108	127+108-150=85	127+85-200=12	254+12-150=116	116-100=16	254+16-150=120	254+120-250=124

Total inventory held = 124 units (at the end of Month 7)

Total Setup cost = (Number of planned order releases)*Setup cost = (12)*80 = $960 (rounded)

Total Holding cost = (Total inventory carried forward from one month to another)*(holding cost per month) = (108+85+12+116+16+120+124)*$2 = $1162

Total cost = Total Setup cost + Total Holding cost = $960 + $1162 = $2122

(b)

POQ uses EOQ to calculate fixed number of period requirements to include in each order

EOQ= 127

Average monthly demand = 200

POQ = EOQ/ Average monthly demand= 127/ 200 = 0.635 ~ 1 month

POQ Interval = 1 month

Month	1	2	3	4	5	6	7
Requirement	400	150	200	150	100	150	250
Planned order receipt	400	150	200	150	100	150	250
Planned order release	400	150	200	150	100	150	250
Balance inventory available	0	0	0	0	0	0	0

Total inventory held = 0 units

Setup costs = (number of setup)* cost per setup = (7)*$80 =$560

Holding cost = $0

Total cost = $560

Hence, POQ is a better cost effective option for order release plan

Please give thumbs up/ likes if you consider my answer useful. Thank you!