Question

(a) What do we mean by the ABC inventory classification? (b) In a firm’s inventory management, it often treats a few items with the “fixed-order quantity” inventory model, while many other items with a “fixed-time period” model. Explain the rationales of this practice from the perspective of inventory management. (c) A manufacturer keeps a continuous inventory review system on the key component, part X. The annual demand on part X is 12,000 units and the demand rate is constant. The supplier charges $50 for each unit of part X. Each order costs $150 to process and annual holding cost per unit is 20% of the purchase price. What is the economic order quantity? How many orders will be placed each year (365 days)? If the lead time is 3 days, what is the reorder point?

Answer 1

ABC stock administration framework arranges the stock things as per their dollar estimation of utilization. The target behind the activity is to dole out the relative significance to various things as indicated by their dollar esteem over a time span, and structure the stock strategies acordingly, so as to ensure that the more significant requests are dealt with all the more adequately to spare the cost and improve the client assistance levels. Under ABC order, the top things which add to 75-80% of dollar esteem are sorted under A,the lower 15-20% supporters among B, and the base 5% or so under class C.

Fixed request amount things are the ones which have progressively ordinary and certain utilization, and future requests are unsurprising. This framework is utilized when the organization bargains in numerous things and assessing every one isn't achievable. This is advantageous on the grounds that lesser wellbeing stock is to be kept, and ease of holding is acquired. The fixed period framework is progressively valuable for things which have unsure interest, and with assistance of this framework, just the amount required is requested after intermittent survey. It is progressively reasonable for organizations that bargain in less things, and it is helpful to check the physical load of the things intermittently. On the off chance that a firm uses the two frameworks, the nature of utilization and estimation of things is should be extraordinary.

EOQ = [2 x demand per annum x cost of ordering / cost of holding]^1/2

= [ 2x 12000x150/50x0.2]^0.5

=600

Number of orders = 12000/600 =20

ROP = demand during lead time = (12000/365)x 3 =98.63 =99 units