In: Operations Management
Suppose that the R&B Beverage Company has a soft drink product that shows a constant annual demand rate of 3,450 cases. A case of the soft drink costs R&B $4. Ordering costs are $23 per order and holding costs are 26% of the value of the inventory. R&B has 250 working days per year, and the lead time is 5 days. Identify the following aspects of the inventory policy:
DEMAND = 3450
ORDERING COST = 23
HOLDING COST = 1.04
COST PER UNIT = 4
LEAD TIME = 5
WORKING = 250
1. EOQ = SQRT(2 * ANNUAL DEMAND * ORDERING COST / HOLDING COST PER UNIT) = SQRT(2 * 3450 * 23 / 1.04) = 390.64
2. REORDER POINT = DAILY DEMAND * LEAD TIME = (3450 / 250) * 5 = 69
3. CYCLE TIME = EOQ / (ANNUAL DEMAND / WORKING) = 390.64 / (3450 / 250) = 28.31
4. ANNUAL HOLDING COST = (EOQ / 2) * HOLDING COST PER UNIT = (390.64 / 2) * 1.04 = 203.1
ANNUAL ORDERING COST = (DEMAND / EOQ) * ORDERING COST = (3450 / 390.64) * 23 = 203.1
TOTAL COST OF MANAGING INVENTORY = ANNUAL HOLDING COST + ANNUAL ORDERING COST = 203.1 + 203.1 = 406.2
ANNUAL MATERIAL COST = ANNUAL DEMAND * PRICE PER UNIT = 3450 * 4 = 13800
TOTAL COST OF INVENTORY = ANNUAL HOLDING COST + ANNUAL ORDERING COST + ANNUAL MATERIAL COST = 203.1 + 203.1 + 13800 = 14206.2
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