Question

With an average of 24,000 units every year in its manufacturing process. The supply chain partner who charges a price per unit of $3000 for the component. Each order costs $500 to process. the operations manager wants to factor in inventory holding cost at 13.75% of the unit cost. (1) Determine the economic order quantity (EOQ) and total annual cost if ordering the EOQ number of units. How much will DBS be able to save by adopting the EOQ versus a current Q = 400? What is the reorder point with safety stock if lead time is 21 days, standard deviation of weekly demand is 3.75 and on an average the firm operates for a total of 48 weeks every year? Assume a z value of 1.645 corresponding to the desired service level What would the reorder point be without safety stock and how would you interpret each of the two reorder points? (2) Environmental considerations, material losses and waste disposal can be included in the EOQ model to improve inventory management practices. Assume that on an average 7.5% of the components that DBS purchases are damaged in transit thus becoming unusable and have to be disposed of. Disposal cost is $250 per unit. Find the new EOQ and total annual cost when the disposal cost is considered. What implications does this have for the sustainability of DBS’ inventory practices?

Answer 1

	Annual requirement	24000	units
	Ordering Cost	500	$
	holding cost	412.5
	3000*13.75%
	Economical order quanitity	root |(2*annual requiremtn*ordering cost)/(holding cost per Unit)
		241
		ROUND(SQRT((2*24000*500)/68.75),0)
		Ordring cost	Holding cost	Total Cost
	EOQ 591	49793	49706	99499
	current order quanity when qty 400	30000	82500	112500
	Total Saving			13001
	Caclulation of reorder quantity
	safty stock when Lead time 21 days
	Daily demand*lead time* std deviation	5625	units
	3*(24000/48)*3.75
	safty stock when Lead time 21 days and z =1.645 for desired service levels
	Daily demand*lead time* std deviation	2468	units
	ROUND(3*(24000/48)*1.645,0)
	Above we have 2 reorder quantiy when we have to serve 100% of the times standed deviation is used as a mulitpair so in any case we shall never go out of stock
	however when a we have to adhare to service levels lets say 90% then multiplair gets changed hence much lower reorder quantity can be
	With the new information supplied every time an order placed we incure $250 extra due to disposal cost of dimaged goods
	Hence new ordering cost	750	$
	500+250
	Annual requirement	24000	units
	holding cost	412.5	$
	500*13.75%
	Economical order quanitity	root |(2*annual requiremtn*ordering cost)/(holding cost per Unit)
		295
		ROUND(SQRT((2*24000*750)/412.5),0)