Question

#1. Harley-Davidson has its engine assembly plant in Milwaukee and its motorcycle assembly plant in Pennsylvania. Engines are transported between the two plants using trucks, with each trip costing $1,000. The motorcycle plant assembles and sells 300 motorcycles each day. Each engine costs $500, and Harley incurs a holding cost of 20 percent per year. How many engines should Harley load onto each truck? What is the cycle inventory of engines at Harley?

#2. As part of its initiative to implement just-in-time (JIT) manufacturing at the motorcycle assembly plant in Exercise 1, Harley has reduced the number of engines loaded on each truck to 100. If each truck trip still costs $1,000, how does this decision impact annual inventory costs at Harley? What should the cost of each truck be if a load of 100 engines is to be optimal for Harley?

#3. A North Face retail store in Chicago sells 500 jackets each month. Each jacket costs the store $100 and the company has an annual holding cost of 25 percent. The fixed cost of a replenishment order (including transportation) is $100. The store currently places a replenishment order every month for 500 jackets. What is the annual holding and ordering cost? On average, how long does a jacket spend in inventory? If the retail store wants to minimize ordering and holding cost, what order size do you recommend? How much would the optimal order reduce holding and ordering cost relative to the current policy?

Answer 1

1. EoQ = [ 2x avg annual demand x ordering cost / cost of holding inventory for a year]^1/2

Assuming that the plant is open all 365 days

EOQ = [ 2 x365x300x1000/500x0.2]^1/2 = 1480

Cycle inventory = Q/2 =1480/2 =740

Cost of holding + ordering = (365x300/1480)x1000+740x100 = 147990

2. If the quantity is reduced to 100, the number of orders will increase and the cost will be affected as,below

(365x300/100) x1000 + 50x100 = 1100000

The cost will increase significantly ( around 7 times)

If the cost has to remain the same ( 147990) the cost of ferrying by truck should be

(365x300/100) x C + 5000 =147990

which gives C = 142990/365x3 =130.58

Hence the cost of transportation bytruck should be 131.

3. The economic order quantity

= [ 2 x 500x12x100/100x0.25]^1/2 = 219

Cost with EOQ = cost of ordering + cost of holding

= 500x12/219 x100+219/2x25 =5476

Cost with exisiting system

= 500x12/500 x100 + 500/2x25 = 7450

Avg inventory = 500/2 = 250

avg time spent in inventory = 250/500 x 1 month = 15 days.

Cost saved = 7450-5476 =1974