Question

Mimova Ltd buys shoes from a supplier in France and sells them on to retailers in Australia. Mimova Ltd currently uses an EOQ model to determine the number of shoes to send to order.

• Annual demand for shoes are approximately 45,600.
• The ordering cost is $55 per order.
• The annual cost of physically storing shoes is $8.75 per unit.
• The insurance on the inventory (shoes) cost is $4.25 per unit.
• The opportunity cost (annual ROI 25% x $30) is $7.50 per unit.

Mimova’s accountant, Maison Courtney, recently attended a seminar on Just-in-Time (JIT) and is considering how the ideas of JIT differ from traditional techniques like EOQ and how they may help to manage inventory more efficiently.

REQUIRED

A) Use the EOQ model to determine the optimal number of shoes per order. (show calculations)

B) If it takes two weeks to receive an order, at what point should Mimova Ltd reorder shoes? (show calculations)

C) What are the total relevant ordering and carrying costs? (show calculations)

D) Mimova Ltd has determined that demand may vary from the average by up to 25%. To handle the variation in demand, Mimova Ltd has decided that it should maintain enough safety stock to cover any demand level. How much safety stock should the Adelaide warehouse hold? How will this affect the reorder point and reorder quantity? (show calculations)  

E) Briefly outline what a Just-in-Time system is and explain why inventory holding cost can be regarded as being underestimated traditionally, providing examples of component parts of that cost. Also explain what measures can be put in place to reduce the cost per order.

Answer 1

A.

EOQ = root off ((2 * D * O ) / C )

Where,

D = Annual demand = 45600

O = ordering cost = 55 per order

C = carrying cost = 8.75 + 4.25 + 7.5 = 20.5

EOQ = root off ((2 *45600 * 55 ) / 20.5 )

EOQ = root off (5016000/20.5)

EOQ = root off (244682.92)

EOQ = 495 units per order

B.

Re-order point = Demand per days * lead time

Here

Re-order point = Demand per week * lead time in week

Demand per week = 45600 / 52 = 877

  lead time in week = 2 weeks

Re-order point = 877 * 2 = 1754 units

C.

Relevant cost

Ordering cost = $55 per order

Carrying costs =

The annual cost of physically storing shoes is $8.75 per unit.

The insurance on the inventory (shoes) cost is $4.25 per unit.

The opportunity cost (annual ROI 25% x $30) is $7.50 per unit.

Total carrying cost = 21.50 per units

D.   

Safety stock =( max. Daily usage * max. lead time in days) - (avg. Daily usage * avg. Lead time in days )

avg. Daily usage = 877 / 7 = 125 units

max. Daily usage = 125 + 25% = 156 units

avg. Lead time in days = 2 week = 14 days

max. lead time in days = 14 days (sames above )

Safety stock =( 156 * 14 ) - ( 125 * 14 ) = 2184 - 1750 = 434 units

Now, the reorder point are changed due to safety stock, in question b we answered the re order question, but there was no safety stock.

Re-order point = ( Demand per week * lead time in week ) + safety stock

Re order level = ( 877 * 2 ) + 434 = 1754 + 434 = 2188 units.

E.

Just - in - time inventory system

JIT is a inventory strategy that process raw-material orders from suppliers directly with production department schedule . firm’s employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs. This method requires companies to forecast demand accurately and correct method in order to ensure perfect to meet demand.

Inventory cost

> Ordering costs (also called Setup costs)

> Carrying costs (also called Holding costs)

> Stock-out costs

The just-in-time system avoids the waste associated with overproduction, waiting for material and holding excess inventory in store.