Question

Study the information provided below and answer the questions which follow:
INFORMATION

Shop n Pay is a fast-growing, diversified South African-based retailer dealing in fast moving consumer goods (FMCGs). The recently-appointed operations manager of Shop n Pay, Mr Benedict Msimanga, is currently reviewing all operations management policies of the company and has gathered the following information:
A. Internationalisation strategy With the recent conclusion of the African Continental Free Trade Agreement (AfCFTA), the company is in the process of expanding its operations to key markets on the African continent. Countries on the radar of Shop n Pay include Kenya, Tanzania and Ethiopia in East Africa, and in West Africa, Ghana, Ivory Coast and Senegal. Market research has revealed that the four countries have favourable tax policies, stable electricity network, relatively good road network and investor-friendly business environment.
B. Inventory management
The current policy is to order 100,000 units when the inventory level falls to 35,000 units. However, forecast demand to meet market requirements for next year is 625,000 units. The cost of placing and processing an order is R250, while the annual cost of holding a unit in stores is 5% of the unit purchase price. Both costs are expected to be constant during the next year. Shop n Pay sells a unit of the product for R15.00 at cost plus 50%. Orders are received two weeks after being placed with the supplier. You should assume a 350-day year and that demand is constant throughout the year.
C. Forecasting and other supply chain activities
A recent report produced by Shop n Pay’s chief demand planner has revealed that the retailer’s reliance on simple exponential smoothing to forecast demand for its products is partly responsible for the significant bullwhip effect in the supply chain and the stock outs in the past few years. In this regard, the chief demand planner is recommending that exponential smoothing with trend adjustment (Holt’s Model) should be used to forecast demand for aggregate planning for the 2020 fiscal year.
Mr Msimanga has retrieved from the retailer’s database the following information on number of goods sold over a two–year period.
Year

REQUIRED:
Study the information provided above under section B: Inventory management and answer the following questions:
2.2.1

Calculate the economic order quantity (EOQ).

2.2.2
Calculate the total cost of the current ordering policy and determine the savings that could be made should Shop n Pay switch to using the economic order quantity model.

Answer 1