Question

I need guidance to resolve this case study, please. I do not know how to start!!!

Medical Computing Solutions, Inc (MCS) designs and manufactures medical grade all-in-on computer systems developed specifically for application in healthcare environment. Medical grade computer systems are developed to meet standard requirement, such as IEC 6060, as well as others that make them a better fit than the consumer grade computers for medical applications, i.e. ruggedized, easily cleanable for infection control, etc,

MCS customers include hospitals, clinics, private practices, laboratories, etc. MCS portfolio offers several standard computer platforms the customers can choose from, as well as highly customized solutions that are tailored to specific customer specifications. One of MCS standard platforms is the Base-Care Platform (BCP), which has been popular with small and medium size clinics and private practices. While BCP sales have been growing, there are a number of competing platforms that are available from competitors.

MCS products are sold through a channel-partner firm (sales-rep) that also offers other brands of medical all-in-one systems. The sales-rep receives the order from MCS distribution center within 3 days after notifying it, provided that the stock is available. Since competition is fierce, backorder is not a viable option for BCP. In such case, MCS simply loses the amount of business.

Below are some key data for BCP:

• BCP retail price is $1800 per unit
• BCP cost per unit is $600
• BCP manufacturing + ship cycle time (lead time) is approximately 1 month
• MCS incurs ordering costs of $70 each time an order is placed for BCP
• Monthly inventory carrying costs for BCP are $10 per unit
• MCS wants to maintain a 97% service level with its BCP customers

Assume we are now approaching the end of this year. A demand forecast for BCP in the upcoming year has been prepared-see-below table-and will be used to make an inventory plan for BCP.

Month	BCP Demand (units) for the upcoming year
Jan	3000
Feb	5000
March	4000
Apr	7000
May	12000
Jun	8000
Jul	7000
Aug	5000
Sep	4000
Oct	3000
Nov	5000
Dec	6000
Total	69000

1. Choose an appropriate inventory model to recommend managing inventories for next year. Specifically, articulate what model you have chosen and why it is an appropriate model to use in this case. Show details of your work, i.e. describe the model/approach, and show the equations, if any, that you use.
2. Determine the reorder point (ROP).
3. Determine the total annual inventory costs. Show details of your work, i.e. describe the approach, and show the equations, if any, that you use.

Answer 1

INVENTORY MANAGEMANT IS ASYSTEMATIC APPROACH TO SOURCING ,STORING ,AND SELLING THE INVENTORY -BOTH RAW MATERIALS (COMPONENTS )AND FINISHED GOODS (PRODUCTS).IN BUSINESS TERMS,INVENTORY MANAGEMENT MEANS THE RIGHT STOCK,AT THE RIGHT LEVELS,IN THE RIGHT PLACE ,AT THE RIGHT TIME ,AND AT THE RIGHT COST AS WELL AS PRICE.

SOME COMPANIES IMPROVE THEIR INVENTORY POLICY FOR WHEN AND HOW MUCH TO REPLENISH THEIR INVENTORY.

THE MATHEMATICAL INVENTORY MODELS USED WITH THIS APPROACH CAN BE DIVIDED INTO TWO BROAD CATEGORIES - DETERMINISTIC MODELS AND STOCHASTIC MODELS- ACCORDING TO THE PREDICTABILITY OF DEMAND INVOLVED . THE DEMAND FOR A PRODUCT IN INVENTORY IS THE NUMBER OF UNITS THAT WILL NEED TO BE WITHDRAWN FROM INVENTORY FOR SOME USE DURING A SPECIFIC PERIOD .IF THE DEMAND IN FUTURE PERIODS CAN BE FORECAST WITH CONSIDERABLE PRECISION,IT IS REASONABLE TO USE AN INVENTORY POLICY THAT ASSUMES THAT ALL FORECAST WILL ALWAYS BE COMPLETELY ACCURATE .THIS IS THE CASE OF KNOWN DEMAND WHERE A DETERMINISTIC INVENTORY MODEL WOULD BE USED.HOWEVER ,WHEN DEMAND CANNOT BE PREDICTED VERY WELL ,IT BECOMES NECESSARY TO USE A STOCHASTIC MODEL WHERE THE DEMAND IN ANY PERIOD IS RANDOM VARIABLE RATHER THAN A KNOWN CONSTANT

THE ECONOMIC ORDER QUANTITY MODEL OR THE EOQ MODEL -

UNITS OF THE PRODUCT UNDER CONSIDERATION ARE AASUMED TO BE WITHDRAWN FROM INVENTORY CONTINUOUSLY AT AKNOWN CONSTANT RATE.

THE BASIC EQO MODEL ASSUMPTIONS

1.A KNOWN CONSTANT DEMAND RATE OF A UNITS PER UNIT TIME

2.THE ORDER QUANTITY TO REPLENISH INVENTORY ARRIVES ALL AT ONCE JUST WHEN DESIRED , NAMELY ,WHEN THE INVENTORY LEVELS DROPS TO 0.

3.PLANNED SHORTAGE ARE NOT ALLOWED .

IN REGARD TO ASSUMPTION 2,THERE USUALLY IS A LAG BETWEEN WHEN AN ORDER IS PLACED AND WHEN IT ARRIVES IN INVENTORY .THE AMOUNT OF TIME BETWEEN THE PLACEMENT OF AN ORDER AND ITS RECEIPT IS REFERRED TO AS THE LEAD TIME .THE INVENTORY LEVEL AT WHICH THE ORDER IS PLACED IS CALLED THE REORDER POINT.

THE REORDER POINT IS THE LEVEL OF INVENTORY WHICH TRIGGERS AN ACTION TO `REPLENISH THAT PARTICULAR INVENTORY STOCK .IT IS A MINIMUM AMOUNT OF AN ITEM WHICH A FIRM HOLDS IN STOCK ,SUCH THAT ,WHEN STOCK FALLS TO THIS AMOUNT ,THE ITEM MUST BE REORDERED.

REORDER POINT =AVERAGE DAILY USAGE * LEAD TIME

3 .ANNUAL INVENTORY COST IS THE SUM OF ANNUAL HOLDING COST AND ANNUAL SETUP (ORDERING )COSTS =$250+$2400=42650.SOMETIMES,ESPECIALLY WHEN COMPARING ALTERNATIVE SOURCES OF SUPPLY WITH DIFFERENT PER-UNIT PURCHASE COSTS,IT IS NECESSARY TO INCLUDE ANNUAL PURCHASING COST IN OUR TOTAL COST COMPUTATIONS

THE TOTAL COST OF INVENTORY IS THE SUM OF THE PURCHASE ,ORDERING AND HOLDING COST . AS A FORMULA ;TC=PC+OC+HC,WHERE THE TC IS THE TOTAL COST .

PC IS PURCHASE COST

OC IS ORDERING COST

HC IS HOLDING COST

WE ARE USING EQO METHOD