Question

The data in the following two questions are taken from assignment 4 page 296 of Merdith & Shafer. The Dubai based construction company Blue Ocean Towers uses a constant flow of in total 15,000 solar panels per year, which it buys from King Kong. Blue Ocean Towers receives the ordered panels from King Kong’s regional distribution center. The ordering cost per delivered order are 50 USD, and the holding cost for Blue Ocean Towers are 1.5 USD per panel per year.

Question 1. Calculate the EOQ for Solar Panels for Blue Ocean Towers.

As a result of implementing Sun Kong’s coloring innovation, King Kong offers Blue Ocean Towers to switch to buying colored panels. The colors red, yellow, and blue are available for the same price as the original panel for a period of 12 months. As King Kong will have to set up the coloring machines, the ordering costs for the red and green solar panels will be four times higher than for the regular panels, at 200 USD per order.

Question 2. Calculate the EOQ for Colored Solar Panels for Blue Ocean Towers. Briefly interpret the change in quantity when compared to the answer to Question 1.

Question 3. Blue Ocean Towers experiences that demand for the colored panels is less stable than for the original ones, causing risks for going out of stock. What inventory replenishment do you advise them to use in this situation.

Answer 1

Economic order quantity ( EOQ ) can be denoted as ;

EOQ = square root ( 2 x Co x D / Ch )

Where ,

D = Annual demand

Co = Ordering cost

Ch = Annual unit inventory cost

Answer to question 1 :

For this case :

D = 15,000 solar panels

Co = $50

Ch = $1.5

EOQ = Square root ( 2 x 50 x 15000 / 1.5 ) = 1000

EOQ FOR SOLAR PANELS = 1000

Answer to question 2 :

For this case :

D = 15000

Co = $200

Ch = $1.5

EOQ = Square root ( 2 x Co x D / Ch ) = Square root ( 2 x 15000 X 200 / 1.5) = 2000

EOQ FOR COLORED SOLAR PANEL = 2000

Answer to question 3 :

Following needs to be done to establish inventory replenishment strategy :

1. Establish delivery lead time for colored solar panel
2. Since demand for colored panel is fluctuating, establish standard deviation of demand for colored panels during lad time
3. Determine percentage service level to customers ( e.g 99% customer service level will mean that if a customer approaches for a specific colored solar panel , probability that the item will be in stock = 0.99)
4. Establish Z value for corresponding service level from standard normal distribution table
5. Determine Safety stock to be maintained for colored solar panels. Safety stock can be frmulated as = Z value x standard deviation of demand during lead time
6. Finally determine reorder point for inventory replenishment strategy . Reorder point = Average demand during lead time + Safety stock