Question

Inventory

Explanation: Catco purchases parts, such as tires, engines, seats, and axles for construction equipment (such as a bulldozer). Catco is concerned with how much inventory is in the supply chain for several important reasons. When Catco purchases the parts (sends a purchase order (PO) to a supplier), Catco is now responsible to pay for the parts, which they do with cash (financial term, not really $20 bills). Cash must be financed through debt or equity (think interest rate on your credit card). This interest rate (weighted average cost of capital) is usually between 6-12% depending on the credit worthiness of the company. In addition, Catco needs to use warehouse space to store the parts when they arrive, they need to insure the parts, some get damaged, and possibly some will become obsolete (they will move to a new model of construction equipment that does not use the same part so it is no longer useful and they need to dispose of it). These costs added together make up an inventory “holding cost” which is typically between 12-24% of the value of the item.

Sample Calculation: Catco produces about 120 bulldozers per week and works four (Mon-Thurs) 10-hour shifts. They need 4 tires per bulldozer and 480 tires can fit on a single truck. Catco orders once a week (assume they pay when they order). Transportation takes one week. They hold 2 weeks worth of tires in safety stock. Map out the inventory in the supply chain. How much do they have at any given time (how much at the beginning of the week vs. the end of the week)? If the tires cost $50 each and the annual inventory holding cost is 18%: Note: assume 52 weeks in a year

1. What is the annual holding cost of transportation inventory?

2. What is the annual holding cost of safety stock inventory?

3. What is the cost per tire for transportation inventory and safety stock inventory?

Answer 1

Answer :

Data Given ,

Assuming no. of weeks in a year = 52 weeks

Annual Bulldozer production = Production of bulldozer per week * No.of week

= 120*52

= 6240 Annually

1 Bulldozer requires 4 tires

Annual Demand of tire = 6240*4 = 24960 (D)

lead time for tire = 1 week

Safety stock = 2 weeks of demand

=2*480

=960 tires

Weekly order size of tire = 6240*4 / 52 = 480 tires

Order size = 480 tires

Hence inventory at the beginning of the week

= Safety stock + order size

= 960 + 480

1440 At the beginning

Inventory at the end of the week

= Safety stock

= 96 At the end

Cost of tire c = $50

Annual inventory holding cost = 18%

(1). Annual holding cost of transportation inventory

Annual holding cost = DTCH /52

Where,

D = Annual demand of tire = 24960

T = lead time in week = 1

C = cost of tire = $50

H = Holding cost = 18%

Annual holding cost = 24960*1*50*0.18/52 = $4320

Annual holding cost of transportation inventory is $4320

(2) Annual holding cost of safety stock

= Safety stock * cost/tire * annual holding cost

= 960*50*0.18

= $8640

Annual holding cost of safety stock is $8640

(3)

Total cost per tire for transportation inventory = Cost per tire + Annual holding cost per tire

= 50 + Annual holding cost or transportation inventory / annual demand

= 50 + 4320/24960

= 50 + 0.1730

Total cost per tire for transportation inventory = $50.173

Total cost per tire for safety stock = cost per tire + annual holding cost per tire of safety stock

= 50 + Annual holding cost of safety stock / Total safety stock

= 50 + 8640/960

= 50 + 9

Total cost per tire per safety stock $59.