Question

Demand for an item is 1,000 units per year. Each order placed costs $10, the annual cost to carry items in inventory is $2 each. Suppose the lead time is 6 days. Assume sales occur over 360 days of the year.

In what quantities should the item be ordered based on the EOQ model? (2 points)

What is the reordering point? (2 points)

Explain the inventory management policy. (1 point)

Answer 1

Inventory management is the process by which inventory and stock items are supervised. Inventory management is the proper management of flow of goods from manufacturers to warehouses to the point of sale. Economic Order Quantity refers to the number of unit the company should add to the inventory and the order is made to minimize the total inventory cost. It maintain a balance between ordering costs and carrying costs. Reorder point is the level of inventory which the firm holds in stock and when the inventory level reach this point, the firm must reorder the item.

If any random quantity is picked it may not minimize the holding and ordering cost. EOQ act as a review inventory system to monitor the inventory level continuously and once the level reaches the reorder point, a fixed quantity of order is placed. Thus EOQ helps in calculating reorder point and optimal reorder quantity to avoid shortage of inventory.

In this situation, the company is ordering 100 units every time the inventory is coming down to 17 units.