Question

The Petroco Company uses a highly toxic chemical in one of its manufacturing processes. It must have the product delivered by special cargo trucks designed for safe shipment of chemicals. As such, ordering (and delivery) costs are relatively high, at $2,600 per order. The chemical product is packaged in 1-gallon plastic containers. The cost of holding the chemical in storage is $50 per gallon per year. The annual demand for the chemical, which is constant over time, is 2,000 gallons per year. The lead time from time of order placement until receipt is 10 days. The company operates 310 working days per year. Compute the optimal order quantity, the total minimum inventory cost, and the reorder point.

SUMMARY
Q = ORDER QUANTITY =
AVERAGE INVENTORY =
NUMBER OF ORDERS =
CARRYING COST =
ORDERING COST =
TOTAL COST =
DEMAND PER DAY =
REORDER POINT =

Answer 1

The optimal order quantity is found using the following equation

Optimal order quantity = 456.07 gallons

Average inventory = 228.04 gallons

Number of orders = 4.4 5 orders

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Carrying cost = Average inventory cost of holding per gallon per year

Carrying cost = 228.04 $ 50 = $ 11,402

Ordering cost = Number of orders cost per order

Ordering cost = 5 $ 2600

Ordering cost = $ 13,000

Total cost = Ordering cost + carrying cost

Total cost = $ 13,000 + $ 11,402

Total cost = $ 24,402

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Demand per day = 6.45 gallons per day

Reorder point = Lead time in days demand per day

Reorder point = 10 6.45

Reorder point = 64.5 gallons

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