Scribd
Upload
139 views

Inventory Management

- Acer sells 10,000 units per year - The cost of placing one order is $50 - It costs $4 per year to carry one unit of inventory - To calculate the economic order quantity (EOQ), the formula is used: EOQ = √(2*Annual Demand*Order Cost) / Annual Holding Cost per Unit - Plugging the values given into the formula, the EOQ for Acer is calculated to be 200 units.

Uploaded by

Shameer Fazeel
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online on Scribd
139 views

Inventory Management

- Acer sells 10,000 units per year - The cost of placing one order is $50 - It costs $4 per year to carry one unit of inventory - To calculate the economic order quantity (EOQ), the formula is used: EOQ = √(2*Annual Demand*Order Cost) / Annual Holding Cost per Unit - Plugging the values given into the formula, the EOQ for Acer is calculated to be 200 units.

Uploaded by

Shameer Fazeel
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 8

Example-1

A plant makes monthly shipments of electric drills to a wholesaler in average lot sizes of 280 drills. The wholesalers average demand is 70 drills a week and the lead time from the plant is 3 weeks. The wholesaler must pay for the order the moment it leaves the plant. If the wholesaler is willing to increase its purchase quantity to 350 units, the plant will guarantee a lead time of two weeks. What is effect on cycle and pipeline inventories?

Example-1 (Contd.)
The present cycle and pipeline inventories are: Cycle Inventory = Q/2 = 280/2 = 140 drills Pipeline Inventory, dL= (70 drills/week)* (3 weeks) = 210 drills

Under the new offer, cycle and pipeline inventories are: Cycle Inventory = Q/2 = 350/2 = 175 drills Pipeline Inventory, dL= (70 drills/week)* (2 weeks) = 140 drills Under the new offer, cycle inventory increases by 25% but pipeline inventories reduce by 33% (Decision Point)

Example -2:
Benefit of Better Inventory Control
A firm's inventory turnover (IT) is 4 times on a cost of goods sold (COGS) of $800,000. Through better inventory control, inventory turnover is improved to 8 times while the COGS remains the same, a substantial amount of funds is released from inventory. What is the amount released? Previous investment in inventory= $800,000/4 =$200,000 Investment required now = $800,000/8 = $100,000

Amount Released=$100,000

Example-3
Fleming sells distributor rebuild kits used on Ford V-8 engines. Fleming purchases these kits for $20 and sells about 250 kits a year. Each time Fleming places an order, it costs him $25 to cover paperwork. He estimated that the cost of holding a rebuild kit in inventory is about $3.5 per kit per year. a) What is the economic order quantity b) How many times per year will Fleming place an order?

Example-3 (Contd.)
S = Cost of placing order = $ 25 D= Annual demand = 250 units/year H= Annual per-unit carrying cost =$3.5 per kit/year Q = order quantity

Qopt= [2 S D/H] Qopt= [(2*25*250)/3.5] = 59.75 round to 60 kits Orders per year =D/Qopt = 250/59.75 = 4.18

EOQ Example-4 Problem Data


Given the information below, what are the EOQ and reorder point?

Annual Demand = 1,000 units Days per year considered in average daily demand = 365 Cost to place an order = $10 Holding cost per unit per year = $2.50 Lead time = 7 days Cost per unit = $15

EOQ Example-4 Solution


Q O PT = 2D S = H 2(1,000 )(10) = 89.443 units or 90 un its 2.50

d =

1,000 units / year = 2.74 units / day 365 days / year


_

R eorder point, R = d L = 2.74units / day (7days) = 19.18 or 20 u nits

In summary, you place an optimal order of 90 units. In the course of using the units to meet demand, when you only have 20 units left, place the next order of 90 units.

EOQ Example-5 Problem Data


Determine the economic order quantity and the reorder point given the following

Annual Demand = 10,000 units Days per year considered in average daily demand = 365 Cost to place an order = $10 Holding cost per unit per year = 10% of cost per unit Lead time = 10 days Cost per unit = $15

EOQ Example-5 Solution


Q O PT = 2D S = H 2(10,000 )(10) = 365.148 units, or 366 units 1.50

d=

10,000 units / year = 27.397 units / day 365 days / year


_

R = d L = 2 7.397 u nits / day (10 days) = 273 .9 7 or 274 u n its

Place an order for 366 units. When in the course of using the inventory you are left with only 274 units, place the next order of 366 units.

Example- 6
Demand for Deskpro computer at Best Buy is 1000 units per month. Best Buy incurs a fixed order placement, transportation and receiving cost of $4000 each time an order is placed. Each computer costs Best Buy $500 and the retailer has a holding cost of 20%. Evaluate the number of computers that the store manager should order in each replenishment lot. Annual Demand, D = 1000 x12 = 12000 units Order cost per lot, S = $4000 Unit Cost per computer, C =$500 Holding cost per year as a fraction of the inv. Value, h = 0.2

Example-6 Solved
Q opt = 2 * 12000 * 4000 0.2 * 500 = 980 units Other Info
Cycle Inventory = Qopt/2 = 980/2 = 490 No. of orders/year = D/Q = 12000/980 = 12.24 Annual ordering & holding costs =(D/Q)*S + (Q/2)hC = $97,980 Average Flow time= Q/2D = 490/12000 = 0.041year = 0.49 months

Example-7
In the above example, the manager at Best Buy would like to reduce the lot size from 980 to 200. For this lot size to be optimal, the store manager wants to evaluate how much the order cost per lot should be reduced.
Desired Qopt = 200 units Annual Demand, D = 1000 x12 = 12000 units New Order cost per lot, S = ? Unit Cost per computer, C =$500 Holding cost per year as a fraction of the inv. Value, h = 0.2

Example-7 (Contd.)
S = H [Qopt]2/2D H =hC= 0.2*500 S = [0.2*500* 2002]/ [2*12000] S = $166.7
THUS THE STORE MANAGER AT BEST BUY WOULD HAVE TO REDUCE THE ORDER COST PER LOT FROM $4000 TO $166.7 FOR A LOT SIZE OF 200 TO BE OPTIMAL

Problem-8
The Acer Co. sells 10,000 units per year. The cost of placing one order is $50 and it costs $4 per year to carry one unit of inventory. What is Acers EOQ?

You might also like