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Computer Center Case

- Tim is purchasing a new computer model for his store and wants to determine the optimal inventory policy using the EOQ model - Currently, he orders batches of 5 computers but wants to know if changing the order quantity could reduce costs - Using the EOQ model in Excel and QM software, the optimal order quantity is determined to be 13 computers - With this policy, the total annual variable inventory costs would be reduced by 33% compared to the current policy

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320 views

Computer Center Case

- Tim is purchasing a new computer model for his store and wants to determine the optimal inventory policy using the EOQ model - Currently, he orders batches of 5 computers but wants to know if changing the order quantity could reduce costs - Using the EOQ model in Excel and QM software, the optimal order quantity is determined to be 13 computers - With this policy, the total annual variable inventory costs would be reduced by 33% compared to the current policy

Uploaded by

Nguyễn Lâm
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
You are on page 1/ 13

HOMEWORK GROUP: – EOQ model for

Computer Center

• Tim Madsen is the purchasing agent for Computer Center, a large


discount computer store. He has recently added the hottest new
computer, the Power model, to the store's stock of goods. Sales of this
model now are running at about 13 per week. Tim purchases these
computers directly from the manufacturer at a unit cost of $3,000,
where each shipment takes half a week to arrive.

• Tim routinely uses the basic EOQ model to determine the store's
inventory policy for each of its more important products. For this
purpose, he estimates that the annual cost of holding items in
inventory is 20% of their purchase cost. He also estimates that the
administrative cost associated with placing each order is $75.
QUESTIONS ?
• A. Tim currently is using the policy of ordering 5 power model computers at a
time, where each order is timed to have the shipment arrive just about when
the inventory of these computers is being depleted. Use the Solver version of
the Excel template for the basic EOQ model to determine the various annual
costs being incurred with this policy.

• B. Use this same spreadsheet to generate a data table that shows how these
costs would change if the order quantity were changed to the following values:
5, 7, 9, ...., 25. Then use the EOQ Analysis module in your Interactive
Management Science Modules to display graphs of the various annual costs
versus the order quantity.

• C. Verify your answer for the optimal order quantity obtained in part D by
applying the square root formula by hand.

• D. Use Solver and QM for Windows to find the optimal order quantity.

• E. Now use the analytical version of the Excel template for the basic EOQ model
(which applies the square root formula) to find the optimal order quantity.
Compare the results (including the various costs) with those obtained in part D.

• F. With the optimal order quantity obtained above, how frequently will orders
need to be placed on the average? What should the approximate inventory level
be when each order is placed?

• G. How much does the optimal inventory policy reduce the total variable
inventory cost per year for Power model computers from that for the policy
described in part A? What is the percentage reduction?
OVERVIEW OF THE CASE STUDY

• Sales per week: 13 products => Sales per year (Demand) : 13 .


52 = 676 products.
• Unit cost: 3000$.
• Each shipment takes half a week to arrive => Lead time : 7 / 2 =
3.5 days.
• Cost of holding inventory is 20% of the purchased cost => Unit
holding cost: 3000 . 20% = 600$
• Administrative cost associated with placing each order is $75 =>
Setup cost per unit: 75$
• Working day of the year: 365 days
• Ordering at a time: 5 products

D 676 product(s)

K 75 $
h 600 $
L 3.5 Day(s)
WD 365 Day(s)
Q 5 products
SOLUTION OF THE QUESTION A:
1. Open the excel (solver activated)

2. Type the data given:


- Demand D :676
- Setup cost K :75
- Unit holding h :600
- Leadtime in day L :3,5
- Workday in a year WD :365
- Decision Q :5

3. Define the cost values (in a year) which need to be calculated, we have
the results :
- Annual setup cost
- Annual holding cost
- Total variable cost

4. Use the formulas for the costs


- Annual setup cost = K . D / Q
= 75 . 676 / 5 = 10140
- Annual holding cost = h . Q / 2
= 600 . 5 / 2 = 1500

- Total variable cost = 10140 + 1500 = 11640


SOLUTION OF THE QUESTION B:
1. With each decision Q, we can find out each total variable cost
respectively.

2. We use the number to build a graph with the decision Q for a


horizontal axis and the total variable cost for a vertical axis.
3. Draw a line graph

SOLUTION OF THE QUESTION C:


• Verify the answer for the optimal order quantity obtained by applying
the square root formula by hand.
• THE SQUARE ROOT FORMULA: Q* = SQRT (2. K. D / h)
• Q* : The optimal order quantity
• D : annual demand rate = 676
• K : setup cost = 75
• H : unit holding cost = 600
=> Q* = SQRT (2. 75. 676 / 600)
= 13 (products)
=> The optimal order quantity is 13 products, by this, the total variable
cost will be minimum!
SOLUTION OF THE QUESTION D:

1) Using the Excel Solver:

1. Input the known data: the value of Demand (676), the unit setup
cost (75) , the unit holding cost (600), the lead time in day (3,5) and
the Workday in a year (365)

2. In the result group, there are the Annual Setup cost, the Annual
holding cost and the Total Variable cost.

3. Set up the cost:


- Annual setup cost = Setup cost unit . Demand / Decision
- Annual holding cost = holding cost unit . Decision /2
- Total variable cost = Annual setup cost + holding cost

4. Then use the Excel solver with:


- Set objective = Total Variable cost ;
- To Min;
- There is no for the Subject to the Constrains;
- Solving method : GRG Nonlinear

5. Solve => We have Decision Q = 13 and the Total Variable cost is


7800$
2) Using the QM:

1. Open QM

2. After opening QM for Windows, click Module button on QM data


tab, then click on Inventory -> File -> New -> Economic Order
Quantity (EOQ) Model, which displays the Create data set for
Inventory/Economic dialog as shown below:

3. Change Title name, choose Compute reorder point and then click
OK. After that, we input data as below:
4. To find the optimal solution, we click on the Solve button.

5. After a moment, the QM returns the optimal solution. Optimal order


quantity (Q*) will be shown on the first row on the right-hand sight of
the table.
6. As the results can be seen:
- Optimal order Quantity will be 13 power model per order.
- Reorder point will be 6.48 units.
- Annual Setup Cost will be $3900.
- Annual Holding Cost will be $3900.

SOLUTION OF THE QUESTION E:

 Using the analytical version of the Excel template for the basic EOQ
model (which applies the square root formula) to find the optimal
order quantity

 As the results can be seen above, they are the same as the answer in
question D.
- The decision order is 13
- The minimum total variable cost is 7800
SOLUTION OF THE QUESTION F:
With the optimal order quantity obtained above, the numbers of orders
need to be placed on the average:

Total demand ∈a year D 676


• Number of orders ¿
Decisionorder = Q = 13 = 52

(This means that the Computer center need to order 52 times a year)
 The approximate inventory level should be when each
order is placed:
Demand ∈a year . Lead time D.L 676 .3,5
• Reorder point = Workday ∈a year = WD = 365 ≈ 6.5
(This means that the Computer center need to order again when the
approximate inventory level reach to 6.5)

SOLUTION OF THE QUESTION G:


• When the order decision gets the optimal value (which is obtained
above) is 13 products, the respective total variable cost will be
7800$.

• The reduction (from question a) will be


= 11640$ - 7800$ = 3840$
• The percentage reduced:
= 3840$ / 11640$ = 0.32989 ≈ 33%
=> With the new order decision, the Computer center will save 3840$ in
total cost per year (corresponding to 33%)

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