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Given the following information, formulate an inventory management system. The item is demanded 50 weeks a year.

Item cost $ 8.00 Standard deviation of weekly demand 20 per week
Order cost $ 223.00 Lead time 4 weeks
Annual holding cost (%) 28 % of item cost Service probability 99 %
Annual demand 27,400
Average demand 548 per week

a. Determine the order quantity and reorder point. (Use Excel's NORMSINV() function to find the correct critical value for the given ?-level. Do not round intermediate calculations. Round "z" value to 2 decimal places and final answer to the nearest whole number.)

Optimal order quantity 2366 units
Reorder point units

b. Determine the annual holding and order costs. (Round your answers to 2 decimal places.)

Holding cost $2616.32
Ordering cost $2615.67

c. Assume a price break of $55 per order was offered for purchase quantities of 2,200 or more units per order. If you took advantage of this price break, how much would you save annually? (Round your answer to 2 decimal places.)

Annual savings $

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Reid Wolff
Reid WolffLv2
28 Sep 2019

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Problem 20-15

Given the following information, formulate an inventory management system. The item is demanded 50 weeks a year.


Item cost $ 9.00 Standard deviation of weekly demand 20 per week
Order cost $ 202.00 Lead time 1 week
Annual holding cost (%) 28 % of item cost Service probability 90 %
Annual demand 24,000
Average demand 480 per week


a.

Determine the order quantity and reorder point. (Use Excel’s NORMSINV( ) function to find your z-value and then round that z-value to 2 decimal places. Do not round any other intermediate calculations. Round your final answers to the nearest whole number.)


Optimal order quantity units
Reorder point units


b.

Determine the annual holding and order costs. (Do not round any intermediate calculations. Round your final answers to 2 decimal places.)


Holding cost $
Ordering cost $


c.

Assume a price break of $50 per order was offered for purchase quantities of 2,000 units per order. If you took advantage of this price break, how much would you save annually? (Do not round any intermediate calculations (including number of setups per year). Round your final answer to 2 decimal places.)


Annual savings $

Sharon Ltd has in the past ordered rawmaterial T in quantities of 3,000 units which is half a year’ssupply. Management has instructed you, an inventory costconsultant, to advise them as to the most desired order quantities.The factory closes for 4 weeks annual leave per annum.

You are given the following data:

Inventory usage rate: 125 per week, Lead time: 3 weeks

Unit price: $1.50, Annual requirement: 6,000 units

Order cost: $9.00 per order, Carrying cost: $0.30 per unit peryear Required:

Calculate the economic order quantity.

Calculate the reorder point.

How much would the company save by using this new method?(Assume the order point calculated in part b is used)

Solution:

For Requirement (a) formula is alreadyprovided in lecture slide.

For Requirement (b): Re-Order point =Lead time usage (No of weeks * Usage per week) For Requirement (c):Savings per year by ordering at EOQ (= Existing policy – EOQpolicy) Existing policy = Cost of ordering + Cost of holding +safety stock

Cost of ordering = No of orders perannum * Cost of an order

Cost of holding = Average Inventory *Carrying cost per unit per annum Safety Stock = Usage per week *Lead Time * Carrying cost

EOQ policy = Cost of ordering + Costof holding + Safety stock

For Requirement (c): Savings per yearby ordering at EOQ (= Existing policy – EOQ policy)

Buckshot Electronics is a chain of electronics superstores that is located throughout California. They have 15 locations concentrated primarily in heavily populated areas. They sell thousands of products made by hundreds of different manufacturers. Buckshot sells everything from phones, cameras, DVD players, and video game consoles to large items like televisions.

Sony is one of their larger suppliers. They offer products in nearly every category Buckshot offers to its customers. In fact, Sony sells multiple cell phone models through Buckshot. One such model is the Q9900.

One of Buckshot's San Francisco stores is forecasted to sell about 7800 units of the Q9900 in the coming year. This forecasted demand is about average in terms of Buckshot's 15 other California locations. Presently they order 900 units of the Q9900 every 6 weeks.

Each store fills weekly orders through its Sony Distributor for items like TV's, DVD Players, cameras, and of course, cell phones, in addition to many other items. Orders for cell phones must be made in increments of 100 units. The distributor takes only one order per week, but Buckshot is not obligated to order every item every week. That order is then shipped 2 days later to that individual Buckshot Electronics location by truck.

Buckshot's Central Procurement is looking to save money by investigating order sizes and subsequent order frequency. You are being asked to create a recommendation for order size and time between orders for the Q9900 based on the numbers for this San Francisco location. Answer the questions that follow in order to create a detailed report for your supervisor.

Below are some the key figures important in your analysis:

Q9900 Wholesale Price $ 325.00

Q9900 Retail Price $ 399.00

Annual Per Unit Holding Costs are estimated at 35% of the wholesale cost of the Q9900.

Costs associated with each order include: Order Placement Fees (Documentation, Network Support) $ 250.00 Delivery

(Fuel, Driver, Truck, etc.) $ 350.00

Packaging $ 150.00

Receiving (Inspection, Documentation, etc.) $ 150.00

Labor ( 5 hours @ $10.00/hr) Stocking, Misc. $ 50.00

Questions:

Using Present Lot Size (Q = 900)

According to the information supplied, what is the present annual inventory cost? (In other words, using their present lot size what is the annual inventory cost?) Also, separately identify, the annual cost of purchasing the inventory, the annual holding cost (AHC) and annual ordering cost (AOC).

7. What is the annual cost to purchase the items? (Q = 900) (Choose the closest answer)

8. What is the annual ordering cost, AOC? (Q = 900) (Choose the closest answer)

9. What is the annual holding cost, AHC? (Q = 900) (Choose the closest answer)

10. What is the total annual cost of inventory, TC? (Q = 900) (Choose the closest answer)

Using the Economic Order Quantity (Q=EOQ)

11. What is the EOQ? (Choose the closest answer)

12. Using the calculated EOQ, how often will orders be placed? All answers are in weeks. (Choose the closest answer)

According to the information supplied, what would be the annual inventory cost if they used the calculated EOQ? Also, separately identify the annual holding cost (AHC) and annual ordering cost (AOC).

13. Using the calculated EOQ, what is the annual holding cost (AHC)? (Choose the closest answer)

14. Using the calculated EOQ, what is the annual ordering cost (AOC)? (Choose the closest answer)

15. What is the total annual cost of inventory, TC? (Q = EOQ) (Choose the closest answer)

16. If they could order the EOQ instead of 900, how much would this one store stand to save annually?

17. Why is this not possible for this company to use the calculated EOQ as their order size?

PROPER ORDER SIZE The store must decide how often they want to order. • Remember, the weekly demand is 150 units. • If they order weekly, the store will require at minimum 200 units per week. • If they order every other week, the store will require at minimum 300 units to get to the next ordering period. (150 units per week, 2 weeks.)

18. If they order every 3 weeks, what will be the minimum required order size? Remember, you must abide by the Sony Distributor’s ordering rules.

19. Assume they sell exactly 150 units each week during the three-week period. Based on the appropriate answer to the previous question, how many extra units will they have left at the end of each three-week period?

20. Based on the ordering scenario where orders are placed every 3 weeks, over a 52-week year, how much extra inventory will this store have accumulated? (Take your answer to #19, divide by 3, and then multiply by 52)

21. If they instead order every 2 weeks what will be the minimum required order size? Remember, you must abide by the Sony Distributor’s ordering rules.

22. Assume they sell exactly 150 units per week. Based on the appropriate answer to the previous question, how many extra units will they have left at the end of the 2-week period?

23. Based on the weekly ordering scenario, over a 52-week year, how much extra inventory will this store have accumulated? (Take your answer to #22, divide by 2, and then multiply by 52)

24. Realistically, which of the following options is most attractive? An attractive option is one where the order size is close or equal to the EOQ, abides by the distributor’s ordering rules, and minimizes the amount of unnecessary inventory. (We will call this Q*)

According to the appropriate recommendation you provided in #24, what would be the Total Annual Inventory cost? Also, separately identify, the annual holding cost (AHC) and annual ordering cost (AOC).

25. Using the Q*, what is the annual holding cost (AHC)? (Choose the closest answer)

26. Using the Q*, what is the annual ordering cost (AOC)? (Choose the closest answer)

27. What is the total annual cost of inventory, TC? (Q = Q*) (Choose the closest answer)

28. The total annual savings for this one store using our recommendation (Q*) versus the present lot size of 900, would be:

TOTAL SAVINGS ALL STORES

29. Without store-by-store information it is difficult to say how much this would save the corporation. Nonetheless, using only the numbers for this store it can be said that if the numbers for the other 14 stores are similar there is a potential to save a total of about…Remember, there are 15 stores, total!

Thanks so much in advance! Much appreicated

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