Question

Inventory Management

1. Ayo is the Purchasing Officer for a company that assembles desktop computers. The computers come with 4 to 6 USB ports. The annual demand for the computers is 600 units. The cost of each computer is $1700, and the inventory carrying cost is estimated to be 10% of the cost of each computer. Ayo has made a study of the costs involved in placing an order and has concluded that the average ordering cost is $50.00 per order. In addition, it takes 5 days for an order to arrive from the supplier.

Determine:

a.   The Optimal Order Quantity

b. The reorder point

c.   The Total Annual Inventory Cost

d. The optimal number of orders per year

e. The optimal number of days between orders, assuming there are 250 working days in the year.

2.               A company produces a product that requires turbine blades in its construction. The company

      plans on building 2500 units of the product over the next year, and therefore, has a need for 2500 units of turbine blades. The cost of placing an order for turbine blades is $15.00, and each unit costs $4.00 per year to carry in inventory. Each turbine blade has a cost of $300.00.

a. What is the Economic Order Quantity?

b. The company has the capability of producing turbine blades internally. It estimates a setup cost of $250.00 per production run. The production rate would be 4800 units of turbine blades per year, thereby reducing the cost of each blade by 20%. What is the Economic Production Lot Size?

c. Based on our cost calculations, should the company produce turbine blades internally or continue to purchase from outside sources? How much is saved as a result?

d. If the Lead-Time is 5 days, what is the inventory level at the point of reordering?

e. Determine the Cycle Time for the EOQ Model.

f. Determine the period of Pure Consumption per cycle for the EPLS Model.

g. What is the Maximum Inventory Level in each model?

             3. World is an outfit that sells video games. Demand occurs at a constant

Annual rate of 25,000. The cost of one copy of the video game is $25. Inventory holding costs are calculated at a 15% annual rate. Production set-up costs are $200 per set-up. The annual production rate is 60,000 copies. Assume there are 300 working days per year, and a lead-time of 10 days.

Using production lot-size model, determine:

                (a)The optimum production lot-size

               (b) The number of production runs per year

                   (c)The length of a production run

                     (d) The cycle time

                    (e)The maximum Inventory level

                      (f)The reorder point

                     (g)The total annual cost.

4.    A firm that makes electronic circuits has been ordering a certain raw material 250 ounces at a time. The firm estimates that carrying cost is 30% per year, and that ordering cost is about $20 per order. The current price of the ingredient is $200 per ounce. The assumptions of the basic EOQ model are thought to apply. For what value of annual demand is their action optimal?

Answer 1

1) Ayo problem

Demand, D = 600

Cost = $1700

Holding cost, H = 10% * 1700 = 170

Order cost = $50

Lead time = 5 days

EOQ = sqrt (2DS/H) = sqrt (2*600*50/170) = 18.78 or 19 units

Reorder point = Demand during lead time = 600 * 5 / 250 = 12 units

Annual inventory cost = (EOQ /2) * Holding cost = 19/ 2 * 100 = $850

Optimal number of Orders = Demand / EOQ = 600 /19 = 31.57 orders or 32 orders

Days between orders = Total working days / number of orders = 250 /32 = 7.81 days or 8 days

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