Question

EOQ, Safety Stock, Lead Time, Batch Size, and JIT

Bateman Company produces helmets for drivers of motorcycles. Helmets are produced in batches according to model and size. Although the setup and production time vary for each model, the smallest lead time is six days. The most popular model, Model HA2, takes two days for setup, and the production rate is 750 units per day. The expected annual demand for the model is 36,000 units. Demand for the model, however, can reach 45,000 units. The cost of carrying one HA2 helmet is $3 per unit. The setup cost is $6,000. Bateman chooses its batch size based on the economic order quantity criterion. Expected annual demand is used to compute the EOQ.

Recently, Bateman has encountered some stiff competition—especially from foreign sources. Some of the foreign competitors have been able to produce and deliver the helmets to retailers in half the time it takes Bateman to produce. For example, a large retailer recently requested a delivery of 12,000 Model HA2 helmets with the stipulation that the helmets be delivered within seven working days. Bateman had 3,000 units of HA2 in stock. Bateman informed the potential customer that it could deliver 3,000 units immediately and the other 9,000 units in about 14 working days—with the possibility of interim partial orders being delivered. The customer declined the offer indicating that the total order had to be delivered within seven working days so that its stores could take advantage of some special local conditions. The customer expressed regret and indicated that it would accept the order from another competitor who could satisfy the time requirements.

Required:

1. Calculate the optimal batch size for Model HA2 using the EOQ model.

__units

Was Bateman's response to the customer right? Would it take the time indicated to produce the number of units wanted by the customer?

Yes

2. Upon learning of the lost order, the marketing manager grumbled about Bateman's inventory policy, "We lost the order because we didn't have sufficient inventory. We need to carry more units in inventory to deal with unexpected orders like these."

Do you agree or disagree?

Agree

How much additional inventory would have been needed to meet customer requirements?

__additional units

Answer 1

Optimal batch size based on EOQ

= ( 2x 36000x6000/3 )^1/2

= 12000

As the production process takes 2 days to set up, the maximum production that can be done within 14 days

= (14-12) x 750 = 9000

As 3000 units were on hand at that time, (9000+3000) units was the highest number that could be produced within 14 days. Hence the company's refusal to the customer was appropriate.

For delivering the 12000 units in 7 days it should have had following numbers in inventory

Inventory = target - production capability

= 12000 - (7-2)X 750 = 8250

Additional units = 8250 -3000 = 5250