ADM 3301 Lecture Notes - Lecture 22: Carrying Cost, Stockout

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lilachippopotamus32

1 Aug 2018

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> as the discount quantity goes up, the item cost goes down, but the carrying cost increases. > the objective is to minimize the total cost. > the total annual cost now includes not only the holding cost, (q/2)(h), and the ordering cost, (d/q)(s), but also the cost of purchased items. > the major trade-off when considering quantity discounts is between the reduced item cost and the increased carrying cost. > the unit holding cost, h, usually is expressed as a percent of the unit price because the more valuable the item held in inventory, the higher the holding cost is. > note that an order quantity computed in step 1 that is greater than the range that would qualify it for a discount may be discarded. Step 3&4 : compare the lowest total costs for each interval, and choose the lowest of these interval lowest costs.

Related Questions

Sharon Ltd has in the past ordered rawmaterial T in quantities of 3,000 units which is half a yearâssupply. 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 â 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 â EOQ policy)

magentalizard111

The manager of a large TV store wants to begin stocking a type of remote control device. Expected monthly demand is 800 units. The remote controls can be purchased from either supplier A or supplier B. Their price lists are as follows:

Supplier A

Quantity	Unit price
1-199	$14.00
200-499	$13.80
500+	$13.60

Supplier B

Quantity	Unit price
1-149	$14.10
150-349	$13.90
350+	$13.70

Ordering cost is $40 per order and annual holding cost is 25 percent of unit price. Which supplier should be used and what order quantity is optimal if the intent is to minimize total annual cost?

Ralph and InventoryManagement

During discussions, Ralph, our hospital stockroom managergestures proudly at the ceiling-high stocked warehouse and statesthat he has never had to turn away any request for any item. Inother words, he is providing his users 100% CSL (cycle servicelevel). We ask him what the average lead times are for the mostused meds and he responds âwithin 3 days for most itemsâ. He thengoes quiet, as the implications of what he has just said sink in âwhy keep so much inventory of everything when replenishments areonly 3 days away? Well, he says defensively, after a pregnantpause, âAs I said, I have never had to turn any user away and youdonât know how wildly variable demand can be in a hospitalâ. Sure,we think, but not so variable as to call for a warehouse full ofmed items! Letâs help Ralph out.

- Pick a few âAâ or vital SKUs from inventory,based on importance in terms of sales, profits, stockoutconsequences to customers, or cost of holding.

We pick a high cost and vital item, heart stents, with uncertaindemand.

- Find out the current formal inventorypolicies, if any, in use for those items (and when these wereset).

Ralph uses a continuous inventory management system forstents:

Order size: 300 units per order

ROP: 200 units (inclusive of safety stock of 50 units), i.e.,order whenever the inventory position falls to 200 units

- Find out whether these policies are beingfollowed.

Ralph confirms that he inherited these policies and followsthem.

- Ascertain current operational inventorymanagement parameters.

Ralph provides the following estimates:

Holding cost H = 25% of item cost

Ordering cost S = $100/order

Current supply lead times LT: 3 days stable

Average daily demand d: 50 units/day

Standard deviation of daily demand Ï_d:3units

Actual customer cycle service level: 100%

Item cost: $1000/unit

Assume 365 working days in a year

1. Develop recommended order size (EOQ) and aROP for the selected SKU using the above current operationalinventory management parameters. Maintain CSL at 100%.

a) Recommended EOQ = ? units

b) Recommended ROP = ? units

EOQ = â (2*D*S)/H; where D = Annualdemand; S = Cost of placing one order; H = Cost of holding 1 unitin inventory for 1 yr

ROP = d * Leadtime + Safety Stock

Safety Stock = z value correspondingto CSL of 100% * Ï_d âLT;

where d is average daily demand,Ï_{d =} standard deviation of demand, LT = leadtime

# of orders/yr= D/EOQ (order qty)

2. Compute and show the differences inrecommended order size, ROP, and total costs for the selected SKUvs. current figures.

Current System

Total cost = TotalHolding Cost + Total Ordering Cost

= Avg Inventory * H + # of Orders/yr *S

= Avg Inventory * H + (D/Order Qty) *S

= ?

Average Inventory = ? units

Recommended System

Total cost = ?

Average Inventory = ? units

Total cost saving with recommendedsystem comparted to current system= $?

Capital investment avoided = ? (fromreducing average inventory @$1000/unit)

3. Can we do even better?

a) If Ralph could reduce the current lead time of 3 days to 2days without significant cost increases:

Revised ROP = ? units

Reduced safety stock = ? units

Reduced average inventory = ?units

b) If Ralph could reduce the cost of placing an order (S) to say$50 instead of the current $100/order by migrating the orderingprocess to a web based system:

Revised EOQ = ? units

Which means that:

Revised average inventory = ?units

and,

Revised total costs = $?

c) Anything else Ralph can do tolower the Total Cost?

PLEASE SHOW EVERY STEP OFTHIS PROBLEM PRECISILY WHEN SOLVED SO I CAN UNDERSTAND THE STEPS. IWOULD REALLY APPRECIATE IF THE SOLUTIONS WOULD BE SHOWN OUT STEP BYSTEP

graysheep764

ADM 3301 Lecture Notes - Lecture 22: Carrying Cost, Stockout

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