Assignment on
“Inventory control model”
Course Title: Supply Chain Management
Course Code: AGBM 327
Submitted to:
Fazlul Hoque
Assistant Professor, Dept. of Agribusiness and Marketing
Sher-e-Bangla Agricultural University
Submitted by:
Md. Aulad Hossain (19-09844)
Faculty: Agribusiness Management
Department: Agricultural Economics
Level: 3, Semester: Ⅰ
Submission Date: 29 June, 2021
Questions
A. Suppose, you are planning to sell the Himsagor mango at SAU campus. You assume that the
demand for the Himsagor will last for 20 days annually. You predict that the total demand will
be 15000 Kg annually. The ordering cost is 50Tk per order and the average carrying cost per
unit per year is 2Tk.
1. Now calculate the optimal number of units per order.
2. Calculate the total cost.
3. Prove that the total cost becomes the lowest at EOQ and show it graphically.
B. Patterson Electronics supplies microcomputer circuitry to a company that incorporates
microprocessors into refrigerators and other home appliances. One of the components has an
annual demand of 250 units, and this is constant throughout the year. Carrying cost is estimated
to be $1 per unit per year, and the ordering cost is $20 per order.
1. To minimize cost, how many units should be ordered each time an order is placed?
2. How many orders per year are needed with the optimal policy?
3. What is the average inventory if costs are minimized?
4. Suppose the ordering cost is not $20, and Patterson has been ordering 150 units each
time an order is placed. For this order policy to be optimal, what would the ordering cost
have to be?
C. The F. W. Harris Company sells an industrial cleaner to a large number of manufacturing
plants in the Houston area. An analysis of the demand and costs has resulted in a policy of
ordering 300 units of this product every time an order is placed. The demand is constant, at 25
units per day. In an agreement with the supplier, F. W. Harris is willing to accept a lead time
of 20 days since the supplier has provided an excellent price.
1. What is the reorder point?
2. How many units are actually in inventory when an order should be placed?
ANSWER
Answer to the Q. No – (A)
(1) Calculating the optimum number of units per order:
Optimum number of units per order is the Economic Order Quantity (EOQ). The economic order
quantity (EOQ) is one of the oldest and most commonly known inventory control techniques. The
objective of the simple EOQ model is to minimize total inventory cost. Economic order quantity
is determined by following formula:
2𝐷𝐷𝐷𝐷𝐷𝐷
EOQ = Q* = �
𝐶𝐶ℎ
Here,
D = Annual Demand
Co = Ordering cost per order
Ch. = Carrying cost per unit per year
Given that,
Annual Demand, D = 15000 units
Ordering cost per order, Co = 50 tk.
Carrying cost per unit per year, Ch = 2 tk.
So. The optimum number of units per order
2𝐷𝐷𝐷𝐷𝐷𝐷
EOQ = Q* = �
𝐶𝐶ℎ
2×1500×50
= �
2
= 866.0254
= 866 units
(2) Calculating the total cost:
The total annual inventory cost is equal to ordering plus holding costs for the simple EOQ
model.
Total annual cost = Order cost + Holding cost
Whereas,
𝐷𝐷
Order Cost =
𝑄𝑄
𝐶𝐶𝐶𝐶
𝑄𝑄
Holding/ Carrying Cost =
2
𝐶𝐶ℎ
Here,
D = Annual demand
Q = Order quantity
Co = Ordering cost per order
Ch = Carrying cost per unit per year
So,
𝑫𝑫 𝑸𝑸
The total cost/ total annual cost, TC = 𝑸𝑸 𝑪𝑪𝑪𝑪 + 𝟐𝟐 𝑪𝑪𝑪𝑪
Given that,
Annual demand, D = 15000 units
Order quantity, Q = 866 units
Ordering cost per order, Co = 50 tk.
Carrying cost per unit per year, Ch = 2 tk.
𝑫𝑫 𝑸𝑸
The total cost/ total annual cost, TC = 𝑸𝑸 𝑪𝑪𝑪𝑪 + 𝟐𝟐 𝑪𝑪𝑪𝑪
15000 866
= 866
× 50 + 2
×2
= 866.05 + 866
= 1732.05 tk.
So, the total cost is 1732.05 tk.
(3) Proving that the total cost becomes the lowest at EOQ and showing it graphically:
From (1) and (2), we get the Economic Order Quantity (EOQ) and total cost, and they are 866
units and 1732.05 tk. respectively.
From the concept of Economic Order Quantity, we know that the total cost is lowest at EOQ. So
we can say that the lowest total cost 1732.05 tk. To prove this statement, we may look at different
order quantity and total cost incurred at those order quantity.
Let’s look at different order quantity and determine total cost at those order quantity.
Given that,
Annual demand, D = 15000 units
Ordering cost per order, Co = 50 tk.
Carrying cost per unit per year, Ch = 2 tk.
When Order quantity, Q = 800 units,
𝑫𝑫 𝑸𝑸
The total cost/, TC = 𝑸𝑸 𝑪𝑪𝑪𝑪 + 𝟐𝟐 𝑪𝑪𝑪𝑪
15000 800
= 800
× 50 + 2
×2
= 937.5 + 800
= 1737. 5 tk.
When Order quantity, Q = 900 units
𝑫𝑫 𝑸𝑸
The total cost/, TC = 𝑸𝑸 𝑪𝑪𝑪𝑪 + 𝟐𝟐 𝑪𝑪𝑪𝑪
15000 900
= 900
× 50 + 2
×2
= 833.33 + 900
= 1733.33 tk.
Cost
Curve for Total Cost
1737.5
1733.33
1732.05
Economic Carrying Cost Curve
Order
Quantity
Ordering Cost Curve
800 866 900 Order Quantity
Economic Order Quantity
Figure-1: Total Cost and Economic Order Quantity Curve
By plotting the order quantity and total cost along the X-axis and Y-axis respectively, we can get
the total cost curve. Carrying cost curve is upward slopping because carrying cost increases with
increase in order quantity. And, ordering cost curve is downward slopping, because ordering cost
decreases with the increase in order quantity.
Carrying cost curve and ordering cost intersect where the total cost is 1732.05 tk. and order
quantity is 866 units. And, we know the point where carrying cost curve and ordering cost
intersect is called Economic Order Quantity Point (EOQ). Because at this point, total cost curve
reaches its minimum point. So, we can say that total cost is minimum at Economic Order
Quantity (EOQ).
Answer to the Q. No – (B)
(1) Calculating the amounts of units should be ordered each time an order is placed to
minimize the cost:
The amount of units of should be ordered each time an order is placed is the Economic Order
Quantity (EOQ).
Given that,
Annual demand. D = 250 units
Carrying cost per unit per year, Ch = $1
Ordering cost per order, Co = $20
Economic order quantity, EOQ =?
We know,
2𝐷𝐷𝐷𝐷𝐷𝐷
EOQ =�
𝐶𝐶ℎ
2×250×20
= �
1
= 100 units
So to minimize cost, 100 units should be ordered each time an order is placed.
(2) Calculating the orders per year are needed with optimal policy:
From (1), we get the Economic Order Quantity (EOQ) is 100 units. Given the annual demand (D)
is of 250 units.
𝐷𝐷
The order needed per year with optimal policy is =
𝐸𝐸𝐸𝐸𝐸𝐸
250
=
100
= 2.5
So 2.5 orders per year are needed with optimal policy. This would mean in one year the company
places 3 orders and in the next year it would only need 2 orders, since some inventory would be
carried over from the previous year. It averages 2.5 orders per year.
(3) Calculating the average inventory if costs are minimized:
We know that the average inventory level is one-half the maximum level. Average inventory level
is Q/2 where Q is the maximum level.
𝐸𝐸𝐸𝐸𝐸𝐸
So the average inventory if costs are minimized is =
2
Economic order quantity (EOQ) is 100 units
100
Average inventory = = 50 units
2
(4) Calculating the ordering cost have to be with the given data:
Given,
Annual demand, D = 250,
Carrying cost, Ch = $1,
An order quantity, Q = 150
Patterson Electronics must determine what the ordering cost would have to be for the order policy
of 150 units to be optimal. To find the answer to this problem, we must solve the traditional EOQ
equation for the ordering cost.
We know, Order Quantity,
2𝐷𝐷𝐷𝐷𝐷𝐷
𝑄𝑄 = � 𝐶𝐶ℎ
2𝐷𝐷𝐷𝐷𝐷𝐷
=≫ 𝑄𝑄2 =
𝐶𝐶ℎ
=≫ 2 × 𝐷𝐷 × 𝐶𝐶𝐶𝐶 = 𝑄𝑄 2 × 𝐶𝐶ℎ
𝑄𝑄2 ×𝐶𝐶ℎ
=≫ 𝐶𝐶𝐶𝐶 =
2×𝐷𝐷
(1502 ×1)
=
2×250
22500
=
500
= $45
As you can see in the calculations that follow, an ordering cost of $45 is needed for the order
quantity of 150 units to be optimal.
Answer to the Q. No – (C)
(1) Calculating the reorder point:
The Reorder Point (ROP) determines when to order inventory. It is found by multiplying the
daily demand times the lead time in days.
ROP = (Demand per day) × (Lead time for a new order in days)
ROP = d × L
Given that,
Demand per day, d = 25 units
Lead time for a new order in days, L = 20
So, the Reorder Point is = 25 × 20
=500 units
(2) Calculating the units which are actually in inventory when an order should be place:
From (1), we get the Reorder Point (ROP) which is 500 units. This means that an order should be
placed when the inventory position is 500.
Since the ROP is greater than the order quantity, Q = 300, an order must have been placed already
but not yet delivered. So the inventory position must be
Inventory position = (Inventory on hand) + (Inventory on order)
500 = 200 + 300
There would be 200 units on hand and an order of 300 units in transit.
