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Inventory Example

- Dorsey Distributors has an annual demand of 1400 units for a metal detector with a unit cost of $400 and a carrying cost that is 20% of the unit cost. The ordering cost is $25 per order. - If orders are 300 units or more, Dorsey gets a 5% discount on the unit cost. - Calculating the economic order quantity both with and without the discount, taking the order at 300 units to get the discount results in a lower total annual inventory cost of $543517 compared to $562366 without the discount. Therefore, Dorsey should take the quantity discount.

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Srijan Shetty
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1K views

Inventory Example

- Dorsey Distributors has an annual demand of 1400 units for a metal detector with a unit cost of $400 and a carrying cost that is 20% of the unit cost. The ordering cost is $25 per order. - If orders are 300 units or more, Dorsey gets a 5% discount on the unit cost. - Calculating the economic order quantity both with and without the discount, taking the order at 300 units to get the discount results in a lower total annual inventory cost of $543517 compared to $562366 without the discount. Therefore, Dorsey should take the quantity discount.

Uploaded by

Srijan Shetty
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Examples

Inventory Model
Inventory is any stored resource that is used to satisfy a
current or future need
Sumco Pump Company

• Sumco, a company that sells pump housings to other


manufacturers, would like to reduce its inventory cost by
determining the optimal number of pump housings to obtain
per order. Annual demand is 1000 units, ordering cost is $10
per order and average carrying cost per unit per year is $0.5. If
the EOQ assumptions are met, calculate the optimal number of
units per order. What is the total annual inventory cost.
Solution

• EOQ = √(2DC0 / Ch)


• = √(2 x 1000 x 10) / 0.5
• = √40000
• = 200 units

• Total annual inventory cost is the sum of the ordering costs


and carrying costs.
• TC = (D/Q) x C0 + (Q/2) x Ch
• = (1000/200) x10 + (200/2) x 0.5
• = 50 + 50
• = $100
Brown Manufacturing

• Brown Manufacturing produces commercial refrigeration units


in batches. The firm’s estimated demand for the year is 10000
units. It costs about $100 to set up the manufacturing process,
and the carrying cost is about 50 cents per unit per year. When
the production process has been setup, 80 refrigeration units can
be manufacture daily. The demand during the production period
has traditionally been 60 units each day. Brown operates its
refrigeration unit production area 167 days per year. How many
refrigeration units should Brown manufacturing produce in each
batch? How long should the production part of the cycle last?
Solution

• Annual demand = D = 10000 units


• Setup cost = Cs = $100
• Carrying cost = Ch = $0.5 per unit per year
• Daily production rate = p = 80 units daily
• Daily demand rate = d = 60 units daily
• Optimal production quantity Q* = √(2DCs/Ch(1 - d/p)
• Q* = √(2x10000x100/0.5(1 - 60/80) =4000 units
• Length of each production cycle will Q/p = 4000/80 = 50 days

• When Brown decides to produce refrigeration units the


equipment will be set up to manufacture the units for a 50 day
time span.
Example

• Brass Department stores toy cars. The store was given a


quantity discount schedule for the cars. The normal cost for
the toy race cars is $5. For order between 1000 and 1999 units
the unit cost is $4.8 and for orders of 2000 or more units, the
unit cost is $4.75. The ordering cost is $49 per order. The
annual demand is 5000 race cars and the inventory carrying
charge as a percentage of cost, I, is 20% or 0.2. What order
quantity will minimize the total inventory cost?
• Solution: First step is to compute EOQ

• EOQ1 = √(2 x 5000 x 49 / 0.2 x 5) = 700 cars per order


• EOQ2 = √(2 x 5000 x 49 / 0.2 x 5) = 700 cars per order
• EOQ3 = √(2 x 5000 x 49 / 0.2 x 5) = 700 cars per order

• Second step is to adjust those quantities that are below the


allowable discount range.

• EOQ1 is between 0 and 999, it does not have to adjusted.

• EOQ2 is bellow the allowable range of 1000 to 1999 and


therefore it must be adjusted to 1000 units. The same is true
for EOQ3 it must be adjusted to 2000 units. After this step the
order quantities must be tested for the total cost in third step.
• Forth step is to select that order quantity with the lowest total
annual cost.

Order Material Ordering Carrying


Discount Discount Quantity Cost Cost Cost
Number Cost (C) (Q) (DC) (D/Q)C0 (Q/2)Ch Total ($)
1 5 700 25000 350 350 25700
2 4.8 1000 24000 245 480 24725
3 4.75 2000 23750 122.5 950 24822.5

• An order of quantity of 1000 toy race cars minimize the total


cost. The total cost of ordering 2000 cars is only slightly
greater than the total cost for ordering 1000 cars. If third
discount cost is lowered to 4.65 this order quantity might be
the one that minimizes the total inventory cost.
• Problem: 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.

a) To minimize cost, how many units should be ordered each


time an order is placed?
b) How many orders per year are needed with the optimal policy?
c) What is the average inventory if costs are minimized?
d) 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?
• Solution:

(a) EOQ assumptions are met, so the optimal order quantity is

• Q = √(2 x D x C0 / Ch) = √(2 x 250 x 20 / 1) = 100 units

(b) No of order per year = D/Q = 250/100 = 2.5 order per year

(c) Average Inventory = Q/2 = 100/2 = 50 units

(d) Q = √(2 x D x C0 / Ch) → C0 = (Q2 x Ch) / 2 x D

• C0 = (1502 x 1) / 2 x 250 = $45


Problem

Flemming Accessories produces paper slicers used in offices and


in art stores. The minislicer has been one of its most popular
items: Annual demand is 6750 units and is constant throughout
the year. Kristen Flemming, owner of the firm, produces the
minislicers in batches. On avearge Kristen can manufacture 125
minislicers per day. Demand for these slicers during the
production process is 30 per day. The setup cost for the
equipment necessary to produce the minislicers is $150. Carrying
costs are $1 per minislicer per year. How many minislicers
should Kristen manufacture in each batch?
• Solution

• D = 6750 units
• Cs = $150
• Ch = $1
• d = 30 units
• p = 125 units

• This is a production run problem that involves a daily


production rate and daily demand rate.

• Qp = √(2DCs) / (Ch(1-d/p))
• = √(2 x 6750 x 150) / (1 x (1-30 / 125) = 1632
Problem

Dorsey Distributors has an annual demand for a metal detector of


1400. The cost of a typical detector to Dorsey is $400. Carrying
cost is estimated to be 20% of the unit cost and the ordering cost
is $25 per order. If Dorsey orders in quantities of 300 or more, it
can get a 5% discount on the cost of the detectors. Should Dorsey
take the quantity discount? Assume the demand is constant.
• Solution: Quantity discount involves determining the total
cost of each alternative after quantities have been computed
and adjusted for the original problem and every discount.
• EOQ with discount
• = √(2 x 1400 x 25 / 0.2 x 400) = 29.6 units
• Total cost = material cost + ordering cost + carrying cost
• = 400 x 1400 + (1400 x 25) / 29.6 + (29.6 x 400 x 0.2) / 2
• = 560000 + 1183 + 1183 = $562366
• EOQ with no discount
• = √(2 x 1400 x 25 / 0.2 x 380) = 30.3 units
• As the last EOQ is below the discounted price, so adjust the
order quantity to 300 units.
• Total cost = material cost + ordering cost + carrying cost
• = 380 x 1400 + (1400 x 25) / 300 + (300 x 380 x 0.2) / 2
• = 532000 + 117 + 11400 = $543517

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