Economic Order Quantity in Supply Chain - Assignment Example

Economic Order Quantity in Supply Chain 1. Periodic Review System a).Average monthly demand for water heaters Mean=Total demand of water heaters Number of months X =∑X N Where: X= represents the mean ∑ =Summation X =Demand for water heaters N= Number of months =265+227+239+238+213 5 =1182 5 =236.4 i.e. approximately 236 water heaters in a month Customers are likely to purchase an average of 236 water heaters in the first five months. b). Z=X-Standard deviation N 0.

95 =236-19.1 N 0.95N=216.9 0.95N=216.9 0.95 0.95 =228.31, The appropriate restocking level is approximately 228 water heaters. c).Stock to be ordered=Appropriate stock order-stock available =228-42 =186 2. a). Economic Order Quantity (EOQ) refers to the quantity level of inventory which is desirable for the organization to operate smoothly. The quantity reduces the ordering costs and holding cost. The Economic Order Quantity is only applicable when organizations experience the same demand for its product throughout the year and replenishment occurs when stock levels have reduced to the minimum levels (Krajewski and Ritzman, 1999).

Economic order quantity a).EOQ=√2XRCXD HC HC represents holding costs D, represents demand RC, reorder cost EOQ=√2X24X2, 440 150 =27.94 i.e. approximately 28 barrels b). Total holding costs are the summation of the holding cost and the reordering costs Total holding cost for the year=Order quantity/2X Holding cost per unit in a year =2,440/2X150 =$ 183,000 c).Total ordering costs=Reordering costs Holding costs = (2,440X24) + (2,440X150) =58,560+366,000 =$424,560 d).

Orders placed in a year=Barrels per year Number of months 2440/12=20.33333 e).Chlorine inventory levels=Barrel per year 365 less the safety stock (2440/365) -40=163.The next order will be placed when the chlorine levels reach 163 3. Quantity Discounts a). EOQ is the level at which the stock being held is sufficient to produce goods without experiencing any forms of operations. The quantity reduces the ordering costs and holding cost. The Economic Order Quantity is only applicable when organizations experience the same demand for its product throughout the year and replenishment occurs when stock levels have reduced to the minimum levels (Krajewski and Ritzman, 1999). a). Economic Order Quantity=√2XRCXD HC HC represents holding costs D, represents demand RC, reorder cost =√2X15X5, 982 9 =141.2091 i.e.

approximately 141 Key chains b).Total annual costs=Holding costs+Ordering+Purchase price Total annual costs = (5,982X9) + (5,982X15) =53838+89730 =$143568 c).Lowest annual cost=Holding+ordering+purchase = (143,568)1.1 =157924.8 Single –period inventory system a).Shortage cost refers to the demand for a product surpasses its supply. It might be brought due to errors during calculation of demand forecast. In addition, some factors which are beyond the control of an organization may cause them to incur shortage costs.

They may include natural catastrophes, or government regulations (Krajewski and Ritzman, 1999). Cu =Underage cost=Selling price-make cost =2.5-0.08 =2.42 b).An Average cost is incurred because of having excessive inventory. Excessive inventory needs to be managed effectively otherwise, it may result to wastages. The cost incurred in preserving the inventory and disposing is usually referred to as overage costs (Krajewski and Ritzman, 1999) Co=Overage cost=Make cost-salvage cost =0.22-(0.16-0.02) =0.08 c).Target service level Service level is applied to evaluate the effectiveness and efficiency of stock management practices.

Service level= (Soup ordered soup remaining)-(soup ordered Soup remaining) X100 Soup ordered soup remaining = (191+19)-(191-19) 191+19 =1.81X100 =181 d).Servings the restaurant should make=Service level-standard deviation =181-19 =162 servings per day Work Cited Krajewski, Lee J., and Larry P. Ritzman. "Operations management." Reading, MA ua: Addison Wesley (1999).