The Total Inventory Cost for Rmb - Assignment Example

Assignment 2 – Quantitative Analysis MGT310 Alzahraa Kamshad 11494623 QUESTION INVENTORY MANAGEMENT Part A Determine the total inventory cost for RMB, with their policy of purchasing 800 cartons per month Q=Number of units per order= 800cartons P=Price per unit= 20kg*$6=$120 D=Annual demand in units=800cartons*12=9600cartons S=ordering costs for each order =$200/order H=Holding cost per unit per year=20%per carton=$120*20%=$24 Total Inventory Cost= Total Item Cost+ Total Order Cost+ Total Holding Cost = ($120*9600) + (12*$200) + (800/2*$24) =$1,152,000+$2,400+$9,600 =$1,164,000. Calculate what the savings would be if RMB used the Economic Order Quantity model Economic Order Quantity Model (EOQ) finds the optimal order quantity (Q*). Q*=sqrt(2DS/H) =sqrt((2*9600*$200)/$24) =400. Therefore, the optimal order quantity is 400 cartons. The total inventory cost of purchasing 400 cartons each order: = ($120*9600) + (24*$200) + (400/2*$24) =$1,152,000+ $4,800+ $4,800 =$1,161,600. Therefore, the total savings would be $2,400 ($1,164,000-$1,161,600) RMB used the Economic Order Quantity Model- place 400 cartons each order. DISCUSSION: The issue has important implications on inventory management, for it involves total inventory cost and economic order quantity model. It was found that the total inventory cost of purchasing 800 cartons per month is $1,164,000. However, the savings would be around $2,400 ($1,164,000 - $1,161,600) for RMB if the economic order quantity model will be employed, considering that the optimal order quantity computed is 400 resulting to a cost of only $1,161,600. This means that the company will benefit from incurring savings from cost as far as the use of Economic Order Quantity model is concerned. The model is dependent on finding the optimal order quantity. Finding this will lead the firm to consider the number of order for consideration so as to save from cost that is linked to ordering surplus quantity that will only contribute to the increase of the amount of cost. Cost saving is essential for the firm in order to ensure remarkable amount of profit, and at some point guarantee a sustainable advantage of the firm in the future, as far as its financial aspect is concerned. Saving of cost is elemental component in business, because it leads to profit, maintain excellent customer service and so on (Stevenson, 2011, p.12). With enough supply, the business will not only substantially grow, but ensure continuous operation for the benefit of the organization and its target market or customers. Part B Should RMD continue to purchase their Cryovaced rumps from Adrian Meats or Kellys Meats? Include the rationale for your recommendation. Make sure to explain the results and their implications for RMD. Discount Number Discount Quantity Discount (%) Discount Price (P) 1 Exceeding 1000 cartons 5% per kg $5.7 per kg 2 Exceeding 1500 cartons 7.5% per kg $5.55 per kg 3 Exceeding 2000 cartons 10% per kg $5.4 per kg Q*= sqrt(2DS/IP) where I is percentage and P is unit price (ANSWER ROUND TO NEAREST WHOLE NUMBER) Q* for discount number 1= sqrt((2*9600*$200)/(0.2*$5.7*20))=410 cartons/order Q* for discount number 2= sqrt((2*9600*$200)/(0.2*$5.55*20))=416 cartons/order Q* for discount number 3= sqrt((2*9600*$200)/(0.2*$5.4*20))=422 cartons/order Since no Q* qualify for a discount, we will choose the lowest possible quantity to get the discount. Discount Number Unit Price Order Quantity Annual Product Cost Annual Ordering Cost Annual Holding Cost Total 1 $5.7*20=$114 1,000 $1,094,400 (Round up (9600/1000)*$200)=$2,000 1000/2*(0.2*114)= $11,400 1,107,800 2 $5.55*20=$111 1,500 $1,065,600 (Round up (9600/1500)*$200)=$1,400 1500/2*(0.2*111)= $16,650 1,083,650 3 $5.4*20=$108 2,000 $1,036,800 (Round up (9600/2000)*$200)=$1,000 2000/2*(0.2*108)= $21,600 1,059,400 DISCUSSION: The lowest total cost will be buying 2000 cartons at $5.40 per kg/ $108 per carton. There will be a savings of $102,200 if RMB switch from buying Cryovaced rumps from Adrian Meats to Kellys Meats. Given that the savings is huge, I would recommend RMB purchase from Kellys Meats. However, there might be a problem if the demand is not constant. The trade-off is between reduced product cost and increased holding cost. If the demand suddenly reduced and RMB is ordering 2000 cartons each time, the holding cost will increase dramatically. Also, RMB should consider other related costs for excess inventory (ordering 2000 cartons instead of 800), including: Labour for inventory management; Costs associated with refurbishing or damage; Wasted warehouse labour activity working around obsolete inventory; Warehouse expansion to hold excess inventory Last but not least, RMB should consider that rump is perishable food. The extra 1600 cartons might be wastage or the quality will suffer stock doesn’t sell. Thus, the ultimate consideration should be within the bound of understanding supply and demand, and the associated cost or savings in ensuring the continuous flow of the business. Part C A local cold store has excess storage space and has proposed to RMD that they could hold excess inventory for $1 per carton per week. Discuss how RMD should evaluate this proposal. DISCUSSION: For part A, the current holding cost is 20% per carton per year: The annual holding cost with 800 cartons per order is (800/2)*0.2*20*$6=$9600 The holding cost for using the local cold store is $52 per carton per year: The annual holding cost with 800 cartons per order is (800/2)*1*52=$20,800 As part B, the annual holding cost is $21,600, whereas if buying 2000 cartons per order whereas the annual holding cost is $52,000. Therefore, it may not be a good option using the local cold store for excess storage. It is a good option if RMD would decide to purchase 2000 cartons per order from Kelly’s meats without spending on expanding the current storage space. Part D Explain the importance of adopting inventory control methodologies in the current business environment. Use examples of inventory control methods to support your argument. DISCUSSION: There are several reasons of adopting inventory control methodologies (Cheaitou, van Delft, Jemai & Dallery, 2014, p.238; Mohammaditabar, Ghodsypour, O’Brien, 2012, p.655; Zomerdijk & de Vries, 2003, p.173): 1- Improve profitability by lowering the cost of goods sold. Economic Order Quantity (EOQ) model determines the optimum order quantity and minimizes the total costs (carrying cost and ordering cost). 2- Inventory control methodologies will evaluate the following performance: >Inventory turnover performance that if we carrying too much inventory and costing too much for storage >Gross profits increase/decrease by inventory turnover >Service level performance that if we are losing customer due to stock out 3- Improve customer service. Better management of stock level and minimize life-threatening shortages. 4- Reduce inventory investment. For example, just in time model the inventory level is significantly reduced by purchasing parts just in time for each stage of production process. This is considerable cost savings for manufacturers. 5- Increase productivity and transportation efficiency. Re-order lead time allows for the time between placing an order and receiving it. 6- Better inventory management and records. Better stocktaking will be in place (i.e. order records to follow the EOQ order quantity) and thus easier management of inventory such as spoilage and obsolescence. In conclusion, inventory control methodologies are very important for balancing benefits and costs in inventory. QUESTION 2 – PROJECT MANAGEMENT Part A. Solution Note: Total Float = Late Start – Early Start (Weiss, 2011). As computed based on this formula, all the Total Float value = 0. This means that all the components in the project and their respective activities are integral parts of the critical path. Just as the value of total floats for each node suggests, none of the activities should be delayed so that the project will not be delayed as a result. DISCUSSION: There are three major components in the expansion project of Five Star Catering Equipment Manufacturers and Distributors (FSCE). The first component is the building, which includes design building (A1), ordering of materials (A2) and construction of building (A3). Based on the critical path computation method, this component of the expansion will have an early and late finish of 16 weeks. The second and third components which are the process equipment and material handling system have to be finished early and late within the 24 weeks. The Critical Path Network of each of these components suggest that none of the activities should be delayed, considering that each activity cannot afford to have a buffer of a week or two just to delay the transaction or project, considering that the computed Total float for each node is equal to zero. Embarking on the expansion project therefore requires enough time, but such time should be thoroughly considered in the implementation for each component identified in the program. In other words, the FSCE should not be willing to consider any delay, in order to obtain the target completion of the project. Based on the above competition, it is implied that the components considered in the program are critical activities that should not be delayed. With this information, the FSCE should be properly oriented as to how these activities are critical for considering the successful completion of the project within 24 weeks. Part B DISCUSSION: The above result is suitable only for basic planning purposes. However, in order to guarantee completion of the project on time, the FSCE should consider concerns or issues about inventory, delivery of raw materials and order system. These are some important systems of consideration prior to planning, monitoring and controlling the project (Heizer & Render, 2014). In the actual scenario, the FSCE will be facing issues concerning the time-span of delivery. This should be specifically considered in order to achieve the ultimate target scope of work for each activity in every component of the project. Inventory model is good for this. This model speaks of reorder point or provides a good system that will keep the entire organization or the project manager to be critically updated about the level of inventory. The lack of inventory is a remarkable source of time lag, minimizing the potential of the entire project to be finished at its optimum duration. QUESTION 3 – TRANSPORTATION PROBLEM Part A Producers Hotel 1 Hotel 2 Hotel 3 Hotel 4 Supply Farm 1 ($8) 70 ($9) 30 $11 $16 100 Farm 2 $12 ($7) 40 ($5) 40 $8 80 Farm 3 $14 ($10) 10 $6 ($7) 30 40 Demand 80 80 40 30   DISCUSSION: Shown in the above table is the number of weekly shipments from each farm to each hotel. This was the result of minimizing the total costs involved. The solution is as follows: Total possible minimum cost = ($8 x 70) + ($9 x 30) + ($7 x 40) + ($10 x 10) + ($5 x 40) + ($7 x 30) = $1,620 In the case of Sam’s Hydroponic Strawberries, its supply, prevailing demand plus the cost associated with the weekly shipments are considerable insights that are to be integrated with a remarkable mathematical technique that could enhance the decision-making process of the said firm. The solution shows the ultimate cost that Sam will have to incur in order to optimize its shipments to the four hotels, with particular consideration of the prevailing concept of demand and supply. Therefore, it is important to direct the idea of shipment to the amount of costs engaged in the actual shipment of the firm to the four hotels with specific demand requirements. Minimizing the total costs is dependent on the supply and demand requirement. Nonetheless, it is also important to minimize the cost by trying to consider the minimum cost for each individual unit of supply and demand. This modeling technique has a positive implication on the profit-making of the firm, because it could remarkably decrease the possible costs in the shipment, without compromising the actual demand requirement of the target market. Thus, in this scenario, it is good to consider that while the inventory issue is addressed, the potential cost of the firm owning the supply is also minimized, leading further to a promising income or profit in the future. Part B DISCUSSION: In reality, supply and demand are not constant. The converse of this is a strong prevailing assumption of the transportation model. The model relies on the important idea of the supply and demand, plus the linked cost in the shipment. A more realistic model should therefore consider this information in detail. It is therefore good to modify the transportation model. One modification is to consider the economic model. It is good to cover the cost, as a consequence of increasing the unit price of the offering, especially when there is high demand for it, but low level of supply. This could compensate the cost of shipment. For example, if the supply is low, but there is high demand, the chance is that the price of the product should be higher this time. This will compensate the amount that should be considered in the shipment. Thus, the model will no longer consider the minimum cost, for as long as there is a higher price for the product. In a way, the cost will be covered by an increase in price. On the other hand, the transportation model seeks to serve the demand that have low amount of cost for shipments. This must not be the case, especially when the market is capable of paying more, in the event of higher demand, but lower supply of product offerings. References Cheaitou, A., van Delft, C., Jemai, Z., & Dallery, Y. (2014). Optimal policy structure characterization for a two-period dual-sourcing inventory control model with forecast updating. International Journal of Production Economics, 157(1), 238-249. Heizer, J. & Render, B. R. (2014). Operations management (11th ed). New Jersey: Pearson Prentice Hall. Mohammaditabar, D., Ghodsypour, H., & O’Brien, C. (2012). Inventory control system design by integrating inventory classification and policy selection. International Journal of Production Economics, 140 (2), 655-659. Stevenson, W. J. (2011). Operations Management. New York: McGraw-Hill/Irwin. Weiss, H. (2011). POM/QM for Windows Version 3. New Jersey: Pearson Prentice Hall. Zomerdijk, L. G., & de Vries, J. (2003). An organizational perspective on inventory control: Theory and a case study. International Journal of Production Economics, 81-82(1), 173-183. Read More