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Inventory Management. MSC Holdings distributes ‘Y-Cube’ game consoles locally. Weekly demand has been fairly uniform at 50 units. Each unit costs at $50 with reorder cost at $200 and holding cost at 25% of value a year.

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management by using the calculations of economic order quantity (EOQ).

These are essential in inventory control and there are several assumptions

that are to be considered:

Demand is known and consistent over a period of time

All cost are known and does not vary

ero lead time

!o shortages allowed

There are also other assumptions that implicit the model:

The purchase price remain constant even in bulk order

The reorder price remain constant with the "uantity ordered

A single delivery is made with any "uantity ordered. !o limit in

shipment.

#eplenishment is instant

The assumptions may seem unrealistic in day to day operations as it is $ust a

simplification of reality and aim to provide useful model results rather than

e%act representations of actual circumstances. The results are good

appro%imation and can be use as a useful guideline.

Figure 2.1 Basic stock cycle

&tock

'evel

D

Q

T

Demand (D): () units weekly

() * (+ , +-)) units yearly

.nit /ost (./): 0() per unit

#eorder /ost (#/): 0+))

1olding /ost (1/): +(2 * 0()3unit , 04+.()

.sing the formulas below5 we substitute the information above to find our

6conomic order "uantity:

Economic order quantity Qo =

HC

D RC 2

=

50 . 12 $

2600 200 $ 2

= +77.88 units

, +77 units

The recommended economic order "uantity for the company to minimi9e cost is

+77 units of game console.

Optimal cycle length = To =

D

Qo

=

2600

288

, ).44)7 years

, ).44)7 * :-( days , 8).88 days

The optimal time between orders is ).44)7 years or 8).88 days.

Optimal variale cost per unit time = !"o = #" Qo

, 04+.() +77 units

, 0:5-))

The optimal variable cost per unit time is $3,600

Optimal total cost T"o = $" % & !"o

, 0() +-)) ; 0:5-))

, 04::5-))

The total cost for ordering +77 game consoles is $133,600

/ompanies often do not meet the optimal order "uantity. <n this case the supplier

can only make a delivery for () units therefore the variable will be:

=/ ,

Q

D RC

;

2

Q HC

,

50

2600 200

;

2

50 50 . 12

, 04)58)) ; 0:4+.()

, 04)5>4+.()

?or orders of () units per delivery (Q)5 the annual inventory cost will be

04)5>4+.()

T/ , ./ % D; =/

, 0() % +-)) ; 04)5>4+.()

, $140,712.50

The total cost for ordering () game consoles per delivery is $140,712.50. This

amount is more than when delivering +77 units of game consoles therefore it is

not feasible. We would suggest that @&/ 1oldings sticks to the optimal order

"uantity of +77 units.

#/ ,

D

HC Q

2

2

,

2600 2

50 . 12 50

2

, 0-.))

.nless the reorder cost (#/) drops to 0-.)) which is largely impossible then the

delivery of () units of game console would be feasible.

B)Assume the lead time (LT) is 9ero. This means as soon as we place an order5

the materials arrive. #ealistically there are bound to be delays such as:

/onsolidation of orders

Areparation of documents

Areparation of goods

Transportation of goods

With this5 we have to define a reorder level (#B') to replenish the stock taking

into consideration the delay for the stock to arrive while having enough stock till

the ne%t shipment.

'raph2.2 "ycle (ength

#eorder level , 'ead time demand , 'ead time C Demand per unit time

#B' , 'T C D

This formula is applicable if the lead time is shorter than the cycle length. Dut if

the cycle length is longer than the lead time we use:

#B' , 'T C D E n C Fo

With the lead between n C To and (n ; 4) C To5 there are n order(s) outstanding

when it is time to place the ne%t order5 so the reorder level is 'T C D E n C Fo.

Where n is the number of complete cycle between lead time.

Optimal cycle length )To* =

D

Qo

=

2600

288

, ).44)7 years

, ).44)7 * (+ weeks , (.7 weeks

The optimal time between orders is ).44)7 years or (.7 weeks.

'ead Time ('T): 8 weeks

S

t

o

c

k

l

e

v

e

l

Time

'T , 8 weeks

T , (.7 weeks T , (.7 weeks

days

Alace order A

Alace order A

Brder A arrives

Brder A arrives

Brder D arrives

Brder D arrives

T , (.7 weeks T , (.7 weeks

'T , 8 weeks

Demand (D): () units weekly

#eorder 'evel (#B') , 'T % D

, 8 % ()

, +))

The reorder level of the GHcube game consoles is 200 units. This means that

when the stock falls to +)) units5 it is time to place an order for +77 units as

previously calculated.

'ead Time ('T): +) weeks

n cycle:

8 . 5

20

, :.88

,: complete cycles

#B' , 'T C D E n C Fo

, +) % () E : % +77

, 4:-

As soon as the stock level reaches 136 units5 @&/ 1olding should make an

order of +77 units.

) <n reality5 there is always uncertainty in inventory management. The

value is unknown but follows a known probability distribution. <t is almost

impossible to know the e%act demand every week and the problems are

classified into :

$nkno+n Ewe have complete ignorance of the situation and any analysis

is difficult

,no+n Ewe know the parameters and values and can use deterministic

models

$ncertain Ewe have probability distributions for the variables and can use

probabilistic or stochastic models

/ompanies usually hold additional stock than they anticipate distributing. These

stocks are called safety stocks. &afety stocks are usually use when companies

encounter delays or when there is a sudden surge in demand.

&afety &tock (&&): - . LT

Tale 2.1 below shows the number of standard deviations (!) from the mean that

correspond to the specified service level:

Tale 2.1 - tale

Dase on Table +.4 the value of for a I)2 service level is 4.+7.

&tandard deviation (J): 4) units a week.

&afety &tock (&&) , - . LT

, 4.+7 % 4) % 4

, +(.- units

, +- units

.sing deterministic model5 we defined the reorder level to be:

#B' , 'T D ; &&

, 'T D ; K LT

, 8 % () ; +-

, ++- units

?or a service level of I)2 @&/ 1olding should hold a safety stock of 226 units

of game consoles

<f the service level is increased to I72 the value of based on Table +.4 will be

+.)(. Therefore:

&afety &tock (&&) , K LT

, +.)( % 4) % 4

, 84 units

, 84 units

#B' , 'T D ; &&

, 8 % () ; 84

, +84 units

?or a service level of I72 @&/ 1olding should hold a safety stock of 241 units

of game consoles.

Difference between service level I)2 and I72 , +84H++-

, 4( units

Additional holding cost for 4( units , +(2 % 0() % 4( units

, 047>.()

Dy having a service level of I72 instead to I)25 the company holds an

additional 4( units of game consoles. The additional cost of having additional 4(

units was calculated to be $1"7.50.

#) Demand: ()units

'ead time ('T): 8 weeks

&tandard deviation Demand (J): 4) units

&tandard deviation 'ead Time (J'T): ).( weeks

The lead time demand has a mean of 'T % D , 8 % () ,+)) units and a standard

deviation of :

J'TD , 'T C JL ; DL C J'TL

, 8 C 4)L ; ()L C ).(L

, :+.)+ .nits

, :+ units

?or a !ormal distribution5 I)2 service level corresponds5 according to Tale 2.15

, 4.+7.

&afety stock (&&): % J'TD , 4.+7 % :+

, 8).I-

, 84 units

#eorder level (#B') , 'T % D ; && , 8 % (); 84units

, +84 units

6conomic order "uantity Fo =

HC

D RC 2

, +77 units

the normally distributed delivery lead time with a mean of 8 weeks and standard

deviation of ).( weeks5 to achieve a service level of I)25 @&/ 1oldings should

have a safety stock of 84 game console units and a reorder level of +84 units. <n

Aart (/) in reorder level for a service level of I)2 is ++-. The difference is 15

game console units.

Difference between standard deviation of ).( weeks at service level I)2

, +84H++-

, 4( units

E) Aeriodic review methods allow for uncertainty by placing orders of varying si9e

at fi%ed time intervals.

Demand (D): () units weekly.

&tandard deviation Demand (JD): 4) units weekly.

'ead Time ('T): 8 weeks

Brder interval (T): + weeks

&ervice level of I)2 ! , 4.+7

With periodic review method5 stocks are reviewed at a specified time. <n this

case5 it is a every + weeks. ?or a !ormal distribution5 I)2 service level

corresponds5 according to Tale 2.15 , 4.+7.

&afety stock , standard deviation of demand over T ; 'T

&& , K T LT +

, 4.+7 % 4) % 4 2 +

,:4.:(

,:4 units

The safety stock buffer is :4 units of game console in order to meet customer

service level of I)2.

Target &tock level , D C (T;'T) ; &&

, () C (+;8) ; :4 units

, ::4 .nits

The target stock level for a customer service level of I)2 is ::4 units.

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