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Inventory Management

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Based on the lot-for-lot rule, orders are made as late as possible but not planning to stock out.
This schedule avoids maintaining of inventories in the business. The lot sizing rule is however
characterized by many orders. The lead time for the gear box is two weeks while that for the
input shaft is 3 weeks. The planned order for the net requirement of gear boxes should thus be
placed two weeks before the forecast demand for the model 1000 engine. Likewise, the order for
the net requirement of the input shafts should be placed three weeks before the forecast demand
for the engine. For every gear box used to assemble the engine, two input shafts are used. This
means that for a given number of engines assembled, the number of inputs shafts used are double
that number. Based on the information given, I assumed that there was no demand for the model
1000 engine for weeks 11 and 12. The net requirements and the planned order releases for both
the gear boxes and the input shafts are shown below:

## Table 1: MRP for Gear box

Week Week Week Week Week Week Week Week Week Week Week Week
1 2 3 4 5 6 7 8 9 10 11 12
Demand 15 5 7 10 15 20 10 8 2 16
Scheduled 5
receipt
Inventory 17 7 2
level
Net 7 10 15 20 10 8 2 16
Requirement
Planned 5 10 15 20 10 8 2 16
Receipt
Planned 5 10 15 20 10 8 2 16
order release
Table 2: MRP for Input shaft

Week Week Week Week Week Week Week Week Week Week Week Week
1 2 3 4 5 6 7 8 9 10 11 12
Demand 30 10 14 20 30 40 20 16 4 32
Scheduled 22
receipt
Inventory 40 32 22 8
level
Net 20 30 40 20 16 4 32
requirement
Planned 12 30 40 20 16 4 32
receipt
Planned 12 30 40 20 16 4 32
order
release

From the cost structure given, the gear box set up cost is \$90/order. The inventory carrying cost
for the gear boxes is \$2/unit/week.

The company made a total of 8 orders for gear boxes within the 12 weeks. Therefore, the cost of
making these orders is;

## Gear box set up = 8 × 90

=\$ 720

In week 1 and week 2, two gear boxes were not used. Hence;

## The gear total box carrying cost = (2 ×2) + (2×2)

=\$ 8

The input shaft set up cost is given as \$45/order. The inventory carrying cost for the input shafts
is \$1/unit/week. Over the 8 weeks, there were a total of 7 input shaft orders. Therefore, the cost
for these orders is;

## Input shaft setup = 7 × 45

= \$ 315

In weeks 1, 10 input shafts were unused, in week 2, 22 input shafts were unused and in week 3, 8
input shafts were unused. Hence,

## Input shaft carrying cost for week 3 = 1×8 =\$ 8

The total carrying cost for the input shafts is therefore (10 + 22 + 8) =\$ 40

The cost of the above schedule is thus given by the sum of the setup costs and carrying costs for
both the gear boxes and the input shafts. This is given by;

## Total schedule cost= 720 + 8 +315 + 40

= \$ 1083.

A better schedule which reduces the number of orders while carrying some inventory is the fixed
period requirements (FPR) where the quantity ordered is enough for a fixed period of time.
Assuming a 3-month FPR, orders for assembling the model 1000 engine are as follows;

## Table 3: FPR for Gear Boxes.

Week Week Week Week Week Week Week Week Week Week Week Week
1 2 3 4 5 6 7 8 9 10 11 12
Projected 2 2 -5 -15 -30 -20 -30 -38 -2 -18
balance
Order 30 38 18
release
Unused 2 2 25 15 0 18 8 0 16 0
Inventory

## Table 4: FPR for Input Shafts

Week Week Week Week Week Week Week Week Week Week Week Week
1 2 3 4 5 6 7 8 9 10 11 12
Projected 10 22 8 -12 -42 -82 -20 -36 -40 -32
balance
Order 82 40 32
release
Unused 10 22 8 70 40 0 20 4 0 0
inventory
Based on this schedule, there are 3 orders for the gear box as well as 3 orders for the input shafts.
Therefore;

= \$ 751