Case Study: Fixed Order Quantity System

George Thomas owns proprietary sports goods manufacturing company –

George Sports (GS) – based in Meerut, India. One of the most popular, fast-
moving products sold by GS is the cricket bat. GS manufactures different types
of cricket bats using local timber. However, one of their products – GSEW7 – is
a cricket bat made out of English willow, a type of wood they import from a
timber merchant in England.

George has been concerned about the increase in manufacturing costs, and like
any other proprietor, he wants to minimize the costs to the extent possible. He
calls for Munshi, his trusted accountant for 30 years.
“I have an important assignment for you Munshi,” says
George.
“Sure, sir. How can I help?” asks Munshi.
“I am very concerned about the excessive inventory of the
GSEW7 logs that I see in the warehouse. I know it is used for
one of our fast-moving products but having it in excess does
increase the inventory costs and reduces profitability of our
company.”
“How frequently are we ordering the logs from England?”
asks George.
“We don’t really have a scientific policy, Sir. I make a visual
check of the inventory of the logs and if I feel the stock is less
then I place an order,” replies Munshi.
“Oh! I thought with a computer in place to manage the stock
we could continuously monitor the level of our inventory,”
exclaims George. “And how many logs do we order every time
we place an order?” asks George.
“The order size is not fixed sir. It varies between 150 and 300
logs,” replies Munshi.
“Ok. I think this is where the problem is Munshi. We need to
come up with an inventory management policy. Please look at
your computer records and come back to me with historical
inventory data for GSEW7. You have 3 days to get me the
data,” asserts George.
Back at his office, Munshi starts working on his new assignment of analyzing
the demand and cost data for GSEW7. From his computer records, he observes
the following:
 Demand for GSEW7 is fairly constant at 200 cricket bats a month.
 Because the wood is imported from England, the ordering cost is high at
$800 per order.
 GS uses an inventory carrying and storage rate of 30% per year for
accounting purposes.
 The unit cost of each piece of GSEW7 works out to $350.
 The lead time is constant at 30 days.

Case Study Questions

(a) Is the EOQ formula really applicable in this scenario? If so, why?
If not, why not?
(b) Considering the data gathered by Munshi, compute the optimal
order quantity of English willow logs, assuming one cricket bat
of type GSEW7 is made out of one log of English willow.
(c) If GS works 20 days a month, compute the reorder level for
English willow logs.
(d) Compute the annual TICs (not including the purchase costs).
(e) Determine the cycle time and the number of orders per year.
(f) The merchant in England can supply English willow logs at a
uniform rate of 300 logs each month. If GS works 20 days a
month, compute the order quantity for English willow logs as
well as the TICs.
(g) Because GS is the sole supplier of English willow bats in the local
market, people wanting to buy these specialized bats back-order
their requirements in case a bat is out of stock. If the shortage
cost is $50, determine the back-ordered quantity and the
maximum inventory level.