Course: Logistics and International Trade

Class: 46K01.2

Members: Võ Hoàng Lâm (16)

Phan Thanh Hằng (9)

Lê Phan Ngọc Huyền (13)

Đặng Lê Thúy Hiền (10)

Nguyễn Vương Thiện (32)

GROUP ASSIGNMENT
Case study chapter 4
Case 8.1: Low Nail Company

After making some wise short-term investments at a racetrack, Chris Low had
some additional cash to invest in a business. The most promising opportunity at the time
was in building supplies, so Low bought a business that specialized in sales of one size of
nail. The annual volume of nails was 2,000 kegs, and they were sold to retail customers in
an even flow. Low was uncertain how many nails to order at any time. Initially, only two
costs concerned him: order-processing costs, which were $60 per order without regard to
size, and warehousing costs, which were $1 per year per keg space. This meant that Low
had to rent a constant amount of warehouse space for the year, and it had to be large
enough to accommodate an entire order when it arrived. Low was not worried about
maintaining safety stocks, mainly because the outward flow of goods was so even. Low
bought his nails on a delivery basis. Questions

1. Using the EOQ methods outlined in the chapter, how many kegs of nails should
Low order at one time?
 Because of the assumption of even outward flow of goods, inventory carrying
costs are applied to one-half of the order size. The average warehousing cost per keg
should be $2

The EOQ formula is:

EOQ =
√ 2 AB
C

Where:

A = annual usage, in dollars

B = administrative costs per order of placing the order

C = carrying costs of the inventory

 EOQ=
√ 2∗2000∗60
2
=√ 120000 ≈345

2. Assume all conditions in Question 1 hold, except that Low’s supplier now offers
a quantity discount in the form of absorbing all or part of Low’s order-processing costs.
For orders of 750 or more kegs of nails, the supplier will absorb all the order-processing
costs; for orders between 249 and 749 kegs, the supplier will absorb half. What is Low’s
new EOQ? (It might be useful to lay out all costs in tabular form for this and later
questions.)

Oders/ Order Processin Warehousing Sum

years size g cost cost of costs
1 2000 Free 2000 2000
2 1000 Free 1000 1000
3 667 90 667 757
4 500 120 500 620
5 400 150 400 550
6 334 180 334 514
 7 286 210 286 496
8 250 240 250 490
9 223 540 223 743

Based on the table above, the order/years should be 8 order and order size are 250
is most appropriate

3. Temporarily, ignore your work on Question 2. Assume that Low’s warehouse

offers to rent Low space on the basis of the average number of kegs Low will have in
stock, rather than on the maximum number of kegs Low would need room for whenever a
new shipment arrived. The storage charge per keg remains the same. Does this change the
answer to Question 1? If so, what is the new answer?

Orders/year Order Processing Warehousing Sum of processing and

size costs ($) costs ($) warehousing costs ($)

1 2000 60 1000 1060

2 1000 120 500 620

3 667 180 334 524

4 500 240 250 490

5 400 300 200 500

6 334 360 167 527

7 286 420 143 563

 The new EOQ, based on the above information, is 500.

 Because of the assumption of even outward flow of goods, inventory carrying
costs are applied to one-half of the order size, a figure that represents the average
inventory.