Last Updated 25 Aug 2020

Inventory and Annual Holding Cost

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  1. Your firm uses a continuous review system and operates 52 weeks per year. One of the SKUs has the following characteristics. Demand (D) = 20,000 units/year
    Ordering cost (S) = $40/order

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    Holding cost (H) = $2/unit/year
    Lead time (L) = 2weeks
    Cycle-service level = 95%
    Demand is normally distributed with a standard deviation of weekly demand of 100 units. The current on-hand inventory is 1.040 units with no scheduled receipts and no backorders. 1. Calculate the item’s EOQ. What is the average time, in weeks between orders? EOQ = (2DS)/H
  • EOQ = (2*20000*40)/2
  • EOQ = 800000
  • EOQ = 894.43894
  • TBO = (EOQ/D)*52weeks
  • TBO = (894/20000)*52weeks
  • TBO = (0.0447)*52weeks
  • TBO = 2.32442.32weeks

2. Find the safety stock and reorder point that provides a 95% cycle-service level. Safety stock = Z*(standard deviation of demand during the lead time) Z for 95% service level is 1.64

  • Safety stock = 1.64*(2*100)
  • Safety stock = 328 units

Reorder point = (Average demand during lead time) + (Safety Stock) Reorder point = ((20000/52weeks)*2) + 328 = 1097.23 1097

3. For these policies, what are the annual costs of holding the cycle inventory and placing orders?

Annual holding cost = (Average cycle inventory)*(Unit holding cost)

Annual holding cost = (Average Lot size/2)*(Unit holding cost)

  • Annual holding cost = ((20000/52weeks)*2.32weeks)/2 * 2
  • Annual holding cost = (892.30 892/2)*2
  • Annual holding cost = 446*2 = $892
  • Annual ordering cost = (Number of orders/year)*(Ordering cost)
  • Annual
    ordering cost = (Demand/Average lot size)*(Ordering cost)
  • Annual ordering costs = (20000/892)*(40)
  • Annual ordering costs = 22.42*40 = $896.8

4. Withdrawal of 15 units just occurred. Is it time to reorder? If so, how much should be ordered?

Inventory position = on hand inventory + schedule receipts – backorders Inventory position = 1040+15+0=1055

IP (1055) < R (1097) so new order must be placed

Order quantity: Target inventory level – Inventory position

Target inventory level = Average demand during the protection interval + Safety stock Target inventory level = (Demand/52weeks)*((EOQ/Demand)*52weeks)*(Lead time) + Safety Stock Target inventory

Inventory and Annual Holding Cost essay

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