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# Cost after introducing an inventory management system

EG151
Demand for the first 21 weeks WEEK DEMAND WEEK 1 104 2 103 3 107 4 105 5 102 6 102 7 101 8 104 9 100 10 100 11 103 Actual total demand in the first 21 weeks Projected total demand for 1 year -> D= 5304 cost of ordering one lot (in \$ per lot): S cost of holding one unit in inventory for a year: H 1.85 Q*= optimal quantity to order =(
2 )

12 13 14 15 16 17 18 19 20 21

## DEMAND 97 99 102 99 103 101 101 104 108 97

2142

5304

20 Assumption: the mentioned inventory cost (21%) is per year -> 12.99\$*(1-0,32(percentage of the gross margin))*0,21 (cost of inventory)

338

numbers of orders placed annually:N -> Annual Ordering Cost: D/Q*(S) Average cycle inventory level: Q*/2

15.68

313.67

169

->Annual Holding Cost: Q*/2 (H) Safety Stock (SS): for a service level of 95%: z Standard deviation: Lead time: L (in days) = *()

313.67

## 1.645 2.86356421 14 17.63

-> Annual Holding Cost for Safety Stock: SS(H) Reorder point: R (R= d*L + SS; d=daily demand -> D/365) Total Annual Cost for inventory with an inventory system: C C= D/Q* (S)+ Q*/2 (H) + SS(H)

32.69 221.07

660.03

## Costs without introducing an inventory system

EG151
Annual Ordering Cost: D/Lot Size*(S) (lot size: 150 according to the case) Average cycle inventory level: Q*/2.2 707.20

Assumption: we took 2.2 instead of 2, because we are running out of stock and thats why our average cycle inventory level must be 68 lower than 75; our denominator must be higher than 2 126.48

## Annual Holding Cost: Q*/2.2 (H)

Assumption: Other costs due to a bad inventory system: costs of backorder (=loss of profit) Projected number of backorders at the end of the year Projected costs of backorder at the end of the year Total Annual Cost for inventory without an inventory system: C 11 parts after 21 weeks > 27,24 parts after 52 27.24 weeks

113.22 =27,24*12,99*32%

## -> the lost margin is our cost for backorders

946.90

Summery
Total Inventory Costs

EG151
Total Annual Cost for inventory without an inventory system: Total Annual Cost for inventory with an inventory system: Cost reduction: Cost reduction in %: Annual Cycle Inventory 946.90

DB032
509.98

Total
1456.87

## 961.81 495.06 33.98%

EG151
Without an Inventory System: With an Inventory System: Change in Annual Cycle Inventory (favorable= ""): 68

DB032
500

Total
568

169

113

282

101

-387

-287

Ordering Costs

EG151
Without an Inventory System: With an Inventory System: Change in Ordering Costs (favorable= "-"): 707.20

DB032
24.58

Total
732

313.67

109.23

423

-393.53

84.65

-308.88

DB032
Demand from 11-21 week WEEK 11 18 12 33 13 53 14 54 15 51 16 53 17 50 18 53 19 54 20 49 21 52 Actual total demand in week 11-21 Projected total demand for 1 year -> D= 2458 cost of ordering one lot (in \$ per lot): S cost of holding one unit in inventory for a year: H

520

2458

10 -> 8.89\$*(1-0,48(percentage of Assumption: the mentioned inventory cost the gross margin))*0,21(cost of 0.97 inventory) (21%) is per year

## Q*= optimal quantity to order =(

2 )

225

numbers of orders placed annually:N -> Annual Ordering Cost: D/Q*(S) Average cycle inventory level: Q*/2

10.92

109.23

113

->Annual Holding Cost: Q*/2 (H) Safety Stock (SS): for a service level of 95%: z Standard deviation: Lead time: L (in days) = *()

109.23

## 1.645 11.3849981 21 85.82

-> Annual Holding Cost for Safety Stock: SS(H) Reorder point: R (R= d*L + SS; d=daily demand -> D/365) Total Annual Cost for inventory with an inventory system: C C= D/Q* (S)+ Q*/2 (H) + SS(H)

83.32 227.25

301.78

DB032
Annual Ordering Cost: D/Lot Size*(S) (lot size: 1000 according to the case) Average cycle inventory level: Q*/2 500 Projected Annual Holding Cost: Q*/2 (H) 485.39 ->Lot size (1000)/2 * H 24.58

Assumption: DB032 won't run out of stock, because Parts Emporium is able to order DB032 in time

509.98

## Total Inventory Costs

EG151
Without an inventory system: With an inventory system: Cost reduction: Cost reduction in %: 946.90

DB032
509.98

Total
1456.87