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Group 1
AC5A
Inventory Cost Flow
Solution:
Inventory Turnover:
Weeks/Days of Supply:
Relevant Inventory Cost
•Item cost includes price paid for the item plus other direct costs
associated with the purchase.
Sample Problem:
The AAU Corp. is considering doing an ABC analysis on its entire
inventory but has decided to test the technique on a small sample
of 15 of its SKU’s. The annual usage and unit cost of each item is
shown in the table
Inventory Record Accuracy
Two methods for checking inventory record accuracy:
•Periodic Counting - a physical inventory is taken periodically,
usually annually.
•Cycle counting - Prespecified items are counted daily
The advantages of cycle counting are
Timely detection and correction of inventory record problems.
Elimination of lost production time since the company does not
need to shut down operations.
The use of employees dedicated to cycle counting
Common Ordering Approaches
•Lot-for-lot The company orders exactly what is needed.
EOQ Assumptions:
•Demand for the product is known and constant.
•Lead time is known and constant.
•Quantity discounts are not considered: the cost of all units is the
same, regardless of the quantity ordered.
•Ordering and setup costs are fixed and constant: the dollar
amount to place an order is always the same, regardless of the
size of the order.
To calculate total annual cost:
Total annual cost = annual ordering costs + annual holding costs
To calculate the total relevant annual costs for the basic EOQ model:
To calculate reorder point:
Sample Problem:
A computer company has annual demand of 10,000. They want to
determine EOQ for circuit boards which have an annual holding cost
(H) of $6 per unit, and an ordering cost (S) of $75. They want to
calculate TC and the reorder point (R) if the purchasing lead time is
5 days.
Solution:
•EOQ (Q)
Solution:
3. Quantity discount model modifies the EOQ process to consider
cases where quantity discounts are available.
Whenever the price per unit is not fixed but varies based on the size of your
order, the total annual cost formula for any inventory policy used must
include the cost of material the formula for this is:
Sample Problem:
Collin’s Sport store is considering going to a different hat
supplier. The present supplier charges $10 each and requires
minimum quantities of 490 hats. The annual demand is 12,000
hats, the ordering cost is $20, and the inventory carrying cost is
20% of the hat cost, a new supplier is offering hats at $9 in lots
of 4000. Who should he buy from?
Solution:
EOQ at lowest price $9. Is it feasible?
Solution:
Since the EOQ of 516 is not feasible, calculate the total cost
(C) for each price to make the decision
Suppose that the owner of the campus bar, Nick’s, has determined
that demand for beer during lead time averages 5000 bottles. Nick,
the owner, believes the demand during lead time can be described
by a normal distribution with a mean of 5000 bottles and a
standard deviation of 300 bottles. Nick is willing to accept a
stockout risk of approximately 4 percent. Determine the
appropriate z value to use. Calculate how much safety stock Nick
should hold. Also determine the reorder point.
Periodic Review System
Target inventory level (TI) is used in determining order quantity in the
periodic review system.
The target inventory (TI) level is calculated as:
Objective: To balance the gross profit generated by the sale of a unit with
the cost incurred for each unit that is not sold until after the primary selling
period has elapsed.
Sample Problem:
Rick Jones is chairman of this year’s Walk for Diabetes event. Each year,
the organizers of the event typically have commemorative T-shirts
available for purchase by the entrants in the walk. Rick needs to order the
shirts well in advance of the actual event. He must place his order in
multiples of 10 (60, 70, 80, etc.). Based on past walks, the organizers
have determined that the probability of selling different quantities of T-
shirts in a given year is as follows:
Rick plans to sell the T-shirts for $20 each. He pays his supplier $8 for
each shirt and can sell any unsold shirts for rags at $2 each. Determine
how many T-shirts Rick should order to maximize his expected profits.
Solution::
THE END
Reference:
Operations Management
by
R. Dan Reid & Nada R. Sanders
Seatwork:
1. Find the economic order quantity and the reorder point,
given the following information:
Annual demand (D) 10,000 units
Ordering cost (S) $75 per order
Annual holding cost (H) $6 per unit Lead time (L) 5 days
The company operates 250 days per year