inventory-probs-solns-s07 - LGT3105 Operations Management...

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UMass Lowell College of Management 63.371 T. Sloan Inventory Management Example Problems with Solutions 1. An auto parts supplier sells Hardy-brand batteries to car dealers and auto mechanics. The annual demand is approximately 1,200 batteries. The supplier pays $28 for each battery and estimates that the annual holding cost is 30 percent of the battery’s value. It costs approximately $20 to place an order (managerial and clerical costs). The supplier currently orders 100 batteries per month. a. Determine the ordering, holding, and total inventory costs for the current order quantity. b. Determine the economic order quantity ( EOQ ). c. How many orders will be placed per year using the EOQ ? d. Determine the ordering, holding, and total inventory costs for the EOQ . How has ordering cost changed? Holding cost? Total inventory cost? Solution We are given the following information: annual demand: D = 1200 batteries per year item cost: c = $28 per battery holding cost: H = ic = 0 . 30(28) = $8 . 40 per battery per year order cost: S = $20 per order current order quantity: Q = 100 batteries a. The current ordering and holding costs are: D Q S + Q 2 H = 1200 100 (20) + 100 2 (8 . 40) = 240 + 420 = $660. b. The EOQ is Q * = q 2 DS H = q 2 × 1200 × 20 8 . 40 = 75 . 6 76 batteries. c. The company will place D Q * = 1200 76 = 15 . 8 orders per year. d. The new ordering and holding costs are: D Q * S + Q * 2 H = 1200 76 (20) + 76 2 (8 . 40) = 315 . 79 + 319 . 20 = $634 . 99. The company will save $25.01 by using the EOQ . 2. Upon closer inspection, the supplier determines that the demand for batteries is normally distributed with mean 4 batteries per day and standard deviation 3 batteries per day. (The supplier is open 300 days per year.) It usually takes about 4 days to receive an order from the factory.
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inventory-probs-solns-s07 - LGT3105 Operations Management...

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