Placed q 2 q 3 order order received received oh oh l

Info icon This preview shows pages 33–43. Sign up to view the full content.

placed Q 2 Q 3 Order Order received received OH OH L L Protection interval Protection interval IP IP 1 IP IP 3 IP IP 2 IP IP IP IP IP IP OH OH
Image of page 33

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Fixed Order Quantity System A perceptual system (sometimes called a fixed quantity or Q/R system) is one that used a fixed reorder point (R) and a fixed order quantity (Q). The time between orders varies depending on when the inventory reaches the reorder point.
Image of page 34
Fixed Order Quantity System The inventory behavior is: LT LT LT Q Q R (d) SS= 0
Image of page 35

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Fixed Order Quantity System Where: R= reorder point = (d*L) + SS Q= economic order quantity = EOQ = D= annual demand (expressed in units/ year) L= reorder lead time (expressed as a fraction of a year) S= ordering cost (expressed as $ per order) C= item cost (expressed in $ per unit) F= inventory holding cost fraction (expressed as a fraction of item cost per year) H= holding cost = (C*F) The total annual cost (TC) for a purchased item managed with a perpetual inventory system can be calculated as follows: TC= (cost of the item) + (ordering cost) + (inventory holding cost) D*C + ( Q/2)*H + (D/Q)*S 2* DS H
Image of page 36
Example 15.2 Example 15.2 3000 3000 — 2000 2000 — 1000 1000 — 0 0 — | | | | | | | | 50 50 100 100 150 150 200 200 250 250 300 300 350 350 400 400 Lot Size ( Lot Size ( Q ) Annual cost (dollars) Annual cost (dollars) Total cost = ( Total cost = ( H ) + ( ) + ( S ) D Q Q 2 Holding cost = ( Holding cost = ( H ) Q 2 Ordering cost = ( Ordering cost = ( S ) D Q Economic Order Quantity Economic Order Quantity
Image of page 37

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Economic Order Quantity Economic Order Quantity Annual cost (dollars) Annual cost (dollars) Lot Size ( Lot Size ( Q ) Figure 15.4 Figure 15.4 Holding cost ( Holding cost ( HC HC ) Ordering cost ( Ordering cost ( OC OC ) Total cost = Total cost = HC HC + + OC OC
Image of page 38
See Example on Your Supplement P. 15-15.
Image of page 39

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Example of Determining Economic Order Quantity An importer/distributor or toys uses a standard, corrugated cardboard box for shipping orders to customers. These boxes are used at the rate of 120,000 per year. Each box costs $0.30, and the estimated annual holding cost is 60% of the purchase price. It requires 20 minutes (or 0.33 hours) to prepare an order for this item. The wage rate of the inventory and purchasing clerks is $5.00 per hour. D=120,000; C=0.30; F=0.60; H=0.3x0.6=0.18 Problem: Determine how many boxes should be ordered from the supplier each time. Solution: S= (1/3) x $5= $1.65 EOQ= √2.D.S/H = √2x120,000x1.65/0.18 = 1,483 ≈1,500
Image of page 40
Problem: If lead time is one day and there are 250 working days during the year, what is the reorder point? Solution: d= 120,000/250= 480, L=1, SS=0 R= d.L + SS= (480X1) + 0 = 480 Problem: What is the total annual cost of this reordering system? Solution: TC = D.C + (D/Q).S + (Q/2).H = (120,000)(0.3) + (120,000/1,483)1.65+(1483/2)X0.18 = $36,267
Image of page 41

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Economic Order Quantity Economic Order Quantity 1. 1. Demand rate is constant Demand rate is constant 2. 2. No constraints on lot size No constraints on lot size 3. 3. Only relevant costs are holding and Only relevant costs are holding and ordering/setup ordering/setup 4. 4. Decisions for items are independent Decisions for items are independent from other items from other items 5. 5. No uncertainty in lead time or supply No uncertainty in lead time or supply 6.
Image of page 42
Image of page 43
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern