The current inventory policy for M&B calls for purchasing HRF 5123 in lot order
ID: 1170510 • Letter: T
Question
The current inventory policy for M&B calls for purchasing HRF 5123 in lot order quantities of 155 cases from the Chem Corporation. M&B has an inventory control system that monitors inventory levels of all products on a weekly basis. Inventory records are attached. M&B operations require that 155 cases be reordered when inventory levels drop to 55 cases within the warehouse. Each case of HRF 5123 cost $10 and M&B has a 14% annual holding cost rate for its inventory. It cost $12 to prepare a purchase order for 1 case of HRF 5123. Assume all shortage cost are negligible and all shortages are fulfilled with backorders. (a) What is the value of the total annual inventory costs for HRF 5123 (need to figure out annual demand, use all data to calculate results)?
i) Does the current inventory policy for HRF 5123 meet this directive? If not, what should be the inventory policy in terms of optimum order quantity (EOQ) and reorder point? If the current policy does meet the safety stock objective, what is the advantage (in terms of cost) of the optimal compared with the current policy?
iii) What would be the impact to EOQ if holding cost varied from 5% to 15% (show a one way data table and plot of holding cost varying in increments of 1%
iv) What would be the impact to EOQ if holding cost varied from 5% to 15% and ordering cost varied from$5 to $15 per order (show a two way data table varying holding cost by increments of 1% and varying ordering cost by increments of $1) (c) M&B is considering purchasing from another supplier located in Slidell, Louisiana. This supplier charges $11 per case but delivers products on time in 14 days. Should M&B change suppliers? Support your decision with analysis. (d) What is the total annual inventory cost associated with the supplier selected in part c?
Week Date Inventory Level Reorder Transaction 1 4-Jan-16 198 Begining Inventory 2 11-Jan-16 122 3 18-Jan-16 106 4 25-Jan-16 66 5 1-Feb-16 55 Order Placed 6 8-Feb-16 30 7 15-Feb-16 7 7 22-Feb-16 160 Order Received 8 29-Feb-16 141 9 7-Mar-16 130 10 14-Mar-16 108 11 21-Mar-16 97 12 28-Mar-16 62 13 4-Apr-16 51 Order Placed 14 11-Apr-16 28 15 18-Apr-16 3 16 25-Apr-16 0 16 2-May-16 155 Order Received 17 9-May-16 141 18 16-May-16 128 19 23-May-16 108 20 30-May-16 97 21 6-Jun-16 87 22 13-Jun-16 53 Order Placed 23 20-Jun-16 44 24 27-Jun-16 31 24 4-Jul-16 186 Order Received 25 11-Jul-16 174 26 18-Jul-16 130 27 25-Jul-16 128 28 1-Aug-16 118 29 8-Aug-16 88 30 15-Aug-16 56 Order Placed 31 22-Aug-16 34 31 29-Aug-16 184 Order Received 32 5-Sep-16 156 33 12-Sep-16 138 34 19-Sep-16 119 35 26-Sep-16 94 36 3-Oct-16 67 37 10-Oct-16 30 Order Placed 38 17-Oct-16 12 39 24-Oct-16 0 40 31-Oct-16 0 40 7-Nov-16 155 Order Received 41 14-Nov-16 154 42 21-Nov-16 142 43 28-Nov-16 121 44 5-Dec-16 98 45 12-Dec-16 72 46 19-Dec-16 54 Order Placed 47 26-Dec-16 37 47 2-Jan-17 190 Order Received 48 9-Jan-17 167 49 16-Jan-17 151 50 23-Jan-17 118 51 30-Jan-17 101 52 6-Feb-17 79 13-Feb-17 68 Ending InventoryExplanation / Answer
ANSWER TO Q .NO.(a) ANNUAL DEMAND = OPENING STOCK +PURCHASES -CLOSING STOCK that =198(stock on 1-4-2016)+930(155*6)-37(26-12-2016)=1091.
ANNUAL INVENTORY COST =PURCHASE PRICE HOLDING COST+ORDERING COST that =
1)PURCHASE PRICE=$10*1091=$10910
working 2)holding cost = 1/2*roq*holding cost per unit per order.
that = 1091*10*14/100=763.7
3) ORDERING COST=12*6=72.
ANNUAL INVENTORY COST=$10910+$763.7+$72=$11457.7.
ANSWER FOR Q.NO (a)(1)the current inventory policy for HRF 5123 dos not meet the directive because the inventory level reached ZERO 3 times
the results in intereption of production the period of ONE WEEK that is (25 APR 2016 TO 2 MAY 2016) , TWO WEEKS that is (24 OCT 2016 TO 7 NOV 2016).
so EOQ=(square root of) Annual demand*2*orderingcost per order/carring cost per order.
(square root of)1091*2*$12/$1.4=137.
working notes
1) annual demand =1091 above done
2)ordering cost per order=$12.
3)carrieying cost p.a=14*10%=1.4.
advantage will be saving in the form of annual invenory cost.annual inventory cost at EOQ= purchase price +total carrieng cost+total ordering cost =$10910+$96+$96=$11102.
working= purchase price=10*1091=$10910.
total carrieng cost=1/2*137*10*14/100=$96.
total ordering cost=1091/137*12=.$96.
there for we save $355.7(11457.7-11102).
answer for q.no(2) if carrieng cost increased to 15% then impact on ROQ=(square root of) 1091*2*12/1.5=132.
total cost=1091*10*132*1/2*1.5+1091/132*12=11110-11102=$8.
answer for q.no-(4)- impact on EOQ if ordering cost $15&carring cost 15%
(square root of) 1091*2*15/1.5=148.
total cost at new roq=1091*10+148*1/2*15%of10+1091/148*15=11132-11102=30.
answered for Q.NO (C)=
answeredfor Q.NO(d)=annual inventory cost if new supplier selected=1091*11+
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