As a result of many process improvements and IT implementations (like EDI), Big

Question

As a result of many process improvements and IT implementations (like EDI), Big Box-Mart has been able to reduce its order costs from $21 to $4.75 when purchasing cases of paper towels from its main paper-products supplier. Annual demand is expected to be 140,000 cases and annual holding costs are 3.50 per case.

Based on this information, what will be the new optimal order quantity (using the reduced ordering cost)? (Display your answer to two decimal places.)

When using the reduced ordering cost, as compared to the original ordering cost, by how many cases will the average inventory go down? (Display your answer to twodecimal places.)

What will be the annual total combined savings to ordering costs and holding costs when using the reduced order cost, as compared to the original ordering cost? (Display your answer to two decimal places.)

Explanation / Answer

Optimal order quantity is calculated as

(2 * Annual Demand * Cost per order/ (Holding cost per unit per year) )^.5

New optimal order quantity = (2*140,000*4.75/3.5 )^.5

=616.44

Original optimal order quantity = (2*140,000*21/3.5)^.5 =1296.14

The average inventory will go down by 52.46%

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