You are in charge of managing the inventory of a well-established SKU that has v

Question

You are in charge of managing the inventory of a well-established SKU that has very steady demand of 330 items per month, with no visible trend or seasonality.

The cost of the product is 135 $/item and your firm uses an annual holding charge of 0.2 $/$/year (recall this is the same thing as saying 20 percent per year). You have found that there are two components to the ordering costs: labor and transportation. Labor costs are 57 $/order and transportation costs are 124 $/order - regardless of the number of items in the order. You sell each item for 270 $/item.

You must order in multiples of 10 since they come in cases of 10 each – so round to the nearest multiple of 10. Assume 12 months per year.

1) The Suppy Chain Manager tells you that Procurement has decided that the supplier of your SKU will supply one more SKU to the company. By combining these SKUs on the same order and shipment, the order costs can be shared between the SKUs. However, this means the items need to be ordered at the same times.

If the items are ordered every 28 days, what is the new order quantity for the first SKU (the one you calculated the order quantity for in Part 1 = 230)? Assume 365 days per year.

Explanation / Answer

Demand is 330 per month. This means the annual demand is 3960. Holding cost is 20% means 0.2*135 = $27. The ordering cost is 57+124 = $181. In order to reduce the cost we need to use EOQ method.

EOQ = sqrt(2DS/H) = sqrt(2*3960*181/27) = 230.41.

Since we need to order in multiples of 10, the nearest number divisible by 10 is 230 units.

Using this method we are placing D/Q orders in a year. This is 3960/230 = 17 orders in a year.

Now that we are planning to combine the order with the new SKU and place order every 28 days we will be placing 365/28 = 13 orders in a year. This means we will need to distribute the total demand across these 13 orders. This makes the order quantity of the well-established SKU to be 3960/13 = 304 units. Since we need to order in multiples of 10, the nearest number is 300. Hence the new order quantity is 300.

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