A company stocks four items. Demand and other data for the items are given below

Question

A company stocks four items. Demand and other data for the items are given below- Inventory charge is 24% per year based on item cost. Ordering costs are as follows: $40 plus $15 per sku included in the order. For example, if an order includes items 2 and 4, then two skus are included, and therefore, the order cost is 40 + 2*15 = $70. Determine the annual costs of ordering, and inventory holding costs if each sku is ordered independently (simply use EOQ approach). Develop a joint replenishment ordering policy where all items (sku's) are included in each order. Determine the annual costs of ordering and inventory holding costs for this

Explanation / Answer

Ans 1 –

EOQ = SQRT (2 x Demand x Ordering cost / Holding cost)

EOQ for Sku 1 = SQRT (2 x 86500 x 55 / 0.24) = 6297

Number of orders to be placed = 86500 / 6297 = 14

Average inventory = EOQ / 2 = 6297 / 2 = 3149

Annual ordering cost = 55 x 14 = $770

Holding cost = Average inventory x holding cost per unit = 3149 x 0.24 = $756

EOQ for Sku 2 = SQRT (2 x 6250 x 55 / 0.48) = 1197

Number of orders to be placed = 6250 / 1197 = 5

Average inventory = EOQ / 2 = 1197 / 2 = 599

Annual ordering cost = 55 x 5 = $275

Holding cost = 599 x 0.48 = $288

EOQ for Sku 3 = SQRT (2 x 700 x 55 / 0.72) = 327

Number of orders to be placed = 700 / 327 = 2

Average inventory = 327 / 2 = 164

Annual ordering cost = 55 x 2 = $110

Holding cost = 164 x 0.72 = $118

EOQ for Sku 4 = SQRT (2 x 1000 x 55 / 0.96) = 339

Number of orders to be placed = 1000 / 339 = 3

Average inventory = 339 / 2 = 170

Annual ordering cost = 55 x 3 = $165

Holding cost = 170 x 0.96 = $163

Total annual ordering cost = $770 + $275 + $110 + $165 = $1320

Total holding cost = $756 + $288 + $118 + $163 = $1325

Ans 2 –

The ordering cost if all sku’s are included in each order = 40 + 4 x 15 = $100

The holding cost if all sku’s are included in each order = 0.24 + 0.48 + 0.72 + 0.96 = $2.4

The quantity to be ordered = 86500 + 6250 + 700 + 1000 = 94450

EOQ if all sku’s are included in each order = SQRT (2 x 94450 x 100 / 2.4) = 2806

Number of orders to be placed = 94450 / 2806 = 34

Average inventory = 2806 / 2 = 1403

Annual ordering cost = 34 x 100 = $3400

Annual holding cost = 1403 x 2.4 = $3367

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