5. Value Electronics has a yearly demand of 100,000 units for their tablet. The

Question

5.

Value Electronics has a yearly demand of 100,000 units for their tablet. The order processing cost per order is $2,000, and inventory holding cost is $100/item/year. They have opted for the reorder point system, and it has two options for transportation: by truck and by rail. Truck transportation takes 1 week, while rail transportation takes 2 weeks of lead time. Truck transportation costs $2 per tablet, while by rail the transportation cost is $1 per tablet. It is the policy of Value Electronics to hold enough inventories to cover demand for twice the lead time.

Calculate the annual transit inventory cost for the truck scenario.

Explanation / Answer

Data Given for Value Electronics:

A = Annual Demand = 100,000 tablet

S = Cost per order = $2,000 per order

H = Holding cost ($) = $100 per tablet per annum

Tuck option:

LT = lead time = 1 week

CT = Transportation cost = $2 per tablet

Rail Option:

LR = lead time = 2 week

CR = Transportation cost = $1 per tablet

Inventory system: Reorder point system (q-system)

Inventory policy: Safety stock = twice the demand during lead time

Assume there are 52 working weeks for the Value Electronics. Thus, the weekly demand for tablet is given as:

d = Annual demand/number of weeks

d = 100,000/52 = 1923 tablets/week

Truck Transportation Option:

Step 1: Determine Safety stock (SS) level

SS = 2 x demand during lead time

SS = 2 x dLT

SS = 2 x 1923 x 1

SS = 3846 tablets

Step 2: Determine costs

Annual cost of holding the SS = SS x H = 3846 tablets x $100 per tablet per annum

Annual cost of holding the SS = $384,600 per annum

Annual cost of transportation = 100,000 x $ 2 = $ 200,000

Annual Transit inventory cost = D x LT x H = 100,000 x (1/52) x $100 = $192,300

Total Annual Transit Inventory Cost = Annual (cost of holding SS + cost of transportation + t ransit inventory cost)

Total Annual Transit Inventory Cost = $384,600 + $200,000 + $192,300

Total Annual Transit Inventory Cost = $776,900 per annum

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