Question

TEST Assignment 1 A computer-supply mail- order house has a memory chips in inventory that it sells to customers around the coutry. A Japanese manufacture supplies theitem using airfreigt. It has following characteristics:m Annual demand 1.200 units Leadtime Holding costs -25% per year Purchase price, delivered 75 USD per unit Ordering cost 25USD per unit - 1 week 1. Design a reorder point method of control for this item. Plot orders time diagramme. 2. What are the annual ordering and holding cost if your design is used ? 3. Suppose that the lead time stretches to three weeks, so that ROP > EOQ. What adjustments would you suggest making in the control policy? Plot time diagramme and give explanations.

Answer 1

1. The Reorder point is to be the inventory level at which a new order should be placed. Given the characteristics, the Reorder point of the supplier can be designed as

ROP =Constant demand per Day $\times$ Purchase lead time (day) - Safety stock

Here, demand per day is 1200/365 = 3.29 units

Lead time is = 7 days

Since the demand is constant and the lead time is known then the ROP is calculated by the formula

ROP = Constant demand per Day $\times$ Purchase lead time (day)

= 3.29 $\times$ 7 = 23.01.

2. Total ordering cost = 25 USD per unit

annual inventory stock = 23.01 $\times$ 365 = 8400 unit

therefore annual ordering cost = 8400 $\times$ 25 USD = 210000 USD

Holding Cost Will be 210000 $\times$ 25% = 52500 USD

3. If the lead time stretches to 3 week then

ROP = Constant demand per Day $\times$ Purchase lead time (day)

= 3.29 $\times$ 21 = 69.04 unit

EOQ

$=\sqrt{\frac{2DS}{HC}}$ Where D= Annual demand

S = Product order cost

C = Unit cost

H= Holding cost

= $\sqrt{\frac{2*1200*25}{0.25*75}}= 56.56$

Hence, ROP>EOQ.