Question

Home Pro Sdn Bhd sells a wide range of electrical appliances to householders in IOl mall. One of the products it offers is Supersonic Blender MX101. The supplier for Supersonic Blender MX101 pays all incoming freight. No incoming inspection of Supersonic Blender MX101 is necessary because the supplier has a track record of delivering high-quality product. The purchasing officer of the Home Pro Sdn Bhd has collected the following information Annual demand for Supersonic Blender MX101 Ordering cost per purchase order Carrying cost per year Cost of Supersonic Blender MX101 12,100 units RM225 10% of purchase costs RM34 per rll The purchasing lead time is 4 weeks. The Supersonic Blender MX101 is open 312 days a year (52 weeks for 6 days a week). Required: a) Calculate the EOQ for Supersonic Blender MX101. b) Calculate the number of orders that will be placed each year. c) Calculate the reorder point for Supersonic Blender MX101, d) Discuss the usefulness and disadvantages of EOQ model. (5 marks) (4 marks) (6 marks) (10 marks)

Answer 1

d)

EOQ Usefulness includes:-

Minimizing Storage and Holding Costs

Storing inventory may be expensive for small business owners. The main advantage of the EOQ model is the customized recommendations provided regarding the most economical number of units per order. The model may suggest buying a larger quantity in fewer orders to take advantage of discount bulk buying and minimizing order costs. Alternatively, it may point to more orders of fewer items to minimize holding costs if they are high and ordering costs are relatively low.

Specific to the Business

Maintaining sufficient inventory levels to match customer demand is a balancing act for many small businesses. Another advantage of the EOQ model is that it provides specific numbers particular to the business regarding how much inventory to hold, when to re-order it and how many items to order. This smooths out the re-stocking process and results in better customer service as inventory is available when needed.

The disadvantages are very obvious if you've got a high periodicity or seasonality to your consumption, or your usage is very minimal. EOQ should only be applied to higher volume items that are worth inventorying; it's much safer to use VMI (Vendor Managed Inventory) for items like bolts and screws that have a high volume and aren't worth inventorying. For instance, I would never use EOQ to order screws or bolts unless they were particularily expensive and individually inventoried. I wouldn't use EOQ to order memory chips for a retail computer store, because demand can vary greatly and the risk that they'll become obsolete is high. However, I would use EOQ to order steel L-brackets for an industrial production facility where production is consistent and/or forecast .

Complicated Math Calculations

The EOQ model requires a good understanding of algebra, a disadvantage for small business owners lacking math skills. Additionally, effective EOQ models require detailed data to calculate several figures. The benefit to resolving the math is the ability to determine how much inventory should be attached to each order at the lowest possible costs. Keeping costs low will inflate margins and ultimately drive more revenue. EOQ software is one solution that may be worth the investment for small business owners lacking the time and capital to hire a consultant or employee for regular calculations.

Based on Assumptions

The EOQ model assumes steady demand of a business product and immediate availability of items to be re-stocked. It does not account for seasonal or economic fluctuations. It assumes fixed costs of inventory units, ordering charges and holding charges. This inventory model requires continuous monitoring of inventory levels. The effectiveness of the basic EOQ model is most limited by the assumption of a one-product business, and the formula does not allow for combining several different products in the same order.