Question

Logistic and Channel management

Fatah Amin is the owner of Amin Hardware in Shah Alam, a hardware store selling local made lawn mower. The shop sells on average of 50 units of lawn mower a month. Fatah Amin purchases the lawn mower from Lofa Engineering in Muar Johor that costs RM300 to buy and 20 percent of the value of the item to hold each year. The lawn mowers are delivered by truck and incurred administrative, transportation and labor cost of RM2000 for each delivery.   

a) Calculate the economic order quantity of lawn mower that Fatah Amin should order for his hardware store. (4 marks)   

b) How many times is optimal for Fatah Amin to place order for the lawn mower from Lofa Engineering in a year? (2marks)

c) On average, how long does each lawn mower is kept at Amin Hardware before it is sold? (2 marks)

d) Calculate the annual inventory related costs incurred by Fatah Amin in a year. (6 Marks)

e) Fatah Amin is considering to expand the selling floor of his hardware store by converting the store room into sales area. Smaller storage means that he needs to reduce the quantity order to 120 units of lawn mowers per order. Is the new inventory related costs incurred by Fatah Amin optimal? Please advise him on what to do to minimize the cost.       (8 Marks)

Answer 1

Answer (e)

It is not optimal system because it is less than economic ordering quantity which is 200 unit. He should find new economic ordering quantity according to the expanded demand. And should choose order size equal to new economic ordering quantity.