Question

Jill's Job Shop buys two parts (Tegdiws and Widgets) for use in its production system from two different suppliers. The parts are needed throughout the entire 52-week year. Tegdiws are used at a relatively constant rate and are ordered whenever the remaining quantity drops to the reorder level. Widgets are ordered from a supplier who stops by every five weeks. Data for both products are as follows:

ITEM	TEGDIW			WIDGET
Annual demand		14,000			9,000
Holding cost (% of item cost)		20	%		15	%
Setup or order cost	$	110.00		$	15.00
Lead time		6	weeks		2	week
Safety stock		40	units		6	units
Item cost	$	5		$	4

a What is the reorder quantity and reorder point for Tegdiws? (Round your answers to the nearest whole number.)

	Optimal reorder quantity units Reorder point units

b What is the inventory control system for Widgets? (Round your answer to the nearest whole number.)

Hint: answer what order-up-to (OUL) is.

	Inventory control system for Widgets q = − I (Inventory on hand)

Answer 1

Economic Order Quantity refers to the number of unit the company should add to the inventory and the order is made to minimize the total inventory cost. It maintain a balance between ordering costs and carrying costs. Reorder point is the level of inventory which the firm holds in stock and when the inventory level reach this point, the firm must reorder the item.

EOQ act as a review inventory system to monitor the inventory level continuously and once the level reaches the reorder point, a fixed quantity of order is placed. Thus EOQ helps in calculating reorder point and optimal reorder quantity to avoid shortage of inventory.

Periodic review system also called fixed interval reorder system has four original economic order quantity assumptions: -

• There are no restrictions on lot size.
• ordering cost and carrying cost
• demand should be independent
• The lead time is constant.