Question

LC Ltd is a distributor of semiconductor products. It purchases integrated circuit (IC) products from manufacturers at a wholesale cost of $200 and resells it to end customers. LC Ltd forecasts that demand of semiconductor products in 2019 is 600,000 units. Ordering costs are S600 per order and carrying costs are $40 per unit, including the opportunity cost of holding inventory Takashi Ltd is a manufacturer of handheld computers. It purchases materials from suppliers. The materials are stored in the warehouse in Kwun Tong. The production factory is located in Shenzhen. Training for workers is lacking, so they can only perform simple duties. The suppliers are relatively new in the market. The CFO finds it difficult to forecast the demands of the products. The handheld computers are similar. Takashi Ltd currently purchases a large volume of products in each order in order to minimize the number of purchase orders from various suppliers. The CEO wants to adopt just-in-time (JIT) production Required: For LC Ltd, compute the optimal order quantity using the EOQ model (a) For LC Ltd, determine the following: (i) The number of order per year (ii) The annual relevant total cost of ordering and carrying inventory (b) For Takashi Ltd, discuss whether just-in-time (JIT) (c) production is appropriate

Answer 1

1. Computation of optimal order quantity for LC Ltd,
   • Formula for calculation is √2AO/C,
   • A = 600,000 units, O = 600 per order, C = 40,
   • Substituting the values = √2 x 600,000 x 600 / 40 = 4,244 units per order.
2. For LC Ltd,

• Number of orders per year = annual requirement ÷ units ordered per order = 600,000 ÷ 4,244 = 142 orders.
• At EOQ both ordering cost and carrying cost will be equal,
• Total ordering cost = number of orders x cost per order = 142 x 600 = 85,200.
• Total carrying cost = total Ordering cost = 85,200.

1. For Takashi Ltd, it is difficult to obtain the demand for the product, purchasing a large volume of products in each order to minimise the ordering cost is not optimal because it may lead increase in hidden inventory carrying cost, as there is no demand forecast ability, it will be better for Takashi Ltd to go for JIT approach to procure the material when the order is received. There are still drawbacks to follow JIT approach because the suppliers are new to market and employees have no required skills which mah delay the delivery of products to the customers but it is better to follow JIT owing to benefits rather than drawbacks.