logo image

Inventory and Annual Holding Cost Essay

Your firm uses a continuous review system and operates 52 weeks per year. One of the SKUs has the following characteristics. Demand (D) = 20,000 units/year
Ordering cost (S) = $40/order
Holding cost (H) = $2/unit/year
Lead time (L) = 2weeks
Cycle-service level = 95%
Demand is normally distributed with a standard deviation of weekly demand of 100 units. Current on-hand inventory is 1.040 units with no scheduled receipts and no backorders. 1. Calculate the item’s EOQ. What is the average time, in weeks between orders? EOQ = (2DS)/H

EOQ = (2*20000*40)/2
EOQ = 800000
EOQ = 894.43894
TBO = (EOQ/D)*52weeks
TBO = (894/20000)*52weeks
TBO = (0.0447)*52weeks
TBO = 2.32442.32weeks
2. Find the safety stock and reorder point that provide a 95% cycle-service level. Safety stock = Z*(standard deviation of demand during lead time) Z for 95% service level is 1.64
Safety stock = 1.64*(2*100)
Safety stock = 328 units
Reorder point = (Average demand during lead time) + (Safety Stock) Reorder point = ((20000/52weeks)*2) + 328 = 1097.23 1097
3. For these policies, what are the annual costs of holding the cycle inventory and placing orders? Annual holding cost = (Average cycle inventory)*(Unit holding cost) Annual holding cost = (Average Lot size/2)*(Unit holding cost) Annual holding cost = ((20000/52weeks)*2.32weeks)/2 * 2

Annual holding cost = (892.30 892/2)*2
Annual holding cost = 446*2 = $892
Annual ordering cost = (Number of orders/year)*(Ordering cost) Annual
ordering cost = (Demand/Average lot size)*(Ordering cost) Annual ordering costs = (20000/892)*(40)
Annual ordering costs = 22.42*40 = $896.8
4. A withdrawal of 15 units just occurred. Is it time to reorder? If so, how much should be ordered? Inventory position = on hand inventory + schedule receipts – backorders Inventory position = 1040+15+0=1055

IP (1055) < R (1097) so new order must be placed
Order quantity: Target inventory level – Inventory position Target inventory level = Average demand during the protection interval + Safety stock Target inventory level = (Demand/52weeks)*((EOQ/Demand)*52weeks)*(Lead time) + Safety Stock Target inventory

Can’t wait to take that assignment burden offyour shoulders?

Let us know what it is and we will show you how it can be done!
Sorry, but copying text is forbidden on this website. If you need this or any other sample, please register

Already on Businessays? Login here

No, thanks. I prefer suffering on my own
Sorry, but copying text is forbidden on this website. If you need this or any other sample register now and get a free access to all papers, carefully proofread and edited by our experts.
Sign in / Sign up
No, thanks. I prefer suffering on my own
Not quite the topic you need?
We would be happy to write it
Join and witness the magic
Service Open At All Times
Complete Buyer Protection
Plagiarism-Free Writing

Emily from Businessays

Hi there, would you like to get such a paper? How about receiving a customized one? Check it out https://goo.gl/chNgQy

We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy