Question1. Explain how carrying cost affects inventory in any organisation. Use examples to illustrate your answer.
Question2. An organisation is planning to introduce an inventory system to manage the annual demand for stationary namely, reams of A4 paper. The daily usage rate for reams of A4 paper appears to be distributed, with mean 25 and standard deviation 3. Once an order is placed, it takes 7 working days before delivery is made and the organisation operates throughout the year. The cost of a ream of A4 paper is valued at approximately Rs12 and the organisation estimates that the carrying cost is 25% of the unit cost. The operations manager has made a study of the costs involved in placing and processing an order from the supplier, and concluded that the average ordering cost is Rs25 per order.
(a) Under the above assumptions, what is the economic order quantity?
(b) What is the expected number of orders to be placed each year?
(c) What is the total annual cost associated with your recommended EOQ?
(d) The organisation is concerned about stockouts of such a basic item and, thus, desires a 97% service level. What safety stock should the organisation maintain using the above information?
(e) Calculate the reorder point to be used.
(f) Suppose that an ordering cost of only Rs15 had been used instead of Rs25.
(i) What is the order size now?
(ii) How would the total cost have changed?