Problem:
Optimal quantity of coal to receive in each order
The purchasing manager for the Atlantic Steel Company must determine a policy for ordering coal to operate 12 converters. Each converter requires exactly 5 tons of coal per day to operate, and the firm operates 360 days per year. The purchasing manager has determined that the ordering cost is $80 per order and the cost of holding coal is 20% of the average dollar value of inventory held. The purchasing manager has negotiated a contract to obtain the coal for $12 per ton for the coming year.
a. Determine the optimal quantity of coal to receive in each order.
b. Determine the total inventory-related costs associated with the optimal ordering policy (do not include the cost of the coal).
c. If 5 days of lead time are required to receive an order of coal, how much coal should be on hand when an order is placed?