Inventory Management Practice Exercises (Complete any Six Problems given below...)
1. What is the re-order point (R/ROP) given an average daily demand of 50 units and a lead time of 10 days?
2. If annual demand is 12,000 units, the ordering cost is $6 per order and the holding cost is $2.50 per unit per year, what is the optimal order quantity using the Economic Order Quantity model?
3. Annual demand is 50,000 units, the ordering cost is $25 per order and the holding cost is $5 per unit per year.
a) What is the Annual Holding Cost function (formula)?
b) What is the Annual Ordering Cost function (formula)?
c) What is the Total Cost function (formula)?
4. An electronic company wishes to determine the best order size for its best selling data storage equipment. The company has estimated the annual demand of 1000 units. The holding (carrying cost) is 10% of selling price of $1000 and the ordering cost is $25 to place.
a) What are the annual holding cost, annual ordering cost and total cost functions for this company?
b) Determine the economic order quantity.
c) What is the average storage equipment on hand (average inventory)?
d) How many orders per year will there be?
e) What is the time between each order?
f) What is the minimum total annual cost?
g) Annual sales is expected to increase by 50% next year, how would the EOQ changes?
5. A particular raw material is available to a company at three different prices, depending on the size of the order:
Less than 100 pounds $20 per pound
100 pounds to 1000 pounds $19 per pound
More than 1000 pounds $18 per pound
The cost to place an order is $40. The annual demand is 3,000 pounds. Holding (or carrying) cost is $4.75 per pound. Should the company take advantage of the price break? What would be the order size?
6. The graph below shows the Economic Order Quantity model. On the graph, clearly identify:
Annual Holding Cost Function
Annual Ordering Cost Function
Total Cost Function
Optimal Order Quantity
7. An upscale home fixture supplier has four locations. Each location manages its ordering independently. The specialized lighting fixture sells for $300 and sales are on average 30 units per week. Currently the supplier orders 10-week supply from the manufacturer. The supplier pays $150 per fixture, and it takes two weeks to receive each delivery. The administrative cost of placing each order is estimated at $225. The supplier estimates the cost of capital at 20%.Assume 52 weeks in a year.
a) What are the annual ordering cost, annual holding cost and total cost functions?
b) Given that each outlet orders independently and gets its own delivery, determine the optimal order size at each outlet graphically (use Excel spreadsheet for this. find EOQ graphically).
c) Given that each outlet orders independently and gets its own delivery, determine the optimal order size at each outlet mathematically.
d) What is the average inventory for each outlet? Across all outlets?
e) How many orders must be placed annually?
f) How frequently orders must be placed?
g) What is the inventory turnover ratio?
If the purchasing centralizes purchasing (for all four outlets), the retailer will only have to place a single order for all the outlets.
h) What is the EOQ under centralization?
i) What is the average inventory across the system (all four outlets)?
j) How many orders must be placed annually?
k) Compare and discuss the two options.