How Much to Order The amount of inventory to order called the economic order quantity (EOQ)...
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How Much to Order The amount of inventory to order called the economic order quantity (EOQ) is calculated to minimize the total annual costs of inventory. Two cost categories are typically included in the total cost equation: 1) Ordering Costs and 2) Carrying Costs. • Ordering costs are calculated by multiplying the number of orders per year (Annual Demand (D)/ Order Quantity (Q)) by the cost per order (K). • Carrying costs are calculated by multiplying the average inventory on hand (Q/2) by the cost of holding (H). The carrying cost rate is typically a combination of interest rate plus a percent costs attributed to obsolescence and other costs. We define the EOQ equation by taking the derivative of the total annual cost equation, setting it equal to zero, and solving for Q. That is, Total Annual Inventory Costs=(D/Q)* K+ (Q/2)* H. EOQ = √2DK/H We will do the math in class. When to Order Orders should be placed so that the new order arrives before existing inventory runs out. When to order can be calculated by multiplying the average order lead time by the average daily inventory use. This calculation is called the reorder point (ROP). Please note that this is the simple version of the ROP. We will go over the ROP with safety stock in class. ROP-LT Average Daily Demand, where Average Daily Demand-Annual Demand/Business Days Because of variability in daily usage and/or order lead time, a company may hold some safety stock. Problems: Antique manufacturers old-fashioned, rotary telephones for use in movie scenes (and other displays). Worldwide demand is 44,000 phones per year. The rotary dial on each phone costs $0.75. Set up costs are $8. The carrying costs are 12%. Your Answers 1. What is the economic order quantity (EOQ)? 2. What are the annual order costs? 3. What are the annual carrying costs? 4. If Antique operates 250 eight-hour days per year and the lead time is eight days, what is the ROP? How Much to Order The amount of inventory to order called the economic order quantity (EOQ) is calculated to minimize the total annual costs of inventory. Two cost categories are typically included in the total cost equation: 1) Ordering Costs and 2) Carrying Costs. • Ordering costs are calculated by multiplying the number of orders per year (Annual Demand (D)/ Order Quantity (Q)) by the cost per order (K). • Carrying costs are calculated by multiplying the average inventory on hand (Q/2) by the cost of holding (H). The carrying cost rate is typically a combination of interest rate plus a percent costs attributed to obsolescence and other costs. We define the EOQ equation by taking the derivative of the total annual cost equation, setting it equal to zero, and solving for Q. That is, Total Annual Inventory Costs=(D/Q)* K+ (Q/2)* H. EOQ = √2DK/H We will do the math in class. When to Order Orders should be placed so that the new order arrives before existing inventory runs out. When to order can be calculated by multiplying the average order lead time by the average daily inventory use. This calculation is called the reorder point (ROP). Please note that this is the simple version of the ROP. We will go over the ROP with safety stock in class. ROP-LT Average Daily Demand, where Average Daily Demand-Annual Demand/Business Days Because of variability in daily usage and/or order lead time, a company may hold some safety stock. Problems: Antique manufacturers old-fashioned, rotary telephones for use in movie scenes (and other displays). Worldwide demand is 44,000 phones per year. The rotary dial on each phone costs $0.75. Set up costs are $8. The carrying costs are 12%. Your Answers 1. What is the economic order quantity (EOQ)? 2. What are the annual order costs? 3. What are the annual carrying costs? 4. If Antique operates 250 eight-hour days per year and the lead time is eight days, what is the ROP?
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Solution 1 Economic Order Quantity EOQ EOQ SQRT 2 x D x K H where D Annual deman... View the full answer
Related Book For
Essentials of Business Analytics
ISBN: 978-1285187273
1st edition
Authors: Jeffrey Camm, James Cochran, Michael Fry, Jeffrey Ohlmann, David Anderson, Dennis Sweeney, Thomas Williams
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