QUESTION 2 [20 MARKS]

Jennet Electronics supplies circuit chips to a company that incorporates microprocessors into refrigerators and other home appliances. One of the main components has annual demand of 250 units, and this is constant throughout the year. Carrying costs are estimated to be R1 per unit per year, and the ordering cost is R20 per order.

2.1 Using relevant calculations advise the operations manager on the number of units that should be ordered each time an order is placed to minimise costs and how many orders will be placed in the next 2 years with the optimal policy. In addition, what is the average inventory if costs are minimised? (10 marks)

2.2 Suppose that the ordering cost is not R20, and the organisation has been ordering 150 units each time an order is placed. For this order policy to be optimal, determine what the ordering cost would have to be. Comment on the primary motivations of holding inventory. (10 marks)