Sharon Ltd has in the past ordered raw material T in quantities of 3,000 units which is half a years supply. Management has instructed you, an inventory cost consultant, to advise them as to the most desired order quantities. The factory closes for 4 weeks annual leave per annum.

You are given the following data:

Inventory usage rate: 125 per week, Lead time: 3 weeks

Unit price: $1.50, Annual requirement: 6,000 units

Order cost: $9.00 per order, Carrying cost: $0.30 per unit per year Required:

Calculate the economic order quantity.

Calculate the reorder point.

How much would the company save by using this new method? (Assume the order point calculated in part b is used)

Solution:

For Requirement (a) formula is already provided in lecture slide.

For Requirement (b): Re-Order point = Lead time usage (No of weeks * Usage per week) For Requirement (c): Savings per year by ordering at EOQ (= Existing policy EOQ policy) Existing policy = Cost of ordering + Cost of holding + safety stock

Cost of ordering = No of orders per annum * Cost of an order

Cost of holding = Average Inventory * Carrying cost per unit per annum Safety Stock = Usage per week * Lead Time * Carrying cost

EOQ policy = Cost of ordering + Cost of holding + Safety stock

For Requirement (c): Savings per year by ordering at EOQ (= Existing policy EOQ policy)