Appendix III – Inventory Management
App III-1
APPENDIX III
Inventory Management
ANSWERS TO REVIEW QUESTIONS
III-1 (a) Ordering costs: The cost of preparing, placing, and receiving a purchase order.
(Examples include the clerical costs of preparing purchase orders, time spent
finding suppliers and expediting orders, transportation, and receiving costs,
III-2 The EOQ approach assumes that some inventory must be held. The objective of the
model is to balance the cost of ordering against the cost of holding inventory. In
contrast, the JIT philosophy is to reduce all inventories to the absolute minimum,
Appendix III – Inventory Management
App III-2
SOLUTIONS TO EXERCISES
EXERCISE III-3 (15 MINUTES)
unit percost holding annual
order) pert)(cost requiremen (2)(annual
EOQ
=
EXERCISE III-4 (10 MINUTES)
1.
Safety stock:
tons (80 – 65).
The lead time is one month, so the safety stock is equal to the difference between
2.
Reorder point:
placed.
The reorder point is 80 tons. This is the maximum amount of the bonding agent that
Appendix III – Inventory Management
App III-3
EXERCISE III-5 (25 MINUTES)
1.
Annual cost of ordering
and storing XL-20
=
+
unit
percost
holding
annual
2
quantity order
order
percost
quanity
order
trequiremen
annual
3.
Using the formula given for requirement (1):
quantity purchased multiplied by the price).
4.
Orders per year:
5.
Using the new cost data:
a.
EOQ
=
unit percost holding annual
order) per(cost t)requiremen (annual (2)
Appendix III – Inventory Management
App III-4
EXERCISE III-5 (CONTINUED)
=
EXERCISE III-6 (20 MINUTES)
1.
Tabulation of inventory ordering and holding costs:
Order size
400
600
800
Number of orders
(4,800 ÷ order size) …………………………...
12
8
6
Average inventory
(order size ÷ 2) ………………………………….
Total annual costs (ordering
costs + holding costs) ……………………….
2.
the order quantities for the tabular analysis, an order quantity other than those
included in the table will be the least-cost order quantity.
The tabular method is cumbersome and does not necessarily identify the optimal
Appendix III – Inventory Management
App III-5
EXERCISE III-7 (25 MINUTES)
Graphical analysis of economic order quantity:
Total annual cost
Order quantity
$3,000
$2,500
$1,500
Total annual cost
$3,500
App III-6
1.
Reorder point:
Monthly usage
=
12
usage annual
=
400 canisters
when the inventory level falls to 400 canisters. In the one month it takes to receive the
order, those 400 canisters will be used in production.
Appendix III – Inventory Management
EXERCISE III-8 (CONTINUED)
2. Graph of usage, lead time and reorder point:
Quantity (canisters)
of XL-20
Usage of
XL–20
600
Appendix III – Inventory Management
App III-8
EXERCISE III-8 (CONTINUED)
3.
Safety stock and new reorder point:
production.
Monthly usage of XL-20 fluctuates between 300 and 500 canisters. Although average
monthly usage still is 400 canisters, there is the potential for an excess range of 100