Answer Happy

Basic economic order quantity model Basic economic order quantity model SO • Economic order quantity: A fixed order size that will minimize the sum of the annual costs of carrying inventory and ordering inventory . Characteristics: - Order a fixed amount of product at each time of reordering Order by referring to re-order point, i.e., a minimum stock level Cargo . Carrying cost: The expense associated with maintaining inventory . Cost components: Insurance: Based on estimated risk or loss over time and facility characteristics - Obsolescence: Results from deterioration of product during storage Storage: Facility expense related to product 2.0 holding rather than product handling - Extra staffing, etc. . Order size increases, carrying cost increases → Prefer to keep order quantity as small as possible 18160 Sed ordental Basic economic order quantity model Basic economic order quantity model $8.000 Total cos 6.000 • Order cost: The expense associated with dealing with an order . Cost components: - Order processing cost - Material handling cost - Clerical support Order size increases, order cost decreases → Prefer to get a larger order • Conduct a trade-off between the inventory carrying cost and the order cost • Total inventory cost = Carrying cost + Order cost A minimum total annual inventory cost Order co/Setup con 4000 Carrying cost 2000 40 160 200 120 Size of order units Order cost/Setup Cost Size of order
Basic economic order quantity model Basic economic order quantity model 4.000 • E.g., each order cycle starts with 4,000 shirts (units) - Demand is constant at the rate of 800 units per week - Place an order for an additional 4,000 units, when inventory falls below 1,500 units - After 5 weeks, the inventory is completely used - Just as the 4,000th unit is sold, the next order of 4,000 units arrives and a new cycle begins Level of inventory 3.000 Reorder point 2.000 1.000 Time (weeks) 11 Basic economic order quantity model Basic economic order quantity model • Assumptions: Rate of demand is continuous, constant, and known - Replenishment time is constant and known All demand is satisfied Price of product is constant and is independent of order quantity or time (e.g., purchase price) - No inventory is in transit - There is one item of inventory or no interaction between multiple items of inventory - An infinite planning horizon exists - No limit is placed on capital availability • Variables of a basic EOQ model: R = annual rate of demand (units per year) Q = quantity ordered (order size in units) A = order cost ($ per order) V = value or cost of one unit in dollars ($ per unit) W = carrying cost per dollar value of inventory per year (% of product value) S = VW = annual carrying cost per unit ($ per unit per year) t = replenishment time (days) TAC = total annual inventory cost ($ per year) 13 14
Basic economic order quantity model Basic economic order quantity model • Total annual inventory cost = Carrying cost + Order cost National Fashion sells jackets. It intends to reduce its inventory cost by determining the optimal number of jackets to obtain per order. The annual demand is 4,000 units. The order cost is $300 per order. The carrying cost per unit per year is $30. What is the economic order quantity? TAC-Qw +A TAC - 1/2 Osta A • Determine Q by 2RA Q= V vw 2RA Q= S 15 16 Basic economic order quantity model Basic economic order quantity model . Given: R = 4000 units/year A = $300 per order S = $30 per unit per year 2RA . By the formula Q= S • Reorder point (ROP): When to order • Replenishment time for order transmittal, order processing, order preparation, and order delivery • ROP = Daily demand Replenishment time Q= 2 x 4000 x 300 30 . To solve Q = 282.8 ~ 283 jackets
Question 2 (30%) (a) Critique the following two assumptions of the basic economic order quantity model from a fashion retailer's perspective. (10%) (i) Price of product is constant and is independent of order quantity or time (e.g., purchase price). (ii) There is one item of inventory or no interaction between multiple items of inventory. (b) Specify two situations that keeping a high level of inventory as safety stock is highly required, with clear explanation. (20%)