Part A
Principle inventory trade-off in a simple EOQ fixed quantity under the condition of certainty EOQ has been used for inventory management Organizations require only enough inventories that will last them through the replenishment or lead time. The reorder point, therefore, is determined by multiplying the lead time with the daily demand. The replenishment time should consider order processing, transmittal, preparation, and delivery. The time for each activity depends on issues like the means for transmitting the order availability of the inventory and the mode of transport. Organizations must be able to strike an optimal quantity that ensures that ordering and holding cost of inventory is reduced. EOQ will, therefore, help an organization determine the most optimal quantity that reduces its total cost (Chopra & Meindl, 2016). EOQ minimizes inventory management cost by ensuring that the ordering costs and carrying costs are maintained at the lowest level possible.
Under the condition of certainty, costs like communication of the order, transport, order placing cost and other related costs are maintained at the lowest level by ordering a bigger volume. However, the excessive stock carries additional cost like the opportunity cost, storage cost, and spoilage cost. The dire to minimize carrying costs will result in the placement of smaller order which will increase the ordering costs. Minimizing ordering cost will also require an organization to place large orders that increase the carrying cost. Striking a balance between the two is a delicate act that needs to a working model and accurate information (Chopra & Meindl, 2016). A trade-off between the two cost must be determined by an organization in order to establish the inventory that should be ordered. A company can also include additional variations that might affect the ordering or carrying a cost. One such approach is to have a fixed order quantity.
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The fixed order quantity uses the minimum maximum approach to manage inventory. As the inventory is depleted, it is replenished when it reaches the reorder point. The use of the min-max approach can be useful in situations where the demand is high and where the volumes at hand are likely to fall below the reorder point before a replenishment order is placed. The min-max approach can be used to increase the amount ordered by determining the difference between the reorder point and the volume at hand. The minimum amount to be ordered is then identified in order to ensure that the maximum inventory at hand reaches the maximum volume.
An increase in the order size reduces the ordering costs and increases the carrying costs. The amount incurred for transporting the consignment, for example, reduces as the volume increase. Similarly, communication costs and ordering costs will also reduce as the company orders. These costs decrease because the transport cost does not depend on the number of units being transported. Similarly, order communication costs will remain the same irrespective of the size of the order.
Question 2
The manager at a supermarket wants to decrease the cycle stock lot size without increasing the total inventory costs incurred. Two different actions can be taken in this case in order to achieve this objective. The manager can reduce the fixed cost of placing an order through automated order placement processes or technologies. A decline in the fixed cost will ensure that the ordering cost is not affected by the volume of stock order. If ordering costs are variable, a .smaller order will incur proportional ordering costs and therefore the supermarket will not experience a substantial increase in cost due to the reduced size of the lot size. Similarly, a slight decrease in the lot size can lead to a situation where an increase in the ordering cost is offset by a decline in the carrying costs. A decrease in the cycle stock lot size decreases the holding stock while the annual ordering cost will increase since more orders must be made. A decline in the lot size will also lead to a decline of the cost of material as per each order but is likely to remain the same throughout the year since demand remains unchanged (Chopra & Meindl, 2016). However the supplier has a price break for order sizes at a certain level, and then the costs of the products might increase if the order size does not contribute any discount.
The manager can simply reduce the lot size and allow the EOQ model to perform its work. It is possible that such a decline can lead to a trade-off between the ordering cost and the carrying cost and in the end, the c.ost saving and increase in the ordering cost, on the other hand, will balance off and the supermarket will still order at the lowest cost. Such a scenario can be ideal as long as there are no cases of stock outs or lost sales. If the supermarket is in need of more lots of size reduction, the manager can order different products in a single order in order to spread the fixed procurement and carrying costs. Dramatic lot size reduction can, therefore, be achieved more easily through this approach (Chopra & Meindl, 2016). If similar products are being ordered by another outlet or stores that are willing to cooperate, the different orders can be delivered by one truck which can reduce the overall cost of transport.
Part B
Exercise 1
Number of engines that Harley should load onto each truck
Demand = 300 motorcycles per day
Cost per trip $1000
Cost per engine $500
Holding cost =20% or 0.2
Q * = Square root of ((2DS)/(Hc))
Q * = Square root of ((2*300*365*1000)/(0.2*500))
Q * = Square root of ((219,000,000/100)
Q * = ⱱ2190000
Q * = 1,479.87 engines per truck
Total annual inventory cost
Annual Inventory cost (TC) = ordering cost + Handling cost
= (D/Q*)S + (Q/2)hC
= (109,500/1,479.87)*1000 + (1,479.87/2)*0.2*500
= 73,992.986 + 73,993.5
= 147,986.486
Cycle inventory of engines at Harley
Cycle inventory =Q*/2
=1479.87/2
=739.935
Average Flow time
= Q/2*D
=1479.87/2*300
= 739.935/600
= 1.233225
Exercise 2
Annual inventory cost under the previous arrangement = 147,986.486
If the inventory is reduced to 100 engines per truck, the inventory cost will be;
Inventory cost = ((300*365)/100)1000 + (100/2)*0.2*500
Inventory cost = 1095000+5000
Inventory cost = 1,100,000
The holding cost for the inventory will be lower but the overall cost will be higher than in the previous example before the JIT arrangement.
The cost of each truck trip with a load of 100 engines if optimal for Harley will be;
Q= SQRT((2DS/hC
100 = ((2*300*365*S)/(.2*500))^0.5
100 =(219,000S/100)^0.5
S=4.57
Reference
Chopra, S., & Meindl, P. (2016). Supply chain management . Boston: Pearson.
