The administrative policy of a certain company is never to run out of articles.

Question

The administrative policy of a certain company is never

to run out of articles. The sales department did an analysis

on a particular article to evaluate this policy. Demand

is deterministic and constant over time at 625 units per

year. The unit cost of the item is $ 50, regardless of the

quantity ordered. The cost of placing an order is $ 5.00

and the annual cost of maintaining the inventory is i = 0.20.

Late orders have a cost of $ 0.20 per unit per week.

Calculate the optimal operating policy under the assumption

that no shortages are allowed and, also, assuming there

are shortages at the indicated cost. What is the annual

loss in dollars caused by the policy that there are no

shortages, if the sales department estimates are correct

for the relevant parameters?

Explanation / Answer

Optimal Inventory Policy can be achieved by ordering Economic Order Quanity =Sqrt(2AO/C) Where A = Annual Demand O = Ordering cost per order C = Carrying cost per unit EOQ for articles =sqrt(2*625*5/10) 25 At EOQ, the company will never run out of articles & their Storage & ordering cost will be equal at EOQ So, there will be no loss in dollars due to shortages.

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