Joe\'s Bar (not its real name) uses 800 kegs of adult beverages per year on a co

Question

Joe's Bar (not its real name) uses 800 kegs of adult beverages per year on a continuous basis (assume 365 days of operations per year). The order cost is $50.00 per order and the carrying cost is $2.00 per unit. It takes 5 days to receive a shipment after an order has been placed (old Joe took this TQM course so he now believes in JIT inventory methods - in other words- assume no safety stock). I need you to calculate four things (and again I need to see your work including a formula if needed) a. Calculate the EOQ (10 points & formula please!) b. Determine the average level of inventory (5 points) c. Determine the reorder point (5 points) d. Compute the Total Cost of Inventory (10 points (another formula needed)

This is a continuation of the previous problem...

One year passes. Joe is now out of the hospital. Seems his delivery company went on strike and Joe ran out of the "adult beverages" just before Hells Angels arrived at his bar. Funny, they did not want to hear about JIT inventory ... bottom line: it was real ugly!

Now Joe has decided "the heck with JIT, I want two weeks safety stock!" What will be the new reorder point (in units) ?

Explanation / Answer

EOQ Details Annual usgae                   800 kg Ordering cost per order $           50.00 Carrying cost per unit per year $              2.00 EOQ = Sq Root of [(2*Ordering cost*Annual usage)/Carrying cost per unit] = Sq root [(2*50*800)/2]=Sq root 40000 =200 a So EOQ is 200 b Average inventory =EOQ /2= 100 units c Daily consumption = 800/365=                  2.19 kg Lead Time for supply in days                        5 Reorder point =5*2.19=                10.96 kg d Total no of orders in a year =800/200=                        4 Total ordering cost = $         200.00 Average inventory =                   100 kg Carrying cost for average inventory= $         200.00 Total cost of Inventory =200+200= $         400.00 e New reorder point Safety stock days                      14 days Lead time days                        5 days Average daily use                  2.19 kg New reoreder level=2.19*19=                  41.6 Kg

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