You own a manufacturing company that uses 3000 hinges per year. The hinges are p

Question

You own a manufacturing company that uses 3000 hinges per year. The hinges are purchased from a company in the next county at a cost of $15 each and it takes the supplier 2 days to deliver the order once it is received. The holding cost per hinge is $1.50 per year. You have determined that it costs you $18.50 every time you place an order. There are 250 working days in each year. a) What is the EOQ? b) Given the EOQ, what is the average inventory? c) How many orders would you place each year and what would be the annual ordering cost? d) What is the time between orders? e) What is the ROP?

Explanation / Answer

demand items, we need methods of bootstrapping, croston etc method to do it. My question is we have different formula for COV. (1) cov= std deviation of demand per period divided by average demand per period(2)cov=st deviation of demand during lead time divided avg demand during lead time. Regarding the second formula, I am not sure of lead time here as it is Not fixed figure. I am not sure how do we calculate COV to check the variability for sporadic, lumpy etc demand pattern then decide My question is we have different formula for COV. (1) cov= std deviation of demand per period divided by average demand per period(2)cov=st deviation of demand during lead time divided avg demand during lead time? WHich one is the right ne to go? By the way, if we use Periodic Review system, do we incorporate review interval in the calculation especially in the second formula? I feel formual 1 shows us the variability in the demand period per period, second shows us the variability in lead time. It is important to understand that the level of service we hope to offer our customers is directly related to the amount of safety stock we keep in house. For example, if we want to maintain a high level of service and offer "off-the-shelf" sales, we'll want to hold additional inventories. If we produce our product or service once a customer places an order, we will have to have high levels of raw material safety stock if we want to turn the product around quickly. There is a formula available to calculate the appropriate level of safety stock. The formula involves calculating the standard deviation, and for most small business applications is not necessary. If you understand the balance between the cost of holding additional inventories versus the cost of losing out on potential sales, you can come up with a number that works best for you business. The nature of your demand patterns will very much determine how much safety stock you should keep in house. If your demand is very consistent and your forecasts are on par with your actual demand, you don't need to carry too much safety stock. If your demand is very inconsistent and you have fluctuating order patterns, you will need to carry more safety stock to meet this volatile demand. The lead time of your suppliers will also impact how much safety stock you should carry. As your company grows, you should be continually gathering and tracking historical demand data. By interpreting this data you should be able to recognize patterns in your demand. Once this has been established, you should be able to reduce your inventories as expected demand can be better predicted. Ultimately, you want your inventories to decrease. Carrying inventory is usually a non-value added activity. As a result, you should keep your inventories low, and match your production to your demand. Some companies I visit make the mistake of creating a set safety stock level for all of their products. The problem with this approach is that not all of the products have the same demand. If you have one product that sells very little, chances are, you do not need to carry a lot of safety stock. If you have a product with very consistent demand, you don't need safety stock. On the flip side, if you have a product that is subject to externalities and the demand is inconsistent, the safety stock level should be higher. It's clear that not all products will have the same demand pattern and therefore not all products should have the same safety stock level. Andrew Goldman is an Isenberg School of Management MBA student at the University of Massachusetts Amherst. He has extensive experience working with small businesses on a consulting basis.

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