CASE STUDY: DENTON PET CLINIC Denton Pet Clinic is a small business owned by two
ID: 335271 • Letter: C
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CASE STUDY: DENTON PET CLINIC Denton Pet Clinic is a small business owned by two veternarians who employ two full-time staff members and a new part-time busi- ness manager. The business manager believes that Denton could save money by improving its inventory management, even though Denton Pet Clinic stocks very little except pharmaceuticals, clean- ing supplies, and some miscellaneous products. In the case of phar- maceuticals, Denton purchases most drugs from a supply company who offers very good prices and who ships to veterinarians over night for a flat fee of $15. Using this overnight service, Denton Pet Clinic has been in the habit of simply ordering a dozen boxes of any drug when only a few doses of that drug remain in stock near ANIMA HOSPITAL ANIMAL HOSPITALExplanation / Answer
1. We will use below annual holding cost formula to calculate the cost for each of the drugs
Holding Cost = Average Inventory level * Holding Cost per units per year
Where Average Inventory Level = Order Quantity / 2
Since order size is 12 units Average Inventory level for each of the 3 drugs = 12/2 =6
Holding Cost Per units = Cost Per Unit * Cost of Capital
Here the Cost of Capital = 15%
We need to calculate the holding cost for each of the three Drugs based on the above formula :
a. Rabies Booster vaccine
Holding Cost / Unit = 120 * 0.15 = 18
Holding Cost for Rabies Booster vaccine = 6 * 18 = 108
b. Distemper Booster vaccine
Holding Cost / Unit = 210 * 0.15 = 31.5
Annual Holding Cost for Rabies Booster vaccine = 6 * 31.5 = 189
c. Broadband antibiotic
Holding Cost / Unit = 400 * 0.15 = 60
Holding Cost for Broadband antibiotic = 6 * 60 = 360
Total Holding cost for the 3 drugs combined = 108 + 189 + 360 = $657
Order Cost = Total Number of Orders * (Cost / Order)
Number of Orders = Annual Demand / Order Size
= Monthly Demand * 12 / (Order size)
For Rabies Vaccine Number of Orders = 12 * 4 / 12 =4
For Distemper Booser number of orders = 20 * 12 / 12 =20
For Broadband Antibiotic = 20* 12 /12 =20
Total number of orders = 4 + 20 + 20 = 44
Ordering cost = 44 * 15 = $660
Total Cost = Ordering Cost + Holding cost = 660 + 657 = 1317
2. EOQ = Sqrt [ (2 * D * C)/H]
Where D = Annual Demand
C = Cost / Order
H= Holding Cost / Annum per Unit
For Rabies Vaccine EOQ = Sqrt ( 2 * 4 * 12 * 15 /18)
= 8.9 = ~ 9
For Rabies Vaccine EOQ = Sqrt ( 2 * 4 * 12 * 15 /18)
= 15.1 = ~ 15
For Rabies Vaccine EOQ = Sqrt ( 2 * 4 * 12 * 15 /18)
= 10.9 = ~ 11
Now we to calculate Holding Cost & Ordering Cost using the above methodology for each of the Drugs
Annual Holding cost for each of the drugs
Rabies Vaccine = 9 /2 * 120 * .15 = 81
Distemper Booster = 15/2 * 210*.15 = 236.25
Broadband Antibiotic =11 /2 * 400 * .15 = 330
Total Holding cost = 81 + 236.25 + 330 = 647.25
Number of Orders for each of the Drugs :
Rabies Vaccine = 4 * 12 /9 = 5.4 = ~ 6 [ Rounding off to greatest nearby integer]
Distemper Booster = 20 * 12 / 15 = 16
Broadband Booster = 20 * 12 / 11 = 21.8 = ~22
Total Ordering Cost = (6 + 16 + 22) * 15 = 660
Total Ordering + Holding Cost by EOQ = 660 + 647.25 = 1307.25
Total Saving by EOQ = 10.25
3. In case we want to reduce the ordering cost we can have different ways combining the vaccines.
In this approach we combine all the orders at an annual level as per demand. In this approach we don’t consider value while combining the orders.
Since demand for Distemper Booster and Broadband Vaccine is same we place the orders for them together. Also the Distemper Booster : Rabies Booster = 20 : 4 = 5 . Hence for Every 5 orders of Distemper Booster and Broadband Vaccine we place 1 order or Rabies Booster
In each order we place 12 units for each of the drugs. Below are the total orders if ordered separately
However we order only 20 times as we place 1 dozen of Distemper Booster and Broadband Antibiotic each time we order. And we place order for Rabies Vaccine once in every 5 times we place the order
Hence the total number of orders is 20
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