Jogh has discovered the concept of economic order quantity (EOQ) and believes he
ID: 339482 • Letter: J
Question
Jogh has discovered the concept of economic order quantity (EOQ) and believes he might be able to save some money by determining the most economic quantities to order for his top sellers. He wants to first focus on the biggest seller (based on annual volume) – Chicago River Beer (CRB). Mr. Barrume provided the following data for calculating the EOQ:
The annual forecast for CRB is 42,500 cases, and each case costs $26.00. After analyzing the other costs together, we have determined that the holding cost is 15% and the cost per order is $85.
There is another factor to consider. The brewery has offered MBBD a 10% discount on the price of Chicago River Beer, with a guaranteed minimum order quantity of 2000 cases and no annual guaranteed amount, i.e. ordering as often as needed.
Your Deliverable: a report that provides
A recommendation regarding the order quantity for Chicago River beer – use the EOQ as calculated or use take the deal offered by the brewery
-Calculate and discuss the EOQ.
Determine if the deal offered by the brewery is more economical.
Discuss and justify your recommendation
Address the warehouse productivity issue:
What is the best KPI to use to measure productivity?
Discuss pros and cons of the different methods to improve productivity: RFID, warehouse system, and cross-docking – do you recommend implementing any of these at MBBD? Justify.
Explanation / Answer
Annual demand, D = 42,500 cases
Unit cost, C = $ 26
Cost per order, S = $ 85
Holding cost rate., i = 15%
Holding cost, H = C*i = 26*15% = $ 3.9
EOQ = SQRT(2DS/H) = SQRT(2*42500*85/3.9) = 1,361
Annual cost = Ordering cost + Holding cost + Product cost = (D/Q)*S + (Q/2)*H + D*C
= (42500/1361)*85 + (1361/2)*3.9 + 42500*26
= $ 1,110,308
With 10% discount,
Unit price = 26*(1-10%) = 23.4
Holding cost, H = 23.4*15% = 3.51
EOQ = SQRT(2DS/H) = SQRT(2*42500*85/3.51) = 1,435
EOQ is less than MOQ (=2000). Therefore, order quantity, Q = 2000
Annual cost = Ordering cost + Holding cost + Product cost = (D/Q)*S + (Q/2)*H + D*C
= (42500/2000)*85 + (2000/2)*3.51 + 42500*23.4
= $ 999,816
Total cost with 10% discount is lower. Therefore, deal offered by the brewery is more economic
Optimal order quantity = 2000 cases
Total annual cost = $ 999,816
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