Fundamentals of Inventory Management: Managing a Continuously-Reviewed, Non-Peri
ID: 371621 • Letter: F
Question
Fundamentals of Inventory Management: Managing a Continuously-Reviewed, Non-Perishable Inventory Item with Steady Demand Notes by W.P. Millhiser Revised 30-Oct-2017 Centura Health is a nine-hospital integrated delivery network based in the Denver, Colorado area. Currently each hospital owns its own supplies and manages the inventory. A common item used is the Sterile Intravenous (IV) Starter Kit. Weekly demand for the IV Starter Kit at one of the hospitals is R- 600 units. (Assume that there is no variability in demand.) The unit cost of an IV Starter Kit is $3. Centura has estimated that the physical holding cost (operating and storage costs) of one unit of medical supply is about 5% per year. In addition the hospital network's annual cost of capital is 25%. Each hospital incurs a fixed order cost of K -$130 whenever it places in order, regardless of the order size. The supplier takes one week to deliver the order. Currently, each hospital places an order of 6000 units of the IV Starter Kit whenever it orders. Question 1: What is "h", the dollar cost of holding one IV Starter Kit per unit of time? Question 2: What will be the average inventory level (sometimes called the "average cycle stock")? Question 3: How often will this hospital be placing orders? How long does an average IV Starter Kit spend in storage, assuming the hospital uses an appropriate FIFO method of cycling through its inventory? How many "inventory turns" will there be in the average year?" Question 4: Compute the following 3 inventory related costs: total annual fixed ordering costs, total annual holding costs, and total annual cost of supplies. Assume the weekly flow rate of 600 IV Starter Kits ates to an annual rate of R 31,200 units.2Explanation / Answer
Given:
Weekly demand = 600
Annual Demand = 31200
Physical holding cost per unit per year = 5% of unit cost
Cost of capital per year = 25%
Total holding cost per unit per year = 5% + 25% = 30% of unit cost
Unit cost = $3
Dollar cost of holding per unit per year = 30% of $3 = $0.9
1. h = 0.9 per unit per year
Lot order size = Q = 6000 units per order
2. Average inventory level = Order quantity/2 = 6000/3 = 3000 units
3.
Number of orders per year = Annual demand/order size = 31200/6000 = 5.2 times
Approximately 5 to 6 times the order is placed.
Time between order = Order size/annual demand = 6200/31200 = 0.1923 years
Time between order in weeks = 52*0.1923 = 10 weeks
Unit spends 10 weeks in storage
4.
Ordering cost per order = $130
Annual Holding Cost
AHC = Q/2 x h
6000 x 0.9/2
= $2700
Per year
Annual Ordering
AOC = D/Q x S
31200/6000
X 130
= $676
Per year
Total annual Cost
TC = AHC + AOC
$3376
Per year
Annual Holding Cost
AHC = Q/2 x h
6000 x 0.9/2
= $2700
Per year
Annual Ordering
AOC = D/Q x S
31200/6000
X 130
= $676
Per year
Total annual Cost
TC = AHC + AOC
$3376
Per year
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