C. Optimal ordering policy: The simple BOM procedure does not consider the econo

Question

C. Optimal ordering policy:

The simple BOM procedure does not consider the economic perspectives of the operation. In reality, placing an order costs money and manpower. On the other hand, holding the inventory also incurs warehouse/carrying cost. How would you give an economic plan for BOM for the company such that the total cost of ordering and carrying is minimized? Assume any reasonable data you need.

Part # (0,3,2) F-100 To, L, N) Lot size LFT Io: Beginning Inventory L= Leadtime, and N: Number of components needed for a parent product. V-150 Figure 2. MRP Tree for feeding components

Explanation / Answer

Answer: If the holding cost = h per unit

and ordering cost = o per order.

Demand = d

economic order quantity = Q

then number of orders to be place = d / Q

and ordering cost = (d / Q) x o

also,

average inventory holded by the company = Q/2

therefore hoding cost = Q/2 x h

Now we assume that at the most econoic purchase we make, that is when the total coat is minimum the ordering cost = holding cost

therefore,

Q/2 x h = d/Q x o

sloving for Q we get:

Q = sqrt(2do/h)

this is known as eoq formula, by which we can find out the minimum cost qualtity purchased.

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