Thomas Kratzer is the purchasing manager for the headquarters of a large insuran

Question

Thomas Kratzer is the purchasing manager for the headquarters of a large insurance company chain with a central inventory operation. Thomas's fastest-moving inventory item has a demand of 6,050 units per year. The cost of each unit is $98, and the inventory carrying cost is $9 per unit per year. The average ordering cost is $31 per order. It takes about 5 days for an order to arrive, and the demand for 1 week is 121 units. (This is a corporate operation, and the are 250 working days per year.)

A) What is the EOQ?
B) What is the average inventory if the EOQ is used?
C) What is the optimal number of orders per year?
D) What is the optimal number of days in between any two orders?
E) What is the annual cost of ordering and holding inventory?
F) What is the total annual inventory cost, including cost of the 6,050 units?

Explanation / Answer

a)EOQ = Sqrt((2 * 6050 * 31) / 9) = 204.15 = 204 units

b)Average Inventory = EOQ / 2 = 204 / 2 = 102 units

c)Number of orders = Annual Demand / EOQ = 6050 / 204 = 29.66 = 30

d) Number of days between order = ((EOQ / Annual Demand) * 250) = ((204 / 6050) * 250) = 8.43 days

e) Annual cost of ordering = 30 * 31 = $930

Annual Holding cost = 102 * 9 = $918

Total annual holding and Ordering cost = $1848

f) Total Annual Inventory Cost = (98 * 6050) + $1848 = $594,748

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