ECONOMICORDERQUANTITY

EXCERCISE1
AnoilenginemanufacturerpurchaseslubricantsattherateofEuro42perpiece
fromavendor.Therequirementsoftheselubricantsare1800peryear.What
shouldbetheorderingquantityperorder,ifthecostperplacementofanorderis
Euro16andinventorycarryingchargesperEuroperyearis20Euro.

EXCERCISE2
Amanufacturingcompanypurchase9000partsofamachineforitsannual
requirementsorderingformonthusageatatime,eachpartcostsEuro20.The
orderingcostperorderisEuro15andcarryingchargesare15%oftheaverage
inventoryperyear.Youhavebeenassignedtosuggestamoreeconomical
purchasepolicyforthecompany.Whatadviceyouofferandhowmuchwouldit
savethecompanyperyear?

EXCERCISE3
AnautopartssuppliersellsHardybrandbatteriestocardealersandauto
mechanics.Theannualdemandisapproximately1,200batteries.Thesupplier
pays$28foreachbatteryandestimatesthattheannualholdingcostis30percent
ofthebatterysvalue.Itcostsapproximately$20toplaceanorder(managerial
andclericalcosts).Thesuppliercurrentlyorders100batteriespermonth.
1. Determinetheordering,holding,andtotalinventorycostsforthecurrent
orderquantity.
2. Determinetheeconomicorderquantity(EOQ).
3. HowmanyorderswillbeplacedperyearusingtheEOQ?
4. Determinetheordering,holding,andtotalinventorycostsfortheEOQ.How
hasorderingcostchanged?Holdingcost?Totalinventorycost?
C. Demartini Performance Management

EXCERCISE4
Uponcloserinspection,thesupplierdeterminesthatthedemandforbatteriesis
normallydistributedwithmean4batteriesperdayandstandarddeviation3
batteriesperday.(Thesupplierisopen300daysperyear.)Itusuallytakesabout4
daystoreceiveanorderfromthefactory.
1. Whatisthestandarddeviationofusageduringtheleadtime?
2. Determinethereorderpointneededtoachieveaservicelevelof95percent.
3. Whatisthesafetystock?Whatistheholdingcostassociatedwiththissafety
stock?
4. Howwouldyouranalysischangeiftheservicelevelchangedto98percent?

EXCERCISE5
FosterDrugs,Inc.,handlesavarietyofhealthandbeautyaidproducts.A
particularhairconditionerproductcostsFoster$2.95perunit.Theannualholding
costrateis20percent.UsinganEOQmodel,theydeterminedthatanorder
quantityof300unitsshouldbeused.Theleadtimetoreceiveanorderisone
week,andthedemandisnormallydistributedwithameanof150unitsperweek
andastandarddeviationof40unitsperweek.
1. Whatisthereorderpointifthefirmiswillingtotoleratea1percentchance
ofastockoutduringanordercycle?
2. Whatsafetystockandannualsafetystockcostareassociatedwithyour
recommendationinparta?
3. Fosterisconsideringmakingatransitiontoaperiodicreviewsysteminan
attempttocoordinateorderingofsomeofitsproducts.Thereviewperiod
wouldbetwoweeksandthedeliveryleadtimewouldremainoneweek.
Whattargetinventorylevelwouldbeneededtoensurethesame1percent
riskofstockout?
4. Whatisthesafetystockassociatedwithyouranswertopartc?Whatisthe
annualcostassociatedwithholdingthissafetystock?
5. Compareyouranswerstopartsbandd.IfyouwerethemanagerofFoster
Drugs,wouldyouchooseacontinuousorperiodicreviewsystem?
C. Demartini Performance Management

C. Demartini Performance Management