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MGMT-6085 Inventory Distribution Management Student Name Student Number Swapnil Raj 0964466

This document discusses inventory management for Sam's Cat Hotel. It provides information about the hotel's demand for kitty litter bags, costs of ordering and holding inventory, and current inventory levels. Calculations are shown to determine: 1) The economic order quantity (EOQ) of 470 bags, which balances ordering and holding costs. 2) The average time between orders would be 3.76 weeks if using the EOQ. 3) The re-order point of 406 bags, above which an order should be placed. 4) Given the current inventory level, it is time to reorder, as it has dropped below the re-order point. 5) Shifting from the

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Swapnil Raj
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209 views

MGMT-6085 Inventory Distribution Management Student Name Student Number Swapnil Raj 0964466

This document discusses inventory management for Sam's Cat Hotel. It provides information about the hotel's demand for kitty litter bags, costs of ordering and holding inventory, and current inventory levels. Calculations are shown to determine: 1) The economic order quantity (EOQ) of 470 bags, which balances ordering and holding costs. 2) The average time between orders would be 3.76 weeks if using the EOQ. 3) The re-order point of 406 bags, above which an order should be placed. 4) Given the current inventory level, it is time to reorder, as it has dropped below the re-order point. 5) Shifting from the

Uploaded by

Swapnil Raj
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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MGMT-6085

Inventory
Distribution
Management

Student Name Student Number


Swapnil Raj 0964466

MGMT-6085- Assignment #2 (worth 5%)


Module 03 - Chapter 03
EOQ

Sam’s Cat Hotel


Sam’s Cat Hotel operates 52 weeks per year, 7 days per week, and uses a continuous
review inventory system. It purchases Kitty Litter for $16.38 per bag. The following
information is available about these bags:
Demand 125 bags/week
Order Cost $75.00 per order
Annual Holding Cost 27% of cost
Desired Cycle-Service Level 80%
Lead Time 3 weeks (21 working days)
Standard Deviation of weekly demand 21 bags
Current on Hand Inventory 450 bags
Open Orders or Backorders 0

SHOW YOUR CALCULATIONS


A. What is the Economic Order Quantity (EOQ) for Kitty Litter?

Demand can be found by = 125 bags / week


D = (125 bags/ week) * (52 weeks / year)
D = 6,500 bags per year
Order Cost = $75 per order
S = $75 per order
Price = $16.38 per bag
Annual Holding Cost = .27 of Cost (27/100 = .27)
H = (0.27 * 16.38) = $4.423
EOQ = square root of (2DS/H)
square root of (2*6500*75/4.423)
EOQ = 470 bags
MGMT-6085
Inventory
Distribution
Management

B. What would be the average time between orders (in weeks)?

Average Time = EOQ / D


= 470 / 6500 = 0.07230769 years
Average Time (in weeks) = 0.07230769 * 52 = 3.76 weeks

C. What would the Re-order Point (R)) be?


Since R = Demand during protection interval + Safety Stock
Lead time (L) = 3 weeks (21 working days)
Standard Deviation of weekly demand = 21 bags
Demand during protection interval = d* L = 125 * 3 = 375 bags
So, Safety Stock = Standard Deviation of weekly demand * square root(L) 
= 21 * (3)0.5 = 37.373 or 37
For the desired cycle-service level of 80%, z = 0.84
Safety stock = 0.84 * 37 = 31.08 or 31 bags
So, R = 375 + 31 = 406 bags

D. An inventory withdrawal of 50 bags was just made… Is it time to re-order?

Current on Hand Inventory = 450 bags


Inventory Withdrawal = 50 bags
Initial inventory position = 450 +0-0 = 450
Current Inventory Position = 450 -50 = 400

As from the above result 400 < 406


Current inventory position is below R point, it is the time to re-order.

E. The store currently uses a lot size of 700 bags (Q = 700). What would be the
annual cost saved by shifting from the 700 bag lot size to the EOQ?

Given Data = Q = 700

Annual Holding Cost can be calculated by:

= (700 / 2) *(0.27) * (16.38)


= $1548.05
MGMT-6085
Inventory
Distribution
Management

Annual ordering Cost

= (D / Q)*S
= (6500 / 700) * 75
= $696.429
Total Cost
Annual Holding Cost + Annual ordering Cost

= $1548.05 + $696.429
= $ 2244.479

When Lot Size = Q = EOQ = 470

Annual Holding Cost

= (Q/2) * H
= (470/2) *.27 * 16.38
= $1038.3

Annual Ordering Cost

= (D/Q) * S
= (6500/470) * 75
= $1038.3

Total Cost

= Annual Holding Cost + Annual Ordering Cost


= $1038.3 + $1038.3
= $2076.6

On shifting LOT size to Economic Order Quantity, from the results


Annual Holding Cost is equal to Annual Ordering Cost

When Q = 700 bags

Annual Holding Cost is larger than Annual Ordering Cost


MGMT-6085
Inventory
Distribution
Management

From the above conclusions and solving equations,


Q is too much large.

On shifting LOT to EOQ

Cost Saving = $2244.479 - $2076.6


= $167.879

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