Northern college of art and technology

Inventory management

Assignment 3

Name Manpreet Kaur

Student id 202101388

Professor name Ashley wojtos

1.An SKU costing $90 is ordered in quantities of $6,000 units, annual demand is 750,000 units.
Carrying costs are 20%, and the cost of placing an order is $35. Calculate the following:

Ans 1.
a. Average inventory: - EOQ/2

EOQ = 6000 units

Average inventory = 6000/2 = 3000 UNITS

b. Number of orders placed per year = Annual Demand/ EOQ

= 750,000/6000 = 125 orders

c. Annual Inventory carrying cost = (Ordered quantities / 2) x Average carrying cost

Here, Averaging Carrying cost = 20% of $95 = $18

Therefore, Annual Inventory carrying cost = (6,000/2) x $18

= 3,000 x $18
= $54,000

d. Annual ordering cost = (Annual Demand/EOQ) * Ordering cost

= (750,000 units/6000 units) * $35
= $ 4375

e. Annual total cost = Annual inventory Carrying Cost+ Annual Ordering Cost
= $54,000 units +$4375

= $58,375
2.A company decides to establish an EOQ for an item. The annual demand is 500,000 units, each costing
$17, ordering costs are $40 per order, and inventory carrying costs are 18%. Calculate the following:
Ans 2.
A The EOQ in units: - square root of (2 x Annual Demand x order cost) / carrying
cost) 
= square root of (2*5,00,000*40/18%*$17) = 3615 .50units

c. Number of orders per year = Annual Demand/ EOQ

= 500,000 units / 3615.50 units
= 138 .29 orders

d. Cost of carrying inventory = (EOQ / 2) x H

= (3615.50 / 2) x 3.06
= $5531.71
 e. Ordering cost = Number of orders per year x S
= 138.29 x 40
= 5531.6
f. Total Cost = (Annual carrying cost) + (annual ordering cost)
= (5531.71) + (5531.6)
= $11063.31

3.A company is presently ordering on the basis of an EOQ. The demand is 15,000 units a year, unit cost is
$15, cost of ordering is $40, and the cost of carrying inventory is 20%. The supplier offers a discount of
2.5% on orders of 1000 units or more. What will be the saving or less of accepting the discount?

Ans 3. EOQ in units: - Demand (D) = 15,000 units per year

Unit Cost (p) = $15

Ordering Cost (S) = $40

Cost Of Carrying Inventory (I) = 20%

Holding Cost (H) = I x P = 0.2 x 15 = $3

EOQ = √ (2 * D * S) / H

EOQ = √ (2 * 15,000 * 30) / 3

EOQ = 632.45 = 632 approx.

Now,

TOTAL COST = ANNUAL CARRYING COST + ANNUAL ORDERING COST + ANNUAL PURCHASE COST

= (Q / 2) H +(D/Q) S +pD

= (632 / 2) * 3 + (15,000 / 632) *40 + 15*15,000

= 948 + 949.4 + 2,25,000

= $ 226897.4

the supplier offers a discount of 2.5 % on orders of 1000 units or more

Annual Purchase cost (pD) = 15 * 15000 * 97.5%

= $ 219375

Annual Holding cost (Q*H/2) = (1000 * 3 * 0.974) / 2

= 2925 / 2

= $ 1462.5

Annual Ordering cost (DS / Q) = (15,000 * 40) / 1000

= $600

TOTAL COST = ANNUAL CARRYING COST + ANNUAL ORDERING COST + ANNUAL PURCHASE COST

= $ 219375 + $ 1462.5 + $ 600

= $ 221437.5

TOTAL COST DIFFERENCE = $ 226897.4 - $ 221437.5

= $ 5459.9

= $ 5460 approximately.

THE SAVING OF ACCEPTING THE DISCOUNT IS = $ 5460

4. Calculate the new lot size for the following if K = 15

Ans 4. For the new lot size, k = 15

We have Annual Demand we will calculate square root of Annual demand

Square root of 8500 = 92.20 New Lot Size = 15*92.20 = 1383

Square root of 3600 = 60.00 New Lot Size = 15*60.00 = 900

Square root of 282 = 16.80 New Lot Size = 15*16.80 = 252

Then New lot size will be K * Square root

Item Annual Demand  AD New Lot Size

1 8500 92.20 1383
2 3600 60.00 900
3 282 16.80 252
5. A company manufactures three sizes of lightning rods. Ordering costs and carrying costs are not
known, but it is known that they are the same for each size. Each size is produced six times per year. If
the demand for each size is as follows, calculate order quantities to minimize inventories and maintain
the same total number of runs. Calculate the new and average inventories. Is there any change in the
number of orders per year?

Ans 5. Present production = present orders per year = 6

Present lot size = Annual usage/present orders

Square root of Annual Demand

K = Sum of Square root of Annual Demand/ sum of present orders =20.56

Average Inventory = sum of Present Lot Size/2 = 4016.67

New Lot Size = K* Square root of Annual Demand

New Orders per year = Annual usage / New Lot Size

New
Present New Lot Orders per
Present
Item Annual Usage Orders per  AD Size = K Year N - AD
Lot Size
Year AD /Q

1 $24,200 6 4033.34 155.60 3198.90 7.56

2 $16,800 6 2800 129.60 2664.36 6.30
3 $7,200 6 1200 84.85 1744.37 4.14
Total $48,200 18 8033.34 370.05 7607.63 18
Average 4016.67
Inventory

6. For a particular SKU, the lead time is 4 weeks, the average demand is 1200 units a week, and safety
stock is 320 units. What is the average inventory if 10 weeks’ supply is ordered at one time? What is
the order point?

Ans 6. EOQ = 10 weeks * 1200 units = 12000 units

Average Inventory = (safety stock) + 9 average demand *10) + (average demand *lead time)
320+( 1200 * 10) + (1200 * 4)
320 +12000+ 4800
17120
Here is the average inventory if there is 10 weeks supply at one time = 17120
 ROL (order Point) = Safety Stock+ consumption during normal lead time

= (1200 X 4) + 320

= 4800 + 320

= 5120
Order point = 5120 units

7. If sigma is 130 units, and the demand during the lead time is 250 units, calculate the safety stock and
order point for:
g. A 50% service level
h. An 85% service level

Ans 7. Sigma = 130 units

Demand Lead Time = 250 units

Safety stock= z * DLT

0 * 130

=0

Order point = (lead time demand + safety stock)

= 250 + 0

250

a. 50% service level = 0 + 250 units =250 units

b. 85% service level = 1.04

50% service level, safety stock = z X standard deviation of demand during lead time

1.04 * 130

135.2

Order point = (lead time demand + safety stock)

250 + 135.2

= 382.2 units
Service Level Service Factor
50% 0.00
85% 1.04

8. A company stocks an SKU with a weekly demand of 800 units and a lead time of 4 weeks.
Management will tolerate one stockout per year. If sigma for the lead time is 100 and the order quantity
is 2800 units, what is the safety stock, the average inventory, and the order point?

Ans 8. Ans 8 Given, weekly demand= 800 units

Annual demand, d = 800X52 = 41,600
Lead time = 4 weeks
Order quantity, Q = 2800 units
Sigma= 100
Number of orders per year= Annual demand/order quantity
= 41600/2800 = 14.85
Since stock per year is there must be not stock = 13.85 (14.85- 1) times per year
Service level= (number of orders 1)/ number of orders
=13.85/14.85
= 93.26%
Safety stock for 93.26 is 1.49
Safety stock = 1.49X 100 = 149
Average inventory= Q/2+ safety stock
= 2800/2+ 149
= 1400+ 149= 1549
Order point= Demand during the lead time+ safety stock
= 800 X 4 + 149
= 3200 + 149 = 3349 units

9. Management has stated that it will tolerate one stockout per year. The forecast of annual demand for
a particular SKU is 100,000 units, and it is ordered in quantities of 10,000 units. The lead time is 2 weeks.
Sales history for the past 10 weeks follows. Calculate: a. Sigma for the demand history time interval b.
Sigma for the lead time interval c. The service level d. The safety stock required for this service level e.
The order points

a) Sigma for the demand history time interval

Average mean=
∑ ❑ AD
N
 N = No. of weeks

Average mean= 2100+1700+2600+1400+1800+2300+2200+1600+2100+2200/10

Average mean= 2000 units

Standard deviation = √ ∑ ❑(xi – average mean)/ N

Xi = Each value of actual demand

N = Number of demands

Standard deviation = 346.410 units

b) Sigma for the lead time interval

Lead time= 2 weeks

Average mean= 2100+1700= 1900

Standard deviation= √∑ ❑ ( xi−averagemean )

N

Standard deviation = 200 units

c) Service level= (no. of orders – 1)/no. of orders

No. of orders= annual demand /order quantity

= 100000/10000= 10%

Service level= (10-1)/10

Service level= 9/10 =90%

Safety factor of 90% is 1.28

d) Safety stock = Safety factor * sigma

= 1.28 * 346.41

Safety stock= 443.40 units

e) Order point= DDLT + SS

DDLT= desired demand in lead time

 SS= Safety Stock

DDLT= Average demand*lead time

DDLT= 2000*2= 4000

Order point= 4000+443.40

Order point= 4443.40 units

Now, we will find out deviation for each week’s annual demand

Deviation = Annual demand- Average mean

For week 1= 2100-2000=100

For week 2= 1700-2000=300

For week 3=2600-2000=600

For week4= 1400-2000=600

For week5= 1800-2000=200

For week6= 2300-2000=300

For week7=2200-2000=200

For week8= 1600-2000=400

For week9= 2100-2000=100

For week10= 2200-2000=200

Further, we will calculate deviation squared

For week 1= 10,000

For week2=90,000

For week3=3,60,000

For week4=3,60,000

For week5= 40,000

For week6=90,000
For week7= 40,000

For week8=1,60,000

For week9=10,000

For week10=40,000
a. The service Sigma for the demand history interval= 346.41
b. Sigma for the lead time interval= 200 units
c. The service level= 90%
d. The safety stock required for this service level= 443.40 units
e. The order points= 443.40 units
 Deviation
Week Actual Demand Forecast Deviation squared
Demand
2100 2000 +100 10000
1700 2000 -300 90000
2600 2000 +600 360000
1400 2000 -600 360000
1800 2000 -200 40000
2300 2000 +300 90000
2200 2000 +200 40000
1600 2000 -400 160000
2100 2000 +100 10000
10 2200 2000 +200 40000
Total 20000 20000 0 1200000

10. If in problem 9, management said that it is increasing the service level to one stockout
every 2 years, what would the new safety stock be? If the cost of carrying inventory on
this item is $10 per unit per year, what is the cost of increasing the inventory from one
stockout per year to one every 2 years?

Ans 10. . . New service level= (no. of orders -0.5)/No. of orders

= (10-0.5)/10

=9.5/10

New service level= 95%

Safety factor of 95% is 1.65

Now, we will calculate Safety stock

Safety stock= Sigma*Safety factor

= 346.41*1.65

Safety stock= 571.57 units

To find the cost of increasing the inventory from one stockout per year to one year to one every

two year we have to calculate average inventory with both of the safety stock.

Average inventory 1= Q/2+SS= 10000/2+443.40= 5443.40

Average inventory 2= Q/2+SS= 10000/2+571.57=5571.57

Carrying cost 1= Average Inventory*unit price*Carrying cost

=5443.40*10=54434

Carrying cost 2=Average inventory*unit price*Carrying cost

= 5571.57*10= 55715.7

Change in carrying cost= 55715.7- 54434= 1281.7