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Inventory Management: Case Study
Inventory Management: Case Study
Inventory Management
Case Study
Golden Gate Industries trades in Hydraulic tools for the mining industry.
You are considering ways to improve the inventory management for the company .
You have chosen an item to demonstrate the improvement that can be achieved.
Annual Demand:
Case Study
Order quantity:
Oq
Unit cost:
Cu
Pattern of demand:
Ordering costs:
Annual holding costs:
Lead time orders:
Co
Ch
Lo
Lss
W
18,000 units
1,200 First day of each month
$15
Uniform over time
$60
0.25 of the average cost of inventory carried
6 working days
5 working days
250 per year
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Maximum
600
Inventory
Level
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Average
400
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Minimum
0
Order 1
Time
Order 3
Order 2
Average Inventory =
Inventory
Level
960 Units
Maximum
300
Average
$3,600
200
Minimum
0
Order 1
Order 2
Time
Order 3
Order 4
Order 5
The question is how much to order and how often in order to achieve
the lowest possible operating costs and investment, while still meeting demand.
Total Relevant Costs
(including safety stock) = Annual Holding Costs + Annual Order Costs
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Cha + Coa
$4,500
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(2 x Co x D)/Ch
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$576,000
2 Co D / Ch
3
EOQ =
Co =
D=
Ch =
Q=
Order Quantity
$4,196
(D / Q) * Co
ROP =
792 Units
(Q / 2) * Ch
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Co + Ch
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Report to management:
Total Relevant Cost - Economic Order Quantity
298784520.xls
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TRCeoq =
$4,500
$4,196
The optimum reorder point (under the EOQ model) occurs at:
792 Units
759 Units
Ch * EOQ
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Option 3
$304
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Inventory
Level
Maximum
300
Average
200
Minimum
100
Safety Stock
0
Order 1
Order 2
Order 3
Order 4
Order 5
Time
SS x Ch
Css
SS
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298784520.xls
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