Prepared by Prof.

Yusoon Kim for BA557 (Global Logistics Management)

Example Questions (EOQ model application)

1. The XYZ Company has an assembly plant in Cincinnati and its parts plant in Indianapolis.
Parts are transported from Indianapolis to Cincinnati using trucks. Each shipment costs $100.
The Cincinnati plant assembles and sells 300 finished products each day and operates 5 days
a week and 50 weeks a year. Part #456 costs $50 and XYZ Company incurs a holding cost of
20 percent per year. How many of part #456 should XYZ Company put in each shipment?
What is the average cycle inventory of part #456 at XYZ Company? And what is the average
flow time through the Cincinnati assembly plant if orders are placed at EOQ level?

Answer:
Q* =
=
= 1224.745 ≈ 1225

Average cycle inventory = Q*/2

= 1225/2
= 612.5

Average flow time = average cycle inventory / demand rate (daily or weekly)
= 612.5 / 300 (daily demand rate) = 2.04 days Or
= 612.5 / 1,500 (weekly demand rate) = 0.41 weeks

2. Tastee Mart sells Frostee Flakes. Demand for Frostee Flakes is 500 boxes per week. Tastee
Mart has a holding cost of 30 percent and incurs a fixed cost of $100 for each replenishment
order it places for Frostee Flakes. Given that cost is $2 per box of Frostee Flakes, how much
should Tastee Mart order in each replenishment lot? What is the average cycle inventory of
the Fostee Flakes (in # of boxes)? And what is the average flow time of the products through
Tastee Mart if they order at EOQ level?
Here, we don’t need the “5” to be multiplied by!
Answer:
Q* =
=
= 2943.92 ≈ 2944

Average cycle inventory = Q*/2

= 2944/2
= 1472

Average flow time = average cycle inventory / demand rate (daily or weekly)
= 1472 / 500 (weekly demand rate) = 2.94 weeks