Production Engineering

PIB360S

Inventory Management Tutorial

Question 1 –EOQ model

The Big Buy Supermark stocks Munchies Cereal. Demand for Munchies is 4,000
boxes per year (365 days). It costs the store R60 per order of Munchies and a box
of Munchies costs R4.00. The inventory holding cost is 20% per year. Once an
order is placed, it takes 4 days to receive the order from a food distributor,

Determine:
(a) Optimal order quantity (EOQ).
(b) Optimal number of orders per year.
(c) Minimum total annual inventory cost (holding cost + ordering cost).
(d) Maximum inventory level if/when EOQ is used.
(e) Average inventory level if/when EOQ is used.
(f) Reorder point.
(g) Time period between orders.
(h) Indicate inventory usage vs time on a graph if/when the EOQ is ordered. Show
all legends.
(i) Calculate the total annual inventory cost if/when 50 boxes of Munchies are
ordered per order.
(j) Calculate the total annual inventory cost if/when 5000 boxes of Munchies are
ordered per order.
(k) Indicate total cost vs order quantity (Q) on a graph (Plot the ordering cost per
year, holding cost per year and total cost per year for the EOQ,
Q = 50 and Q = 5000).

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Question 2 - POQ model

A toy manufacturer uses 48,000 rubber wheels per year for its popular truck. The
firm makes its own wheels, which it can produce at a rate of 800 per day. The toy
trucks are assembled uniformly over the entire year. Carrying cost is
R1 per wheel per year. Setup cost for a production run of wheels is R45. The firm
operates 240 days per year.

Determine:
(a) The optimal run size (Qp)*.
(b) The length of a production run in days.
(c) Number of setups/production runs per year if/when the Q p* is manufactured
during each production run.
(d) The maximum inventory level if/when the Q p* is used.
(e) The average inventory level if/when the Qp* is used.
(f) The minimum total annual inventory holding and setup cost.
(g) The inventory cycle for the optimum run size (period between production runs).
(h) Indicate inventory usage vs time on a graph if/when Q p* is manufactured.
Show all legends.
(i) Calculate the total annual inventory costs (holding cost + setup cost) if/when
100 wheels are manufactured during each production run.
(j) Calculate the total annual inventory costs (holding cost + setup cost) if/when
5000 wheels are manufactured during each production run.
(k) Indicate total cost vs run size (Q p) on a graph (Plot the setup cost per year,
holding cost per year and total cost per year for Qp*, Qp = 100 and
Qp= 5000).