# Operations Management

Q uestion

## Demand and EOQ

Description:

For an item, the embedded Excel spreadsheet contains sales forecast data for two products for the upcoming 12 months.

Assume that both products are purchased from a supplier, and there is a \$200 transaction cost for each order. This cost is the same for either product. Holding cost for inventory of the item is dependent on the value of the product and it is estimated to 5% of the unit cost for Product A and 1% of the unit cost for Product B. The full-price paid to the supplier is \$53/unit for Product A and \$2/unit for Product B. In other words, Product B is a much cheaper product than Product A. Assume that demand for the products occur steadily throughout the year but the monthly forecasts in the embedded spreadsheet show the level of expected sales in a month. The average lead time of supply, counted as the time between when an order is placed to the supplier to the time when the company receives the order, is 6 days. Assume that the lead time is the same for both products. The two products under consideration could be an A-category item or a C-category item. Your task is to formulate an inventory policy for the two products with respect to order quantities, reorder level, safety stock and order interval. As part of this analysis, your decision needs to incorporate the type of inventory system that you plan to operate for each product.

Would your decisions above change if there is a 2% discount provided by the supplier on the price of the products any time the order size exceeds 5,000 units? If so, what will be the changes?

(Make any other assumptions you may need to arrive at the decisions. State the assumptions clearly. Also, any conclusions you derive for the above decisions need to be supported by the appropriate analysis/calculations).

 Product A January February March April May June July August September October November December Sales 850 884 2089 1650 1194 197 807 853 467 1384 552 697 Seasonality Index 0.88 0.91 2.16 1.70 1.23 0.20 0.83 0.88 0.48 1.43 0.57 0.72 Average Demand 968.67 StdDev       Demand 530.69 Coefficient of Variation 54.79% Max Seasonal Index 2.16 Min Seasonal Index 0.20 Product B January February March April May June July August September October November December Sales 3000 2800 2920 2100 2850 2800 2950 2800 2900 2900 2950 3200 Seasonality Index 1.05 0.98 1.03 0.74 1.00 0.98 1.04 0.98 1.02 1.02 1.04 1.12 Average Demand 2847.50 StdDevDemand 260.21 Coefficient of Variation 9.14% Max Seasonal Index 1.12 Min Seasonal Index 0.74

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• A nswer

### Operations Management

Submitted by PROFSTAN on April 26th, 2016 17:54

Price \$40.00

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