The Annual Requirements For A Particular Raw Material Are 20 ✓ Solved

The Annual Requirements For A Particular Raw Material Are 2000 Units

The annual requirements for a particular raw material are 2,000 units costing Re. 1 each to the manufacturer. The ordering cost is Rs. 10 per order and the carrying cost 16% per annum of the average inventory value. 1.

Based on the above Find and explain the economic order quantity and the total inventory cost per annum. The costs of placing an order are Rs. 150 per order. It is estimated that 1000 units will be used in the next 12 months. The carrying cost per month is Rs. 2.50. Assuming that the demand is deterministic and continuous and that no stock-outs are allowed, determine the optimal order quantity . 2. Based on the above, explain the following What is the time between the placing of orders? The procurement lead time is one month. What is the re-order point based on the on-hand inventory level?

Sample Paper For Above instruction

Introduction

The management of inventory is a critical component of operations in any manufacturing organization. It ensures that materials are available when needed, minimizing costs related to ordering and storage. This paper aims to explore the concepts of Economic Order Quantity (EOQ), total inventory costs, reorder points, and order timing, using a hypothetical scenario involving raw material procurement.

Economic Order Quantity (EOQ) and Total Inventory Cost

The EOQ model provides a quantitative basis for determining the most cost-effective order size, balancing ordering costs and holding costs (Harris, 1913). It minimizes total inventory costs by identifying the optimal order quantity that reduces the sum of these costs.

Given:

- Annual demand (D) = 2000 units

- Cost per unit (C) = Re. 1

- Ordering cost (S) = Rs. 10 or Rs. 150 (for different scenarios)

- Carrying cost rate (i) = 16%

- Monthly carrying cost = Rs. 2.50

- Estimated demand for 12 months = 1000 units

First, calculating EOQ based on the initial data:

EOQ = √(2DS / H)

Where:

- D = annual demand

- S = ordering cost

- H = annual holding cost per unit

The annual holding cost per unit (H) is derived from the carrying cost rate:

H = C i = 1 0.16 = Rs. 0.16 per unit per year

Plugging in the values:

EOQ = √(2 2000 10 / 0.16) ≈ √(40000 / 0.16) ≈ √250000 ≈ 500 units

This suggests that ordering 500 units at a time minimizes total inventory costs.

Total annual ordering cost = (D / EOQ) S = (2000 / 500) Rs. 10 = 4 * Rs. 10 = Rs. 40

Average inventory = EOQ / 2 = 250 units

Total holding cost per annum = average inventory H = 250 Rs. 0.16 = Rs. 40

Total inventory cost (ordering + holding) = Rs. 40 + Rs. 40 = Rs. 80

In the second scenario, considering the cost of Rs. 150 per order and a demand of 1000 units annually, the EOQ is recalculated:

H = Rs. 2.50/month * 12 = Rs. 30/year per unit

EOQ = √(2 1000 150 / 30) = √(300,000 / 30) = √10,000 ≈ 100 units

Total annual ordering cost = (1000 / 100) Rs. 150 = 10 Rs. 150 = Rs. 1500

Average inventory = 100 / 2 = 50 units

Total holding cost = 50 * Rs. 30 = Rs. 1500

Total cost = Rs. 1500 + Rs. 1500 = Rs. 3000

Time Between Orders and Reorder Point

The time between placing orders, known as the reorder interval, depends on the demand rate and order quantity.

Demand rate = 2000 units / 12 months ≈ 166.67 units per month

Order quantity (EOQ) = 500 units

Time between orders = EOQ / demand per month ≈ 500 / 166.67 ≈ 3 months

Procurement lead time is one month; thus, the reorder point must ensure sufficient inventory to cover the lead time demand:

Reorder point = demand during lead time = 166.67 units/month * 1 month ≈ 167 units

This means that when the inventory level decreases to approximately 167 units, a new order should be placed to prevent stock-outs.

Conclusion

Effective inventory management requires understanding and applying concepts like EOQ, reorder points, and order timing. By calculating EOQ meticulously, organizations can minimize total inventory costs. Managing reorder points ensures continuous supply and avoids stock-outs, especially when lead times are predictable. Proper implementation of these principles enhances operational efficiency and reduces unnecessary expenses.

References

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