OM423b Homework 1
- Consider a manufacturer who orders a particular part to supply a production process. Assume that the cost and demand characteristics for the ordered part satisfy the assumptions of the EOQ. Specifically, suppose that demand occurs at a constant rate of 37 units per day during the 365 days in which the manufacturing plant operates annually. The unit cost of purchased parts is $20/unit, and the annual holding cost is estimated to be 33% of the unit cost. Assuming that it costs $35 to place an order, determine:
- EOQ for the part
- Annual holding cost, annual order cost and total relevant costs associated with this order quantity.
- Consider the same situation as described in question 1 with the exception that the supplier of the ordered part uses a standard sized pallet for shipment. Specifically, assume that the supplier ships parts in pallets of 45 units. Moreover, suppose that the supplier requires a 14-day period to deliver an order. In this case:
- What would be the optimal order quantity?
- What are the total relevant costs associated with the optimal order quantity?
- Does the modified order quantity result in higher ordering costs, higher holding costs, or both and why?
- What would be the inventory level at which new orders should be placed (ROL)?
- What would be the optimal time between consecutive orders?
- Reconsider question 1 and assume that the supplier can deliver orders of any size, i.e., the pallet size restriction of question 2 no longer applies. Suppose that the demand rate provided is just an estimate and that the daily demand rate may be as low as 33 units/day or as high as 41 units/day, i.e., roughly a ±11% range. If we chose to implement the EOQ based on the estimate of 37 units/day:
- What is the maximum increase in total relevant costs that we may incur over the upcoming year?
- Construct a chart to show how the TRC changes as the actual demand rate varies within the specified range.
- You work for a company and are tasked with the decision of purchasing a product or making the product in house. Demand for the product is 10,000 units per week. The supplier charges $25.10 per unit, $200 per order, and sells in batches of 500 units. Your plant can produce 20,000 units per week and incurs costs of $19 per unit and $700 per setup. Holding cost in either situation is $1.30 per unit per week and both the supplier and your plant operate 45 weeks out of the year.
- What is the optimal production quantity (EPQ)
- What is the optimal order quantity (EOQ)?
- Do you make the product or purchase it and why?
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