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# Quantitative analysis: EOQ

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You know from your prior experience that moving to lean manufacturing (or demand-based manufacturing) can generate not only profitability improvements but also improvements in asset requirements (inventory reduction). Based on this, you wanted to let the Global Supply Chain Manager and her purchasing department know about the kind of inventory savings that might be achievable.

She is already familiar with the classic EOQ formula, of

Q= √2CD / H

Where
C = cost of issuing a new purchase order or cost of a changeover in the manufacturing plant;
D = demand per period; and
H = carrying cost of inventory

To assess the expected level of average inventory, the formula is

Average inventory = Q / 2

where Q = EOQ from the EOQ formula.

In a traditional forecast-driven manufacturing operation, assume the following:
Monthly sales or demand = 1,000 units
Changeover cost = \$500
Inventory carrying cost = 30% of inventory cost
Average cost per unit of inventory = \$10

Let the Global Supply Chain Manager and her purchasing department know the following:
1.In a traditional forecast driven manufacturing operation, what would be the EOQ?
what would be the average inventory level in units, and in dollars?

2.In a demand-based, synchronous manufacturing operation, assume C = \$10, with the changeover time reductions seen in synchronous manufacturing. What would be the new EOQ?
What would be the new average inventory level in units, and in dollars?

3.Assuming the carrying cost of inventory is 30%, what is the dollar savings in inventory needed?
4.What conclusions can you reach about the impact on the company's overall ROI when switching to demand-based, synchronous manufacturing? including 1 page of calculations

#### Solution Preview

You know from your prior experience that moving to lean manufacturing (or demand-based manufacturing) can generate not only profitability improvements but also improvements in asset requirements (inventory reduction). Based on this, you wanted to let the Global Supply Chain Manager and her purchasing department know about the kind of inventory savings that might be achievable.
She is already familiar with the classic EOQ formula, of

Q= √2CD / H
Where
C = cost of issuing a new purchase order or cost of a changeover in the manufacturing plant;
D = demand per period; and
H = carrying cost of inventory
To ...

#### Solution Summary

The problem set deals with determining the economic order quantity given certain information.

\$2.19
Similar Posting

## Stephanie's Baskets quantitative analysis: Order quantity

Stephanie's Baskets sells wicker baskets at home parties. Stephanie sells 120 baskets/year, carries an ordering cost of \$20/order, and an annual holding cost of 25. She currently orders 25 baskets at a time without using discounts. She has the opportunity to purchase at a discount. Given the following pricing sheet, what quantity do you recommend?

DC Category Order Size Discount (%) Unit Cost
1 0-49 0 \$30.00
2 50-99 5 \$28.50
3 100 or more 10 \$27.00

Questions:

1. What order quantity do you recommend?
2. Using this solution, how many times will the owner need to reorder baskets?