# Inventory Decision Model

THe annual demand is estimated to be 15,000 units and is assumed to be constant throughout the year. Each unit costs $80. THe company's accounting department estimates that hits opportunity cost for holding this item in stock for one year is 18% of the unit value. Each order placed with the supplier costs $220. THe company's policy is to place a fixed order for Q units whenever the inventory level reaches a predetermined reorder point that provides sufficient stock to meet demand until the suppliers order can be shipped and received. Develop a decision model.

1. Define the data, uncontrollable inputs, and decision variables that influence total inventory control.

2. Develop mathematical functions that compute the annual ordering cost and annual holding cost based on average inventory held throughout the year in order to arrive at a model for total cost.

3, Implement model on spreadsheet.

What I have so far...

DEMAND RATE (D) = 15,000

COST (C) = $80

INVENTORY CARRYING RATE (I) = 18% PER YEAR

INVENTORY CARRYING COST (Ch) = 1*C = .18*80 = $14.40 PER YEAR

ORDER COST C0 = $220

EOQ =

Q = EOQ = ?2DC0 = 677.0032 = 677

Ch

OPTIMUM NUMBER OF ORDERS

N = D 15000 =22.15657 = 22

Q 677

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#### Solution Preview

See the attached file. Thanks

Inventory Decision Model - Fixed Quantity Model

Data Uncontrollable Inputs

Annual Demand (D) 15000 Annual Demand D

Cost (C) $80 Cost C

Inventory Holding Rate ...

#### Solution Summary

Inventory decision models are examined.

Inventory Management Decision Model

Inventories represent a considerable investment for every organization; thus, it is important that they be managed well. Excess inventories can indicate poor financial and operational management. On the other hand, not having inventory when it is needed can also result in business failure. The two basic inventory decisions that managers face are how much to order or produce for additional inventory, and when to order or produce it to minimize total inventory cost, which consists of the cost of holding inventory and the cost of ordering it from the supplier.

Holding costs, or carrying costs, represent costs associated with maintaining inventory. These costs include interest incurred or the opportunity cost of having capital tied up in inventories; storage costs such as insurance, taxes, rental fees, utilities, and other maintenance costs of storage space; warehousing or storage operation costs, including handling, record keeping, information processing, and actual physical inventory expenses; and costs associated with deterioration, shrinkage, obsolescence, and damage. Total holding costs are dependent on how many items are stored and for how long they are stored. Therefore, holding costs are dependent on how many items are stored and for how long they are stored. Therefore, holding costs are expressed in terms of dollars associated with carrying one unit of inventory for one unit of time.

Ordering costs represent costs associated with replenishing inventories. These costs are not dependent on how many items are ordered at a time, but on the number of orders that are prepared. Ordering costs include overhead, clerical work, data processing, and other expenses that are incurred in searching for supply sources, as well as costs associated with purchasing, expediting, transporting, receiving, and inspecting. It is typical to assume that the ordering cost is constant and is expressed in terms of dollars per order.

For a manufacturing company that you are consulting for, managers are unsure about making inventory decisions associated with a key engine component. The annual demand is estimated to be 15,000 units and is assumed to be constant throughout the year. Each unit costs $80. The company's accounting department estimates that its opportunity cost for holding this item in stock for one year is 18% of the unit value. Each order placed with the supplier costs $220. The company's policy is to place a fixed order for Q units whenever the inventory level reaches a predetermined reorder point that provides sufficient stock to meet demand until the supplier's order can be shipped and received.

As a consultant, your task is to develop and implement a decision model to help them arrive at the best decision. As a guide, consider the following:

1) Define the data, uncontrollable inputs, and decision variables that influence total inventory cost.

2) Develop mathematical functions that compute the annual ordering cost and annual holding cost based on average inventory held throughout the year in order to arrive at a model for total cost.

3) Implement your model on a spreadsheet.

4) Use data tables to find an approximate order quantity that results in the smallest total cost.

5) Use Solver (in Excel) to verify your result.

6) Conduct "what-if" analyses to study the sensitivity of total cost to changes in the model parameters.

7) Explain your results and analysis.