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Stereo & Electronic manufactures stereo equipment. For different parts needed in a stereo, S&E has the option of either producing it in the in-house facility or buying it from outside. S&E is trying to decide what policy to follow for one such component. The outside supplier has a lead-time of 35 days and the mean demand for the part during that lead-time is 700 units. The different costs associated with production and outside ordering are summarized below.
Production: Annual production rate = 9000 units. Set up cost = $100/set up. Unit cost of the product = $18.
Outside: Ordering cost = $90/order, Unit cost of the product = $20.
Assume the annual holding cost to be 25% of the unit cost of the product and 250 days of operation per year in both the cases.
Option 1: In-house production
Product cost (C1) = $18 per unit
Ordering cost for option 1 (S1) = $100 per order
Inventory carrying cost for option 1 (I1) = 25%*$18 = $4.5 per unit per year
Option 2: Outsourced production
Product cost (C2) = $20 per unit
Ordering cost for option 2 (S2) = $90 per order
Inventory carrying cost for option 2 (I2) = 25%*$20 = $5 per unit per year
a. What is the total annual demand? (Hint: What is the demand for 35 days? For 250 days?)
The demand during lead time given is deterministic, no variation ...
Inventory management Word document contains calculations of EOQ annual demand, the number of production runs and number of orders in a year for the production and purchase scenario respectively and reorder point.