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# Inventory management

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Hi,

Please see attached file for complete details on your posting. Explanations and computation are given for ease in understanding.

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 ...

#### Solution Summary

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.

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