Operations Management

2. A manufacturer uses a continuous review inventory system. It purchases motorcycle part for ₹12 per part. The demand of the part is 80 units per week, and its weekly standard 2 of 3 deviation is 15. The company estimates ordering cost as ₹55/order, lead time as 3 weeks (18 working days) and annual holding cost as 30%. The company aims to provide 92% service level. The company operates 52 weeks per year, 6 days per week. Current on-hand inventory is 300 units, with no open orders or backorders.
(a) Determine EOQ and average time between orders (in weeks)

(b) What is total cost for the EOQ?

(c) What should reorder point be?

(d) If an inventory withdrawal of 40 units was just made, is it time to reorder?

(e) Instead of using EOQ, the company is currently using a lot size of 550 units. What is the annual holding cost and annual ordering cost? Without determining EOQ and its corresponding cost, from these two costs how can you conclude that current lot size is too large?

(f) Using the Internet the company automated order placing which reduced the ordering cost to ₹15. However, operations manager responsible for inventory management was unaware of the development, and therefore EOQ was not adjusted to account new reduced ordering cost. If actual demand is 60 units, how much higher total cost the company will be paying, compared to the total cost if they could adjust the EOQ?

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