Question 1: EOQ/ROP Calculations
Multi period Inventory System: Fixed-Order Quantity Model (EOQ/ROP)
Demand for products is constant, however safety stock added as precaution to stock outs. Probability of not stocking out is 95%
Lead time is constant
Price per unit is constant
Inventory holding cost is based on average inventory and storage costs for safety stock Setup costs are constant
All demands for product will be satisfied
Setup Costs: Consists of combination of blending costs and other various setup costs. Blending costs include withdrawing spirits from storage and complete rectification of item. The other various setup costs consist of size changeovers, label changeovers, and order processing costs. The original 1969 figures were also used for the adjusted 1972 figures.
Blending/Withdraw spirits from storage/Complete rectificationVaries Size changeover$8.85
Order processing cost$51.43
Annual Demand: Based on Fiscal Year Ending January 1972 sales, located in Exhibit 5. Determined average weekly demand based on the 1971 sales over 52 week period.
Annual Holding Cost (H): We agree with the 1969 figure of 11.5% total. This includes 9% Cost of Capital and 2.5% other holding costs, which include estimated costs of obsolescence, shrinkage, insurance and year-end inventory tax. This figure also takes into consideration the potential for additional costs due to storage costs for the safety stock we have added to our ROP. However, based on current warehouse capacity, the reserved space for finished goods is only used a maximum of 50% at any given time. This allows for plenty additional storage space for the additional inventory and does not affect the annual holding cost percentage of 11.5%. The total annual holding cost will vary based on number of units in inventory for the year. This figure is computed in the accompanying chart by dividing the lead time (3.5 weeks) into 52 weeks and multiplying that by the amount of safety stock units used during that time period. This is then added to annual demand and multiplied by the per unit cost.
Lead Time: 3.5 weeks
Unit Cost: We used the 1969 unit cost figures for our computations. Number of Standard Deviations: Based on 95% probability of not stocking out. Our corrected figures for EOQ are very similar to those figures calculated in 1969. Some of the products our order is slightly larger, where others are slightly smaller, but they are very close and follow similar trends. The difference is our ROP figures, when compared to their 1969 figures. One reason for the significant difference is that we felt it is necessary for Blanchard Importing & Distributing to begin carrying safety stock. They seemed concerned with the possibility of running out of stock, so our figures include a 3.5 week lead time of safety stock to help minimize this risk.
Question 2: What are the disadvantages of the formal EOQ/ROP system and the actual system used for scheduling bottling runs at Blanchard? Which system do you prefer? What improvements can be made?
The disadvantages of the Fixed Order Process (Q-Model) and the Fixed Time Process (P-Model) are the criteria that Hank should use to validate each one's usefulness and application. While each model affords certain benefits and might allow for different operational strategies, an analysis of the two models and a related comparison of the five products in question can reveal which may best serve the company. The Fix-order quantity models are designed to be event triggered, where inventory is ordered at the ROP or reorder point. It is a perpetual system, which requires constant inventory monitoring for each product, with every withdrawal and addition. With more expensive products, this system is found to be more favorable as it keeps inventory...