# Formulation in Identifying Cost of Capital

**Topics:**Inventory, Economic order quantity, Supply chain management

**Pages:**2 (370 words)

**Published:**January 6, 2013

(Note: Discussion should not be restricted to these questions)

Day 1

1.Identify the cost of capital and estimate the cost of placing an order. Assume that the annual inventory cost of a unit is given by, CH = iCI, where i is the cost of capital and CI, the unit cost of the item. 2.Consider the connector data and the all unit price structure described in Table 1. For each price level ($5.00, $4.75, etc.) determine the EOQ, and the corresponding total annual cost. Sketch the total annual cost as a function of the order quantity. Based on these results, identify the optimal ordering policy. 3.Repeat the analysis of (2) above for the incremental unit discount situation described in Table 2.

Day 2

4.Consider the make or buy decision for item #4569802 (on page 4). Using the economic order quantity (EOQ) model, determine the order quantity (lot size) for each alternative and the corresponding annual cost. 5.Consider the three items procured from a single overseas vendor (page 4 of the case). In this analysis you may ignore variability. a.Evaluate the cost of switching to local suppliers, i.e. assume that each item is managed independently and ordered from local suppliers. Compute the EOQ and the corresponding total annual cost of the three items. b.Now evaluate the cost of using overseas supplier and placing joint orders for the three items. What is the corresponding total annual cost? Is the EOQ model useful?

Day 3

6.Consider the special resistor # 4915082 (inexpensive part). Based on the information presented on page 3, develop a probability distribution of demand during lead time. 7.Consider the inexpensive part (# 4915082). Determine the appropriate inventory policy for this item in order to achieve the desired objective of shipping 99% of demand within 24 hours (treat this as the required fill rate). 8.Revisit “several items ordered together” with a target service level of 99%, i.e. the probability of...

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