Upd Case

Topics: Economic order quantity, Order theory, Reorder point Pages: 2 (286 words) Published: September 29, 2010
Case: UPD Manufacturing

Given,

Demand, d = 6
Ordering Interval, OI = 89
Ordering cost, S = $32
Holding Cost/Carrying Cost, H = $.08

As there is no demand variability, the formula for quantity is:  
Q = d (LT + OI) – A  
(as there is no safety stock) ------- A - ROP (Reorder point)  
We know, A = d * LT, so the fixed order interval order quantity equation Q becomes

Q = (d * LT) + (d * OI) – (d * LT)
 
* Q = d * OI = (6) (89)  = 534 units
 
Therefore, ordering at six-week intervals requires an order quantity of 534 units.  
Now, the optimal order quantity is determined by using EOQ equation.  
Q = sqrt(2dS/H)
= sqrt[(2*89*32)/.08]
= 266.833 (or) 267

The weekly total cost based on optimal order quantity EOQ is given below:

TC of EOQ = (d/q)*s + (q/2)*H
= (89/267)*32 + (267/2)*.08
= 10.6666+ 10.68
= 21.3466

The weekly total cost based on six-week fixed order interval (FOI) order quantity is given below:

TC of FOI = (d/q)*s + (q/2)*H
= (89/534)*32 + (534/2)*.08
= 5.3333+ 21.36
= 26.6933

 Weekly savings of using EOQ rather than 6-week FOI is 26.6933 – 21.3466 = $5.3467 The annual savings = (52 weeks) * ($5.3467 /week) = $278.02
 
The total annual savings as a result of switching from six-week FOI to EOQ are relatively small and switching to the optimal order quantity may not be warranted. However, even though the absolute value of the savings is relatively small, the percentage of savings is approximately 25.05% (5.3467 / 21.3466). Therefore if FOI approach is used with other parts or components as well, the total potential loss may be significant. 
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