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- QUESTION
Southeastern Bell stocks a certain switch connector at its central warehouse for supplying field service offices. The yearly demand for these connectors is 15,000 units. Southeastern estimates its annual holding cost for this item to be $25 per unit. The cost to place and process an order from the supplier is $75. The company operates 300 days per year, and the lead time to receive an order from the supplier is 2 working days. Prepare a 3-4 page APA formatted paper to address the following:
Find the economic order quantity (EOQ)
Find the annual holding costs
Find the annual ordering costs
What is the reorder point?
Submitting your assignment in APA format means, at a minimum, you will need the following:Title page: Remember the running head and title in all capital letters.
Abstract: This is a summary of your paper, not an introduction. Begin writing in third-person voice.
Body: The body of your paper begins on the page following the title page and abstract page, and it must be double-spaced between paragraphs. The typeface should be 12-pt. Times Roman or 12-pt. Courier in regular black type. Do not use color, bold type, or italics except as required for APA level headings and references. The deliverable length of the body of your paper for this assignment is 3–4 pages. In-text academic citations to support your decisions and analysis are required. A variety of academic sources is encouraged.
Reference page: References that align with your in-text academic sources are listed on the final page of your paper. The references must be in APA format using appropriate spacing, hang indention, italics, and upper- and lower-case usage as appropriate for the type of resource used. Remember, the reference page is not a bibliography, but it is a further listing of the abbreviated in-text citations used in the paper. Every referenced item must have a corresponding in-text citation.
| Subject | Economics | Pages | 5 | Style | APA |
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Answer
Abstract
Economic Order Quantity is known as the Wilson EOQ Model after it was developed by Harris, F.W. and other consultants, R.H. Wilson and Andler, K. who also contributed extensively in research work and in-depth application analysis. It is a model that is only applicable when the demand of a product is consistent and available constantly throughout the year (Malakooti, 2013). The assumptions on this model to be effective are that orders should be replenish-able when depleted while the costs of reordering should also be fixed and the storage costs should also be available per unit cost commonly referred to as holding costs. The parameters required for EOQ are: annual demand, purchase cost per unit, the ordering and storage fixed costs per unit (Bozarth, 2011).
Introduction
Economic order quantity or EOQ is basically the quantity of order that minimizes the total holding costs together with the ordering costs. EOQ model is applied to determine the quantity of the optimal order (Cousens et al, 2009). It is that order quantity that results in the least total ordering and holding costs per year. EOQ provides the best indication when the order quantities are reasonable. Excessive stocks tie a lot of company resources in stocks while under-stocking results in unexpected stock outages that lead to losses and customer apathy (Chase, Jacobs & Aquilano, 2007).
EOQ
The formula for determining the EOQ is:
√2 x A x Cp/Ch
Where:
A = Annual Demand = 15,000 units
Cp = Ordering costs per unit = $ 75
Ch = Holding costs per unit of inventory = $25
Solution
√2 x 15000 x 75/25 = 300 units per order
Annual Holding Cost
The annual holding costs = Holding costs per unit x total units in stock per year =
$25 x 15000 units per year = $375,000
Annual ordering costs
Annual Ordering costs = ordering costs per unit x annual demand = $75 x 15000 = $ 1,125,000
The reorder point
The reorder point or the ROP is that level of stock that triggers or necessitates the replenishment of stock. It is arrived at by calculating the forecasted material demand or usage required during the lead time together with the provision for safety stock. The reorder level is calculated by multiplying the average daily rate of material usage and the lead-time required in days. Lead time is the period between the delivery of orders and the time when the order was placed (Malakooti, 2013). Lead time can be taken literally as the duration taken between the initiation of a process and its execution. The daily rate of material usage can be taken as the daily demand while the lead time is 2 working days as provided.
To obtain the reorder point the formula above is applied:
Reorder Point = Daily demand x Lead time
Reorder Pont = 15,000/300 days (To obtain the daily demand) x 2 days
Reorder Point = 50 x 2 = 100 units.
Conclusion
Economic order quantity provides a helpful model in supply chain management and its application prevents losses that may be occasioned by overstocking or under-stocking. It is application provides a critical input in SCM management processes (Cousens et al, 2009). Lead time calculations and reorder level determination supplements the economic order quantities in SCM processes and management (Chase, Jacobs & Aquilano, 2007).
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References
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Bozarth, C. (2011) Economic order quantity (EOQ) Model, Pertinent and Timely Articles to cultivate Your SCM Knowledge, retrieved January 30, 2016 from https://scm.ncsu.edu/scm-articles/article/economic-order-quantity-eoq-model-inventory-management-models-a-tutorial Cousens, A., Szwejczewski, M., & Sweeney, M. (2009) "A process for managing manufacturing flexibility." International Journal of Operations & Production Management, 29(4), pp.357-385. Chase, R.B., Jacobs, F.R., & Aquilano, N.J. (2007) Operations Management for Competitive Advantage. New York, NY: (11th ed) McGraw-Hill. Malakooti, B. (2013). Operations and Production Systems with Multiple Objectives. New York, NY: John Wiley & Sons.
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