Determine the economic order quantity

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Reference no: EM133837211

Question

One of the largest retail chains in the country uses a centralized warehouse to manage the inventory of household appliances. The manager of this warehouse is concerned about the current inventory strategy used for one of their most popular products: refrigerators. The annual demand for refrigerators is 400,000 units. You can assume that this demand is deterministic and uniformly distributed over the 250 days that the warehouse operates every year.

Currently, refrigerators are purchased from an overseas supplier that charges $400 per unit. Orders are shipped by ocean freight and arrive in 25 working days. The ordering cost (including transportation, customs fees, etc.) is $20,000 independent of the order size. The holding cost is $40 per unit per year.

1. Determine the economic order quantity. What is the average time (in days) that a refrigerator stays in the warehouse as inventory?

2. What is the reorder point? Briefly explain how you would implement this reorder point policy.

3. What is the Annual Holding cost and Annual Ordering cost?

4. Suppose the manager decides to order every month. What is the order size in this case? What are the new Holding and Ordering cost of this inventory policy? What is the new ROP?

5. The manager is looking for alternatives to reduce inventory costs, in particular ordering costs. After some rounds of negotiations, the transportation company is willing to reduce freight fees to $10,000 per order if orders exceed 40,000 units. Do you recommend accepting the terms of this new contract?

Reference no: EM133837211

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