Reference no: EM13340535

1 A product used in a laboratory of the hospital costs $60 to order, and its carrying cost per item per week is one cent. Demand for the item is six hundred units weekly. The lead time is three weeks and the purchase price is $0.60.

a. What is the economic order quantity for this item?

b. What is the length of the order cycle?

c. Calculate the total weekly costs.

d. What is the investment cost for this item?

e. If ordering costs increase by 50 percent, how would that affect EOQ?

f. What would be the reorder point for this item if no safety stock were kept?

g. What would be the reorder point if one thousand units were kept as safety stock?

2: SURGERY ASSOCIATES, a local surgery practice group, orders implants from device manufacturers. Order quantities for ten items have been determined based on the past two years of usage. Other relevant information from the practice's inventory records is depicted in Table EX 11.6. The practice is functional for fifty-two weeks a year.

a. Perform basic EOQ analysis for each item.

b. Classify the implant inventory items according to the ABC analysis.

c. Calculate the yearly inventory management cost.

d. Determine the investment cost (per cycle) for each item.

TABLE EX 11.6

Implant Item No	Yearly Demand (Unit/Year)	Unit Cost	Yearly Carrying Rate of Each Item	Ordering Cost
1	104	2,225	12%	6.00
2	260	5,000	10%	5.00
3	728	3,550	8%	12.00
4	1,248	1,205	12%	28.00
5	104	11,100	2%	18.00
6	1,040	1,500	20%	32.00
7	780	1,900	11%	50.00
8	884	3,700	9%	12.00
9	780	6,400	2%	35.00
10	520	2,700	5%	12.00

USE THE FORMULAE BELOW

There are four conditions that affect the reorder point quantity: (1) the rate of forecast demand; (2) the length of lead time; (3) the extent of variability in lead time and demand; and (4) the degree of stock-out risk acceptable to management. When demand rate and lead time are constant, there is no risk of a stock-out created by increased demand or lead times longer than expected. Therefore, no cushions stock is necessary, and ROP is simply the product of usage rate and lead time as:

ROP = D×L

Where

D = demand per period, and

L = lead time; demand and lead time must be in the same units

When demand or lead time is not constant, the probability that actual demand will exceed the expected demand increases. In that situation, health care providers may find it necessary to carry additional inventory, called safety stock to reduce the risk of running out of inventory (a stock-out) during lead time. In variable situations, the ROP increases by the amount of the safety stock:

ROP = expected demand during lead time + safety stock.

Here, the expected demand is indicated as an average, so variability of demand is present. Similarly, the expected lead time is variable. Hence the health care facility may run out of stock because of either more than expected demand or more than expected lead time for the shipment's arrival. The only way to ensure the continuity of operations is to keep an appropriate level of safety stock.

For example, if the expected demand for implants during lead time is ten units and the management keeps a safety stock level of twenty units, the ROP would be thirty units.

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