question archive A shop manager orders packs of drinks as soon as the shop runs out
A shop manager orders packs of drinks as soon as the shop runs out
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A shop manager orders packs of drinks as soon as the shop runs out. Assume that orders are delivered instantaneously. Demand is constant, D = 100 packs per time unit. Storing the drinks in inventory incurs opportunity costs at a rate of 5% per £, time unit, and packs. Now, the manager has a choice between two suppliers, S1 and S2 With S1, the shop pays a fixed cost £100 every time it makes an order and each pack's value is £20. With S2, the shop pays a fixed cost of £200 every time it makes an order and each pack's value is £5. Assuming that, for each supplier, the manager would order the amount of packs that minimise cost per time (while always meeting demand), which supplier would minimize total cost? Do all of the calculations that you feel are relevant and write a short report, including your calculations, which can be photographs of handwritten equations. The report should also include a discussion of the appropriateness the assumptions of the model.
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Economic order quantity is the quantity where the total inventory management(Ordering cost, carrying cost) costs are optimum and it is the reader level of inventory.
Let's find out the EOQ for both options.
EOQ (S1)
= { (2 * Annual consumption of units * Ordeing cost per oder) / (Holding cost p.u p.a) } ^ 0.5
= { (2*100*100) / (0.05*20) } ^ 0.5
= 142 Units
EOQ (S2)
= { (2 * Annual consumption of units * Ordeing cost per oder) / (Holding cost p.u p.a) } ^ 0.5
= { (2*100*200) / (0.05*5) } ^ 0.5
= 400 Units
Note : It is considered that annual demand of the units as "100" in both the options.
COST UNDER EACH OPTIONS (Demand of 1000 Units)
| Particulars | S1 | S2 |
| Cost of Units | 1000*20 = 20000 | 1000*5 = 5000 |
| Ordering Cost | (1000/142) * 100 = 704 | (1000/400) * 200 = 500 |
| Inventory Carrying Cost | 1000*20*0.05 = 1000 | 1000*5*0.05 = 250 |
| Total Cost | 21704 | 5750 |
Therefore, it can be clearly seen that "Supplier 2" is providing the goods at lower cost. So "S2" would minimize the total cost.
Conclusion : It is better to purchase from "S2".
