2009-11-17
Seminar 4
Purchases  Video Galore  Sells
Information:
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
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Annual demand 13 000 packages
250 packages per week (13 000/52)
15%
Purchase: delivery time 2 weeks
Ordering costs: 200 per order
a) Calculate the economic order quantity
Carrying costs:
3.10
Required rate of return for each unit: 15%*14 (purchasing cost) = 2.1
Total of 5.20
EOQ (economic order quantity)= sqrt(2*annual demand*cost per order) = sqrt((2*13000*200)/5.2)=
1 000
b) What is the total annual cost for video tapes?
Total annual cost = ((annual demand/order quantity)*cost per order) + ((order quantity/2)*annual
carrying cost per unit) = (13000*200)/1000 + (1000*5.20)/2 = 2 600 + 2 600
These are always supposed to be equal.
Total annual cost
d)
Total annual
Carrying cost
EOQ
Cost of ordering
Ordering quantety
13 000/1 000 = 13 per year
Reordering point
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Order quantity 1 000
Demand each week 250
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Purchase lead line 2 weeks
250 per week * 2 weeks = Reordering point 500
e)
Safety stock units: No safety stock
Demand resulting in stockouts: 600
Stockout: 600 – 500 = 100
Stockout costs: 100*4=400
Number of orders per year: 13
Probability of stockout: 0.20
Expected stockout costs: 400*13*0.20 = 1040
Carrying costs: 0 (as we had no stock)!
Safety stock units: No safety stock
Demand resulting in stockouts: 700
Stockout: 700 – 500 = 200
Stockout costs: 200*4=800
Number of orders per year: 13
Probability of stockout: 0.09
Expected stockout costs: 800*13*0.09 = 936
Carrying costs: 0
Safety stock units: No safety stock
Demand resulting in stockouts: 800
Stockout: 800 – 500 = 300
Stockout costs: 300*4=1200
Number of orders per year: 13
Probability of stockout: 0.06
Expected stockout costs: 1200*13*0.06 = 936
Carrying costs: 0
Total annual cost: 2912 + 0 = 2912
With a safety stock of:
100  1612
200  1352
300  1560
f) Should Video Galore implement JIT purchasing?
Order size with JIT is 100 instead of 1000.
Current (EOQ)
JIT
Order cost
200*13=2600
0 (negligible)
Purchasing cost
14*13000=182000
14.02*130000= 182260
Carrying cost
5.20*500=2600
15%*(100/2)*14.02= 105.15
Stockout cost
0
4*50=200
187 200
182 720.15
4479.85 in favor of JIT.
EOQ is static. With JIT, you reduce stock levels (more dynamic).
Change system if you need improvements.
g)
Sontek
Purchasing price
Inspection cost
Carrying cost
14.02*13000=182260
0 ( not necessary)
15%*14.02*50=105.15
Denton
13.60*13000*176800
0.05*13000= 650
15%13.60*50=102
Other carrying costs
3.10*50=155
3*50=150
Stockout cost
4*50=200
360*8=2880
50*3.10=155
Customer return cost
25*(2%*13000)=6500
182720.15
187082
Better to stay with Sontek.