A company needs to hold a stock of item X for sale to customers.
Although the item is of relatively small value per unit, the customers' quality control requirements and the need to obtain competitive supply tenders at frequent intervals result in high procurement costs.
Basic data about item X are as follows:
Annual sales demand (D) over 52 weeks 4095 units
Cost of placing and processing a purchase order
(procurement costs, Cs)
£48.46
Cost of holding one unit for one year (Ch) £4.00
Normal delay between placing purchase order and
receiving goods
3 weeks
(a) Calculate
(i) The economic order quantity for item X;
(ii) The frequency at which purchase orders would be placed, using that formula;
(iii) The total annual procurement costs and the total annual holding costs when the EOQ is used; (b) Explain why it might be unsatisfactory to procure a fixed quantity of item X at regular intervals if it were company policy to satisfy all sales demands from stock and if:
(i) The rate of sales demand could vary between 250 and 350 units per four-week period or
(ii) The delivery delay on purchases might vary between 3 and 5 weeks suggesting in each case what corrective actions might be taken;
(c) Describe in detail a fully-developed stock control system for item X (or other fast-moving items), designed to ensure that stock holdings at all times are adequate but not excessive. Illustrate your answer with a freehand graph, not to scale.