EOQ Model: The company management has indicated a desire to adopt a very simple inventory control policy for the three engine oil products. In particular, they have heard that the economic order quantity model is easy to understand due to the constant and known demand assumption. Determine the EOQ and reorder level for each of the three engine oil products and calculate the inventory costs (fixed order, and holding costs) under this constant demand scenario.
| Demand Information | |
| | | |
| Product | ANNUAL DEMAND |
| Mean | stdev |
| Diesel oil | 1,000,000 | 450,000 |
| Gas oil | 400,000 | 140,000 |
| Nat. Gas oil | 500,000 | 65,000 |
| Cost Information | |
| | | |
| Fixed order cost | $ 7,500.00 | per order |
| | | |
| Product | Holding cost | Stockout cost |
| $/unit/yr | $/unit |
| Diesel oil | 1 | 2 |
| Gas oil | 5 | 10 |
| Nat. Gas oil | 5 | 15 |
| Super oil | 5 | 15 |
| | | |
| | | |
| Lead time | 0.083333333 | years |
The central warehouse of a large manufacturer of heavy machinery and engines stocks three different engine oil products. The central warehouse orders these three products from the company's manufacturing operations division and stocks them to meet demands of the company's dealers, which serve customer demand for these engine oil products. The lead time and fixed order costs are about the same for each order, regardless of the quantity or product type ordered; it is safe to assume that lead time is about one month and fixed order costs are $7,500 per order. The following table includes information on various costs and demand for each of the products. Product Diesel Engine Oil - DE495 Gas Engine Oil - GE275 Natural Gas Engine Oil NG645 Annual Demand Costs ~Normal (mean, std dev) Holding cost | Std. Dev. Stock-out Mean ($/unit/yr) cost ($/unit) 1,000,000 450,000 2 400,000 140,000 5 10 500,000 65,000 15 15 If the central warehouse does not have the item in stock when a dealer puts in an order, the order is recorded and is delivered to the retailer as soon as the next shipment arrives from the manufacturing division. The warehouse estimates the stock-out cost to be equal to the same-day shipping costs that they incur as a result of the stock-out incident (given in the table above). Questions: 1. EOQ Model: The company management has indicated a desire to adopt a very simple inventory control policy for the three engine oil products. In particular, they have heard that the economic order quantity model is easy to understand due to the constant and known demand assumption. Determine the EOQ and reorder level for each of the three engine oil products and calculate the inventory costs (fixed order, and holding costs) under this constant demand scenario. Annual Demand ~ Normal (mean, std dev) Costs Mean Std. Dev. Stock-out cost ($/unit) Product Diesel Engine Oil - DE495 Gas Engine Oil - GE275 Natural Gas Engine Oil - NG645 2 1,000,000 400,000 500,000 Holding cost ($/unit/yr) 1 5 5 450,000 140,000 65,000 10 15 L The central warehouse of a large manufacturer of heavy machinery and engines stocks three different engine oil products. The central warehouse orders these three products from the company's manufacturing operations division and stocks them to meet demands of the company's dealers, which serve customer demand for these engine oil products. The lead time and fixed order costs are about the same for each order, regardless of the quantity or product type ordered; it is safe to assume that lead time is about one month and fixed order costs are $7,500 per order. The following table includes information on various costs and demand for each of the products. Product Diesel Engine Oil - DE495 Gas Engine Oil - GE275 Natural Gas Engine Oil NG645 Annual Demand Costs ~Normal (mean, std dev) Holding cost | Std. Dev. Stock-out Mean ($/unit/yr) cost ($/unit) 1,000,000 450,000 2 400,000 140,000 5 10 500,000 65,000 15 15 If the central warehouse does not have the item in stock when a dealer puts in an order, the order is recorded and is delivered to the retailer as soon as the next shipment arrives from the manufacturing division. The warehouse estimates the stock-out cost to be equal to the same-day shipping costs that they incur as a result of the stock-out incident (given in the table above). Questions: 1. EOQ Model: The company management has indicated a desire to adopt a very simple inventory control policy for the three engine oil products. In particular, they have heard that the economic order quantity model is easy to understand due to the constant and known demand assumption. Determine the EOQ and reorder level for each of the three engine oil products and calculate the inventory costs (fixed order, and holding costs) under this constant demand scenario. Annual Demand ~ Normal (mean, std dev) Costs Mean Std. Dev. Stock-out cost ($/unit) Product Diesel Engine Oil - DE495 Gas Engine Oil - GE275 Natural Gas Engine Oil - NG645 2 1,000,000 400,000 500,000 Holding cost ($/unit/yr) 1 5 5 450,000 140,000 65,000 10 15 L
