Excelsior is in need of your expertise you did such a good job in helping with their forecast they decided to ask you for further help in managing their inventory. You are scheduled to meet with the Inventory Manager and the Purchasing Manager to discuss how to minimize the total cost of inventory. They have both heard about the EOQ model, however they arent sure exactly what it is or if it will help them.

Q#1 Using your textbook OM6 Explain what Economic Order Quantity (EOQ) is (provide the page number you found this), why it is important for a company to calculate EOQ (this is found in the beginning of CH 11). Finally if an Item is ordered at EOQ then what will happen to Annual Inventory Holding Costs and Annual Ordering Costs (i.e. what will be the relationship?)

Q#2 The Purchasing Manager for Excelsior has decided EOQ could be helpful for her on ordering a number of components that they use in operations. She provides you the following information on LED diodes they use in their flashlights. (EOQ should be rounded to a whole number)

Compute the economic order quantity (EOQ) and then the annual inventory holding cost and annual ordering cost.

Annual requirements (D) = 33,500 units Order cost (Co) = $23 per order

Holding rate (I) = 13% Unit cost (C) = $13.5 per unit

Q#3 What do you notice about the annual holding cost and the annual ordering costs?

As you are discussing the advantages of EOQ, the Inventory Manager excuses himself to meet with Jack, an owner of a local trucking company who delivers to Excelsior. After a little discussion, he brings Jack into the office to meet you. Jack also needs help in managing his inventory. He explains with fuel costs being expensive, Jack wants to evaluate how much fuel, on average, he should store in his new 5,000-gallon fuel tank. Each year Jack uses 63,000 gallons of diesel (usage is spread evenly throughout the year). Jack knows with certainly that he can have a load of fuel delivered in 5 days. The avg price of fuel is $4.25 per gallon and there is a separate $85 ordering fee per order. Jack thinks his holding cost per unit (gallon) is 18%.

Q#4 If Jack orders at EOQ, what will be the average inventory of fuelin his 5,000 gallon tank?

After helping Jack, the Purchasing manager then turns the discussion towards the topic of when orders should be placed and she asks if there is anything needed to help discover Re-Order Point. Excelsior also manufacturers spotlights used in security systems. The demand for the diode in this product has an average daily demand of 33 units and the order lead time for this product from the supplier is 14 days.

Q#5 Calculate the Re-Order Point (ROP) for this component?

Well that was easy! stated the Inventory Manager, however he noted that they have had issues with that particular supplier, being up to (a standard deviation of) 2 days late. The Purchasing Manager agreed and stated that is why she often carries extra flags just in case. This Safety Stock is hard to manage without knowing exactly how to calculate it. You state you can help her with that with a simple Safety Stock (SS) calculation but need to know what her desired probability of not having a stockout is. She states she would like a service level of 95% (z=1.65) to avoid a stockout. Your Safety Stock and ROP should be rounded UP to whole numbers)

Q#6 Calculate the Re-Order Point (ROP) for this component with SS ? Assume Demand is constant (a value of 0) .

The Inventory Manager then asks about fluctuating demand stating that sometime daily operations can vary up to 4 units a day. This type of uncertain demand can surely cause problems with calculating safety stock? Rest assured you say. I can recalculate Safety Stock (SS) with both a 2 day standard deviation of Lead Time and a demand standard deviation of 4 units a day. And as before, she would like a service level of 95% (z=1.65) to avoid a stockout. Use the Instructor Slides ONLY TEXT does not deal with Standard deviation of Lead Time. Your Safety Stock and ROP should be rounded UP to whole numbers)

Q#7 Calculate the new Re-Order Point (ROP) for this component (Flag) with SS ?

**Please show all work so I can use this as my study guide**