Question 1 - Inventory control methods (15 marks)

Pork Bellies is considering manufacturing ready-made meals in the new processing plant.The company is planning on working 250 working days per year and has devised the following estimates on sales of the new product:

Daily Sales

Probability

400

0.5

500

0.3

600

0.1

700

0.1

• The annual carrying cost per unit is $0.40
• Set-up time to manufacture the meals is 20 minutes for each of the 5 machines involved in preparing the meals and it costs $24.50 per hour for operators to set the machines up.
• Manufacturing overhead is charged out at a rate of $12.50 per machine hour.
• The ready-made meals are packaged in recyclable containers and cost $3.00 per 10 pack.The containers are sourced from Western Australia and can take anywhere between 15 to 20 days to arrive and have the following probability estimates:

Days to fill order

Probability

15 0.30

16 0.15

17 0.15

18 0.15

19 0.15

20 0.10

Required:

1. Calculate the economic size for each production run (3 marks)
2. When should an order for more containers be placed, based on expected values? (3 marks)
3. How can ordering be handled to eliminate stock-outs 9 out of 10 times without holding large amounts of containers? (4 marks)
4. Explain the differences in the basic philospophies underlying the JIT and EOQ approaches to inventory management (5 marks)