The unit cost is $112.00 and we order 10,752 units per 365 day year. While we do not have to order by the case, it does come in 15 units per case. The average lead time from when we place the order to the time we receive it at our dock is 8.2 days with a standard variation of 1.7 days. Later that week in the conference room, Ferguson and Patrachalski each offered proposals for ordering part number 64-1909. Purchasing Director Patrachalski stated he was trying to keep his purchasing costs down by ordering in larger quantities and suggested buying 32 cases at a time. He has also indicated he would like to avoid ordering in partial cases since doing so may result in shipments of incorrect quantities and consequent higher costs. Comptroller Ferguson claimed the most important issue was the cost to carry inventory and argued for ordering 4 cases at a time to keep Page 2 This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the Council of Supply Chain Management Professionals (CSCMP). You may not upload any of this site's material to any public server, online service, network, or bulletin board without prior written permission from CSCMP. average inventories low. Seeking a compromise, Lewin suggested using economic order quantity (EOQ). Lewin stated, economic order quantity can be very complex. The original EOQ, known as Wilsons EOQ, was actually developed by F. W. Harris1 2 in 1913, but a consultant named R. H. Wilson, who embraced the model and applied it extensively, was given credit for his early in-depth analysis of it.3 4 It determines the lowest total inventory cost by calculating the optimum order quantity denoted as Q*. Economic order quantity incorporates the trade-off between inventory carrying cost and ordering costexactly the trade-off we are facing with Finance and Purchasing. You can now find more complicated economic order quantity models extending the concept to consider discount pricing for ordering in larger quantities, backordering costs, differences in transportation rates if you ship by full truckload instead of LTL, including the step function of adding another warehouse as it impacts inventory carrying costs, or bridging into optimal production quantities. Anything that might influence the economic order quantity variablesthere is probably an extension. There is probably even one considering the phases of the moon! There are a lot of assumptions for economic order quantity including:5 A continuous, constant, and known rate of demand A constant and known replenishment or lead time Entire order delivered at same timeno in-transit inventory All demand is satisfied A constant price or cost that is independent of the order quantity (i.e., no quantity discount) No inventory in transit One item of inventory or no interaction between items Infinite planning horizon Unlimited capital But we should just use the original Harris-Wilson Model and consider tweaking it later. As I recall, the basic formula is: Q*=(2xAnnual Demand x Ordering Cost)/(Inventory Carrying Cost x Unit Price) And the entire equation needs to be square rooted. Q#1: What is the cost difference between Ferguson's proposal to order 4 cases each time and Patrachalski's proposal to order 32 cases each time? Q#2: Lewin suggested looking at economic order quantity. Based on the lowest total annual cost, what order quantity should Martin recommend? Q#3: Let's explore the concept of "robustness." Lewins proposal to use economic order quantity may be unrealistic since SMC would like to place orders in whole cases. If the order quantity is decreased to the nearest whole case (which is a 2.78% reduction) what percent would your total annual cost change? What percent would your annual total cost change if the order quantity is increased to the nearest whole case? Hint: Use the formula ([New Total Cost / Old Total Cost] 1 ).