Case 3

Case 3

Robert is faced with looking at creating an inventory policy for Totalee toothbrushes that are carried at the local drug store, Nightingale, which Robert works at. The first thing that Robert needs to determine is the demand of toothbrushes, carrying and ordering costs, and the amount of days that the drug store is opened for the year. He will be able to use a basic EOQ model to determine how many toothbrushes he should order, how often to order, and total costs.

D = 250 x 12 months = 3000 toothbrushes

Cc = $18.75 x 1/3 = $6.25

Co = $1.25 x 12% = $0.15

Working Days = 30 x 12 = 360 Days

Robert’s optimal inventory policy is Continuous (fixed-order)

Qopt = √((2(6.25)(3000))/0.15) = 500 Toothbrushes per order

Number of orders per year = 3000/500 = 6 orders per year

TC = 6.25(3000/500) + 0.15(500/2) = $75.00

Robert’s next task is to determine how many Totalee toothbrushes to order due to the manufacturer changing distribution centers, which causes a 6 day delay in shipments. Robert will need to use the same criteria as his previous equations and use his new 6 day lead time for optimal order quantities and when to place the orders.

R (reorder point) = dL = (3000/360) (6) = 50

Robert should still place an order of 500 toothbrushes. Due to the new lead time he should place orders once inventory drops to 50 and Robert will still be placing 6 orders per year.

Robert has now determined that Nightingale might be able to have planned shortages to save money. Robert has determined that due to many factors, Nightingale will incur a cost of $1.50 per unit short per year.

Qopt = √((2(6.25)(3000))/0.15((1.5+ 0.15)/1.5)) = 524.40 Toothbrushes per order

Sopt = 524.40(0.15/((1.5+0.15))) = 47.67 is maximum shortage

TC = 1.50(〖47.67〗^2/(2(524.4))) + 0.15(〖(524.4-47.67)〗^2/(2(524.4))) + 6.25(3000/524.4) = $71.51

R = (3000/360) (6) – 47.67 = 2.33

With planned shortage, Robert will need to order 525 toothbrushes and will have a maximum shortage...