Operations Management question: EOQ
Guy’s BBQ Grille in Saskatoon serves 5,000 steaks per year. The steaks are kept in a freezer. The holding cost for each steak is $1.50. The cost to place an order is $45. The lead time is 4 days and there are 250 working days per year.
- What is the optimal order quantity (EOQ)?
- What is the average inventory? Hint: Use the EOQ calculated in i).
- What is the annual inventory holding cost?
- How many orders would be placed each year?
- What is the annual ordering cost?
- What is the total annual cost to manage the inventory?
- How many days on average are there between orders?
- What is ROP?
Question 1: EOQ or the Economic Order Quantity is calculated by getting the square root of (2*annual demand*order cost)/holding cost. In this case get the square root of (2*5000*45)/1.5=547.72
Question 2: Average inventory in units is calculated by dividing the EOQ by 2. In this case 547.72/2=273.86
Question 3: The annual inventory holding cost will be calculated by dividing the EOQ by 2 and multiplying the product by the holding cost for each steak. In this case (547.72/2)*1.5=410.79
Question 4: The number of orders that would be placed each year would be calculated by dividing the annual demand by the EOQ. In this case 5000/547.72=9.13 or 9 orders
Question 5: The annual ordering cost would be calculated by dividing the annual demand by the EOQ and multiplying the result it by the order cost. In this case (5000/547.72)*45= 410.79
Question 6: The total annual cost to manage the inventory would be calculated by getting the sum of the annual ordering cost and annual holding cost. In this case 410.79+410.79=821.58
Question 7: The number of days between orders would be calculated by multiplying the number of lead days by the number of orders. In this case 4*9=36 days
Question 8: ROP refers to the reorder point which is the level of inventory that is reached to necessitate an order or a fresh batch.