A manufacturing company purchase 9000 parts of a machine for its annual requirements ordering for month usage at a time, each part costs N20. The ordering cost per order is N15 and carrying charges are 15% of the average inventory per year. You have been assigned to suggest a more economical purchase policy for the company. What advice you offer and how much would it save the company per year?
Answers
Solution:
Given data are:
Number of lubricants to be purchased, D = 9000 parts per year
Cost of part, Cs= Rs. 20
Procurement cost, C3= Rs. 15 per order
Inventory carrying cost, CI = C1= 15% of average inventory per year
= Rs. 20 × 0.15 = Rs. 3 per each part per year
Then, optimal quantity (EOQ), Q0= √2C3D
= √C1
Q0= √2 ×15× 300
= √3
= 300 units
and Optimum order interval, (t0) =
Q0in years
D = 300
9000 = 1 years
30 = 1 × 365
30 =122 days
Minimum average cost=
=√2C3DC1
=√2 ×3 ×15 ×9000
= Rs. 900
If the company follows the policy of ordering every month, then the annual ordering cost is = Rs 12 × 15 = Rs. 180
Lot size of inventory each month = 9000/12 = 750
Average inventory at any time = Q/2 = 750/2 = 375
Therefore, storage cost at any time = 375 × C1 = 375 × 3 = Rs. 1125
Total annual cost = 1125 + 180 = Rs. 1305
Hence, the company should purchase 300 parts at time interval of 1/30 year instead of ordering 750 parts each month. The net saving of the company will be = Rs. 1305 – Rs. 900 = Rs. 405 per year.
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