Question

A manufacturing company purchases 9000 parts of a machine for its annual requirements, ordering one months requirement at a time. Each part costs rs 20. The ordering cost per order is rs 15 and the carrying charges are 15 percent of the average inventory per year. You have been assigned to suggest a more economical purchasing policy for the company. What advice would you offer, and how much would it save the company per year

Answer 1

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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