Page 162 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 7: Inventory Management

Second, the transportation cost must be added to the purchase price to obtain an accurate Notes
assessment of the value of goods tied up in inventory. Once the inventory has been received, the
amount invested in the product must be increased by the transportation expenses. Inventory
carrying cost should then be assessed on the combined cost of the item plus transportation.
Quantity discounts can be handled directly with the basic EOQ formulation by calculating total
cost at any given volume-related purchase price to determine associated EOQs. If the discount at
any associated quantity is sufficient to offset the added cost of maintenance less the reduced cost
of ordering, then the quantity discount offers a viable alternative. It should be noted that quantity
discounts and volume transportation rates each affect larger purchase quantities. This does not
necessarily mean that the lowest total-cost since it represents a fixed cost once the decision is
made to replenish product. If it is decided to use a private fleet to transport replenishment
product, the enterprise should fill the truck regardless of the EOQ.

!

Caution It does not make sense to transport a half-empty truck simply so that the order
quantity represents the EOQ.
Another consideration when establishing the order quantity is the unitization characteristic.
Many products are stored and moved in standard units such as cases or pallets. Since these
standardized units are designed to fit transportation or handling vehicles, there may be significant
diseconomies when the EOQ is not a unit multiple.
Problem 1:

Assume you have a product with the following parameters:
Annual Demand = 360 units
Holding cost per year = ` 1.00 per unit

Order cost = ` 100 per order
What is the EOQ for this product?

Solution:
2 * Demand * Order Cost 2 * 360 * 100
EOQ = 72000 = 268.33 items
Holding cost 1

The EOQ model assumes any real quantity is feasible. The actual quantity ordered may need to
be an integer value and may be affected by packaging or other item characteristics. In the
following Problems an EOQ of 268 is assumed.

Problem 2:
Given the data from Problem 1, and assuming a 300-day work year, how many orders should be
processed per year? What is the expected time between orders?

Solution:
Demand 360
N = = 1.34 orders per year
Q 268

Working days
T = = 300/1.34 = 224 days between orders
Expected number of orders

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