Consider a ship engine company Shult, which keeps stocks of spare parts in many
ID: 337533 • Letter: C
Question
Consider a ship engine company Shult, which keeps stocks of spare parts in many ports in Europe to facilitate quick engine repairs. The demand for a certain cylinder head, costing 1000 euros at the location Antwerp is 1 per month. The leadtime to make the part at the factory is 2 months. Transporting it from the factory to Antwerp costs 50 euro. The company applies a 25% yearly holding cost rate.
a) Presently the company places an order upon each demand. Calculate the average inventory holding and the average fixed ordering costs per year.
b) Calculate the Economic Order Quantity for this spare part and the associated inventory holding and average fixed ordering costs.
c) The factory has high set-up costs for making the part and therefore likes to see orders of at least 5 pieces. How much discount (as % of the price) does it have to give to the spare part depot in Antwerp to make it worthwhile for them to order each time 5 items?
Explanation / Answer
Consider a ship engine company Shult, which keeps stocks of spare parts in many ports in Europe to facilitate quick engine repairs. The demand for a certain cylinder head, costing 1000 euros at the location Antwerp is 1 per month. The leadtime to make the part at the factory is 2 months. Transporting it from the factory to Antwerp costs 50 euro. The company applies a 25% yearly holding cost rate.
a) Presently the company places an order upon each demand. Calculate the average inventory holding and the average fixed ordering costs per year.
b) Calculate the Economic Order Quantity for this spare part and the associated inventory holding and average fixed ordering costs.
c) The factory has high set-up costs for making the part and therefore likes to see orders of at least 5 pieces. How much discount (as % of the price) does it have to give to the spare part depot in Antwerp to make it worthwhile for them to order each time 5 items?