For the next eight-week planning period, the daily demand is forecast to be exac
ID: 357366 • Letter: F
Question
For the next eight-week planning period, the daily demand is forecast to be exactly 200 unit with no uncertainty. Only for Q1, there are 80 units left over from the previous period, which ended on a Sunday The supplier is willing to deliver a fixed amount of units every Monday morning, on time. Management mandates a 100% target fill rate. Decide the fixed order quantity that that is associated with the highest inventory turns. Explain how you found the solution, and show more than one table if necessary.Explanation / Answer
It is mentioned that daily demand is exactly 200 units for the next eight-weeks. Further supplier is willing to deliver a fixed amount of units every Monday morning, on time.
It is also mentioned that for Q1, there are 80 units left over from the previous period, which ended on a Sunday.
Inventory Turnover = Net sales / Average Inventory or Cost of goods sold / Average inventory
Average Inventory = (Beginning inventory + Ending inventory) / 2 or Average inventory = Ending inventory
Therefore to maximise inventory turns implies minimization of the Average inventory.
Assiming that daily demand of 200 units holds for all the seven days (including Saturday and Sunday) of the week, the total demand for a week is 1400 units.
There are eight weeks in the planning period giving total demand 1400*8 = 11,200
In case only one order is placed for 11,200 units, Average Inventory = Q/2 = 5600
In case Two orders of fixed quantity are placed then Average In ventory = 5600/2 = 2800
Therefore, in case fixed order quantity is received every Monday for the week then Average inventory = 1400/2 = 700 units which is minimum.
Therefore, as per my understanding the fixed order quantity to be received as per the demand of the week, 1400 units for 7 days in a week and or 1000 for a week of 5 working days in a week.
Goods are received only on Mondays and it is fixed as per the narration.
In the absence of inventory holding and ordering costs, in order to have maximum inventory turnover (minimum average inventory), order quantity should be equal to demand for the period between placing an order and receiving the order.