Situation 1. Demand for Sharp disposable razors at Chevere Drugs averages seven
ID: 453057 • Letter: S
Question
Situation 1.
Demand for Sharp disposable razors at Chevere Drugs averages seven packages per day. The razors cost Chevere $0.80 per package and sell for $1.49. Chevere uses a 20% annual holding cost rate and estimates the cost to place an order for additional razors at $25. Chevere is open 365 days a year and maintain a safety stock of 15 packages. The lead time for delivery is five days. Determine the following:
a) The optimal inventory policy (order quantity and reorder point) for Sharp razors.
b) The number of days between orders (cycle time).
c) The total annual inventory cost (holding, ordering, and procurement) and the projected annual net profit of this policy.
d) What assumptions did you make regarding demand in solving this problem?
e) How would your answers to part a change if Sharp requires its customers to purchase razors in gross units (multiples of 144) and Chevere desires a safety stock of 20 razors?
Explanation / Answer
a Annual Demand (7 packages/day * 365 days) 2555 Ordering Cost $ 25.00 Holding Cost - 20% of Price = 20% * $0.80 $ 0.16 EOQ = 2AO / H where A = Annual Demand O = Ordering Cost per order H = Holding Cost per unit per annum EOQ = 2AO / H = (2 * 2555 * 25) / 0.16 = 893.5533 units or, 894 units Lead Time Demand (Lead Time * Avg Demand = 5 days * 7 per day) 35 Safety Stock 15 Reorder Point = Lead Time Demand + Safety Stock 50 b Order Cycle Length = 365 days / # Orders # Orders = Annual Demand/EOQ = 2555/894 = 2.8579 Order Cycle = 365 / 2.8579 = 127.71 or 128 days c Product Cost (2555 units * $0.80) (A) $2,044.00 Ordering Cost (Annual Demand/EOQ * $25) (B) $71.45 Carrying Cost (EOQ/2*$0.16) (C ) $71.52 Total Cost (D = A+B+C) $2,186.97 Total Revenue (2555 units * $1.49/unit) ( E) $3,806.95 Net Profit (F = E-D) $1,619.98 d Assumptions - 1. Demand is constant and deterministic throughout the year 2. All the prices of input and output remain constant. 3. Inventory holding and ordering cost are also constant. 4. Everything procured will be sold off. e. Since the order quantity has to be in multiple of 144, the EOQ changes Order quantity can be either = 894/144 = 6.20x So order size be either 6 * 144 = 864 units or 7 * 144 = 1008 units, - whichever leads cheaper inventory cost Inventory Order Size (A) 864 1008 No of orders (Annual Demand/Order Quantity per order = 2555 / A) (B) 2.96 2.53 Ordering Cost (No orders * $25 = B *$25) ( C) $73.93 $63.37 Carrying Cost per unit (20% * $0.80) (D) $0.16 $0.16 Carrying Cost (Order Size / 2 * Carrying Cost per unit per annum = A/2 * D) (E) $69.12 $80.64 Total Cost (C+E) $143.05 $144.01 Since Total Cost is lower in 864 units, new optimal quantity is 864 Lead Time Demand (Lead Time * Avg Demand = 5 days * 7 per day) 35 Safety Stock 20 Reorder Point = Lead Time Demand + Safety Stock 55