SCMD: Assessment 3
Case 2
Company B is a retailer of mobile phones in Australia that works 250 days in a year. The manager would like you to determine a minimum-cost inventory plan for an upcoming mobile phone to be launched in the market. They have collected the following information:
- Annual demand: 750 phones
- Phone cost: $1,005 each
- Phone RRP: $1,149 each
- Net weight: 167 g each
- Tare weight: 257 g each
- Annual inventory holding cost: 27.5%
- Cost per order to replenish inventory: $81.71
- Annual in-transit holding cost: 10%
- Freight rate (per kg): $8.10
- Freight-related charges (per shipment): $276.50 (i.e. handling fee, dangerous good fee, and lithium battery fee)
- Time to process order for freight: 2 day
- Freight transit time: 5 days
The manager wants you to determine the following information:
- Economic order quantity
- The total purchasing cost
- The total ordering cost
- The total inventory holding cost
- The total transportation cost (by weight)
- The total freight-related cost (by shipment)
- The total in-transit holding cost
- The total cost for this inventory plan
- The number of orders
- Ordering point
- The profit from this inventory plan
You will get higher marks if your model generates only integer results for economic order quantity and the number of orders.
a. Economic Order Quantity (EOQ): The Economic Order Quantity represents the optimal order quantity that minimizes the total cost of inventory management. It can be calculated using the following formula:
EOQ = √((2 * Annual demand * Cost per order to replenish inventory) / Annual inventory holding cost)
Given: Annual demand = 750 phones Cost per order to replenish inventory = $81.71 Annual inventory holding cost = 27.5%
Using the formula, we can calculate the EOQ:
EOQ = √((2 * 750 * 81.71) / (0.275)) EOQ ≈ 91
Therefore, the Economic Order Quantity is approximately 91 phones.
b. Total Purchasing Cost: The total purchasing cost is the cost of acquiring the inventory based on the Economic Order Quantity. It can be calculated by multiplying the EOQ by the cost of each phone:
Total Purchasing Cost = EOQ * Phone cost Total Purchasing Cost = 91 * $1,005 Total Purchasing Cost = $91,455
c. Total Ordering Cost: The total ordering cost is the cost incurred for placing orders to replenish inventory. It can be calculated by dividing the annual demand by the Economic Order Quantity and multiplying it by the cost per order:
Total Ordering Cost = (Annual demand / EOQ) * Cost per order to replenish inventory Total Ordering Cost = (750 / 91) * $81.71 Total Ordering Cost ≈ $672.17
d. Total Inventory Holding Cost: The total inventory holding cost is the cost of holding inventory in stock. It can be calculated by multiplying the average inventory level by the annual inventory holding cost. The average inventory level can be derived by dividing the EOQ by 2:
Total Inventory Holding Cost = (EOQ / 2) * Annual inventory holding cost Total Inventory Holding Cost = (91 / 2) * 0.275 Total Inventory Holding Cost ≈ $11.64