Question

Sandy’s Cabinet Company uses MRP to schedule its production. Due to the current recession and the need to cut costs, Sandy has targeted the inventory investment area for cost reduction. However, the company does not want to reduce its customer service level in the process. Demand and inventory data for a standard two-drawer file cabinet are given in the following table. Complete an MRP matrix for the cabinet using (a) no lot sizing, (b) minimum of 200, and (c) multiples of 175 lot sizing. Which lot-sizing rule do you recommend?

Ordering cost =$100 per order

Holding cost = $1 per cabinet per week (Notice the unit change)

Lead time = 1 period

Beginning inventory = 150

Demand: Period 1/145 Period 2/165 Period 3/155 Period 4/135 Period 5/170

Answer 1

a. No Lot Sizing
	Period	1	2	3	4	5	Total
Item	Demand	145	165	155	135	170
OH= 150	Scheduled Receipts	0	0	0	0	0
LT = 1	Projected On Hand | 150	5	0	0	0	0	5
Q = L4L	Net Requirements	0	160	155	135	170
	Planned Order Receipt	0	160	155	135	170
	Planned Order Release	160	155	135	170	0
	Cost:
	Number of orders (order release)	=	4
	Total On-hand at end of period	=	5
	Ordering cost	=	$100
	Holding cost per unit per period	=	$1.00
	Total Ordering cost (number of orders * Ordering cost per order)	=	$400
	Total holding cost (total On-hand* holding cost per unit per period)	=	$5
	Total Cost	=	$405
b. Minimum order quantity 200
	Period	1	2	3	4	5	Total
Item	Demand	145	165	155	135	170
OH= 150	Scheduled Receipts	0	0	0	0	0
LT = 1	Projected On Hand | 150	5	40	85	150	180	460
Q = Minimum order quantity 200	Net Requirements	0	160	115	50	20
	Planned Order Receipt	0	200	200	200	200
	Planned Order Release	200	200	200	200	0
	Cost:
	Number of orders (order release)	=	4
	Total On-hand at end of period	=	460
	Ordering cost	=	$100
	Holding cost per unit per period	=	$1.00
	Total Ordering cost (number of orders * Ordering cost per order)	=	$400
	Total holding cost (total On-hand* holding cost per unit per period)	=	$460
	Total Cost	=	$860
c. Multiple of 175
	Period	1	2	3	4	5	Total
Item	Demand	145	165	155	135	170
OH= 150	Scheduled Receipts	0	0	0	0	0
LT = 1	Projected On Hand | 150	5	15	35	75	80	210
Q = Multiple of 175	Net Requirements	0	160	140	100	95
	Planned Order Receipt	0	175	175	175	175
	Planned Order Release	175	175	175	175	0
	Cost:
	Number of orders (order release)	=	4
	Total On-hand at end of period	=	210
	Ordering cost	=	$100
	Holding cost per unit per period	=	$1.00
	Total Ordering cost (number of orders * Ordering cost per order)	=	$400
	Total holding cost (total On-hand* holding cost per unit per period)	=	$210
	Total Cost	=	$610

We should go for no-lot sizing or Lot for Lot (L4L) as the total cost is less under this strategy. Under this rule the lot size ordered covers the demand for a single period (week) and minimizes inventory levels.