Question

1) Pet Store (PS) sells a very popular blend of cat food at $20 per pack. Average weekly demand of this cat food at PS is 500 packs per week. The owner of the store, John Snow, orders the packs of cat food from the Ice & Fire Co. (I&F) at $15 per pack and have to pay a flat fee of $100 per order for shipping and handling.  PS uses a fixed order size as their inventory policy. Assume that the opportunity cost of capital and all other inventory cost is 15 percent annually and that there are 50 weeks in a year.

(a) How many packs of cat food should PS order at a time?

(b) What is the average number of replenishment cycles (inventory cycles) per year?

(c) What is PS’s total order cost for one year when John Snow orders the amount you found in part (a) above?

(d) Given your answer in part (a), how many months of cat food packs does PS have on average (1 month equals 4 weeks)?

(e) On average, how many dollars per year does PS spend to hold cat food?

(f) What is PS’s weekly inventory turns when John Snow orders the amount you found in part (a) above? (Hint: Weekly Inventory Turns = 1 / Average Inventory in Weeks)

(g) Determine the reorder level (on‐hand inventory at time of reorder) if the replenishment lead time is three weeks.

(h) Assume I&F is willing to give a 1 percent quantity discount if PS orders more than 5,000 or more packs at a time. If PS is interested in minimizing its total cost (i.e., purchase and inventory‐ related costs), should PS begin ordering 5,000 or more packs at a time? (Hint: Note that the holding cost per item also decreases by 1% if PS orders more than 5,000 packs. Compare the total annual cost when PS goes after the discount to the annual cost with Q<5,000)

Answer 1

Economic Order Quantity refers to the number of unit the company should add to the inventory and the order is made to minimize the total inventory cost. It maintain a balance between ordering costs and carrying costs. Reorder point is the level of inventory which the firm holds in stock and when the inventory level reach this point, the firm must reorder the item.

EOQ act as a review inventory system to monitor the inventory level continuously and once the level reaches the reorder point, a fixed quantity of order is placed. Thus EOQ helps in calculating reorder point and optimal reorder quantity to avoid shortage of inventory.