Question 1 - Inventory ManagementPart A: The economic order quantity = Units per day * days working week * working weeks a year = 640 units * 5 days * 50 weeks = 160,000 Units The total cost for this policy = Total cost of sales + Total cost of holding + Cost of order = (20 * 160,000) + (640/2) 4 + (160,000/640) 200 = 3,200,000 + 1,280 + 50,000 = $ 3,251,280 per yearThe total cost for this policy (InfoSys Parts) = (19 * 160,000) + (10,000/2) 4 + (160,000/10,000) 200 = 3,040,000 + 20,000 + 3,200 = $ 3,063,200 per yearN/B: Therefore, it is recommended that the item be bought from InfoSys Parts. Part B: The Economic Order Quantity has been applied as a mathematical model in solving the above question; the same model can be altered when there is uncertainty in the overall demand of the item in question.
This implies that when the demand of an item ceases to be constant and its values keep on varying, one is supposed to ensure that the issue of stock-outs is not encouraged, which is considered to be a common issue in businesses, and this can be achieved through the process of holding the additional inventory.
The additional inventory that held for the purpose of protecting against the existence of variations in the item demand is referred to as safety stock. Therefore, to ensure that protection is issued against the projected variation, especially in the case of demand uncertainty, a strategic measure is put in place to ensure that safety stock is put in place; hence it involves the process of increasing the Reorder Point.
The following formula is applied in the case of reorder point (Bozarth & Handfield, 2008): Reorder Point = R = (d * L) + (z * σL), wherez = the z-score of the normal allotment within a desired service degreeσL = the standard deviation (demand that takes place during the lead time)d = the standard deviation for demand that happens on daily basis (demand deviation) σd = STDEV(daily demand times) when using Excelp = the probability of not stocking outWhen applying Microsoft Excel, within a given desired service level of the z-score during the lead time (σL), p and the standard deviation of demand is: z = NORMSINV(p)σL = SqRoot(L * σd^2)Reorder Point = R = (d * L) + (NORMSINV(p) * [SqRoot(L * σd^2)])Quantity to Order = EOQ = Square Root of ((2*D*S)/H)When involving features of safety stock in an Economic Order Quantity model for the purpose of accommodating different variation in values, the sum of the safety stock normally increases the quantity of the average inventory that is placed on hand, which is represented by Q/2.
Therefore, to obtain the total cost of the inventory the current sum average inventory is multiplied by the identified annual holding cost, which results to the following formula (Bozarth & Handfield, 2008). TC = DC + (D/Q)*S + [(Q/2) +SS]*H, where: SS is equivalent to total amount of the Safety StockPart CIn the actual application of inventory control measures, there is a wider scope of modern inventory control methodologies that have been approved to effective and efficient in their operational procedures. Nevertheless, a few of the vast moving organization have adopted them and are experiencing a huge change in various measures as per the benefits derived.
Some of the reasons as to why most of the organizations have not yet incorporated such control measure in their inventory practices is because most of the gigantic manufacturing and distribution firms are going through a difficult time with the aspect of having lower customer service, experiencing higher costs in the process of implementing and absorbing such inventory control measures, and also having excessive inventories than are considered to be necessary and yet it is hard to operate them simultaneously (Palepu, Healy & Benard, 2008).